The next step in the evolution of Sony

Illustration: Istvan Szugyiczk

Kazuo Hirai peers past the bright stage lights to survey the thousands of technologists assembled in the Las Vegas ballroom before him. “This is the Betamax,” he says, somewhat haltingly, as an image of the failed 1975 videotape format appears on a screen behind him. Laughter cascades through the room. “Now, despite Betamax being first to market and, dare I say, offering superior technology than that other format”—more laughter, peppered by guffaws and applause —”I’ll be the first to admit, VHS won the battle for commercial success. However, before you completely write off Betamax based on its failure to become the consumer standard, think of it as an idea.” A Betamax advertisement urging consumers to “Watch whatever whenever” appears on the screen—prescient, given today’s mobile-dominated world. “That was almost 40 years ago,” Hirai exclaims. He smiles, and the corners of his eyes crinkle. “Forty years ago!”

You can forgive Sony’s chief executive for waxing nostalgic. The 1970s were a far simpler time for the Japanese conglomerate—a time when the company, one-tenth the size it is today, mostly made radios, televisions, and tape recorders. Fast-forward to February 2014, and Hirai announces that Sony will completely withdraw from the PC market and spin off its TV business.

The company will sell its estimated $4 billion (but unprofitable) PC business to the private equity fund Japan Industrial Partners for a reported $394 million because sales for the personal computer market, long served by Sony’s premium Vaio brand, are plummeting with such speed that almost every major manufacturer is frantically looking elsewhere—primarily in services—for growth. On the TV front, Sony will spin off its $1.8 billion business, which loses hundreds of millions of dollars a year, into a wholly owned subsidiary because the television business, for decades a Sony strength, is rapidly becoming commoditized.

“I’d like to keep holding ourselves to a higher standard that goes beyond saying, ‘Breakeven is good enough,’ ” Hirai said during an investors call following the announcement. “We have the potential with our product portfolio to do a lot better than that.”

Sony will now seek opportunity in its digital-imaging, mobile-device, and games businesses. The first holds promise as it transitions away from consumer cameras, for which sales are rapidly declining, and toward image sensors, which are seeing increased demand as they are used in smartphones (such as Apple’s iPhone), tablets, televisions, medical devices, and cars. The second and third, bolstered by the Xperia and PlayStation brands, respectively, have each experienced more than 30% sales growth in the past year and serve as excellent platforms for content from Sony’s other businesses.

“The action we announced marks a significant step forward in our strategy and our process of selection and focus as we concentrate our resources in the areas that will drive our future growth and profitability,” Tokyo-based Sony spokesman Shiro Kambe says.

Sony is no stranger to restructuring, but some question the conglomerate’s guiding principles as it discards its classic lines of business. “Sony’s top managers must answer the question, ‘What does Sony stand for?’ and inspire both employees and the buying public with the answer,” Macquarie Securities analysts Damian Thong and Claudio Aritomi wrote in a Feb. 18 research note.

William Drewry, an investment banker for RBC Capital Markets who monitored the company for years as an analyst, says Hirai is under pressure to demonstrate improved synergy between Sony’s electronics and entertainment businesses. It’s not unprecedented: What began six years ago as the PlayStation Network has blossomed into a music, movies, and gaming hub called Sony Entertainment Network. “They need to peel the onion back a bit,” he says. “The question is how far to go with that. Does it make sense to have any real hardware assets?”

For now, Sony’s answer to that question is yes. With PCs gone and TVs quarantined, Hirai must show that he can grow revenue as quickly as he can cut costs. Despite strong holiday sales of its smartphones, Sony lowered its global forecast for 2014. It will take two years to break even on the PlayStation 4 because of development costs. And its high-profile TV and film production business accounts for only 10% of Sony’s sales.

Will the new Sony emerge as a hardware-focused company or evolve into a firm defined more by its content networks? Can it restore its capacity for innovation? Like Betamax, it’s all a grand experiment.

“At Sony, failure is not really an end,” Hirai tells his Las Vegas audience. “It’s a reason to keep trying.”

This story is from the March 17, 2014 issue of Fortune.

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