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posted: 8/31/2013 6:16 AM

Sony's newest hit found inside Apple, Samsung Smartphones

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Bloomberg News

Sony Corp. has a hit product on its hands. Apple Inc., Samsung Electronics Co. and LG Electronics Inc. will be happy to sell it to you.

Sony's latest star performer isn't a gadget like the Walkman or PlayStation. Instead, it's a chip found in almost every high-end camera and smartphone. Apple's iPhones 5 and 4S use it and so do Samsung's flagship Galaxy S4 and LG's G2, researchers say.

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The company that helped invent the compact disc has captured almost a third of the $7.6 billion market for low-power sensors that record crisp snapshots. Sony boosted its revenue from the chips by about 30 percent last year as Chief Executive Officer Kazuo Hirai tries to revive the electronics unit after its TV business posted nine straight annual losses.

"Sony is making a clean sweep of rising demand," said Yasuo Nakane, an analyst with Deutsche Bank AG in Tokyo. "These are distinguished products the company spent three decades developing."

Rivals' reliance on Sony components isn't new, as the company supplied semiconductor parts for music players to other manufacturers. About 80 percent of the imaging sensors Sony produces are sold outside the company, said Masahito Takeda, a spokesman for Sony.

Most of the 10.9 billion yen ($111 million) operating profit last quarter from Sony's device division was generated by sales of the chips, Deutsche Bank estimates. Global shipments of the imaging sensor will probably grow by a quarter to 3.14 billion units this year, according to Techno Systems Research Co. in Tokyo.

Apple Supplier

Sony declined to identify the companies that buy the chip or provide exact prices. The company appears on the list of suppliers posted on Apple's website, which doesn't identify the components Sony provides. Sony is a supplier to Apple and Samsung, according to Bloomberg supply chain analysis.

An Apple spokeswoman didn't return calls and an emailed request for comment. Samsung and LG declined to comment.

Sensors made by Sony sold for an average of $7.30 each, almost four times the $1.93 that Samsung got for similar chips, based on 2012 unit sales and revenue estimates from Techno Systems.

Sony, maker of the Xperia handset, wasn't among the top five smartphone vendors last quarter as global sales of the units jumped about 47 percent to 225 million, Gartner Inc. said Aug. 14. Samsung, Apple and LG were the top three, accounting for about 51 percent of the global market.

CMOS Wager

Yoshinori Hashitani, a Sony vice president, said during an Aug. 1 earnings call there was "a significant increase in sales of image sensors for mobile products." When Hirai took over in April 2012, he said he planned to win back customers by concentrating on mobile devices, games and digital imaging, which includes sensors.

The company's image-sensor division gained an advantage against competitors after switching in 2004 to a technology known as complementary metal-oxide semiconductors, or CMOS. Sony bet it could improve the technology, which at the time couldn't match the picture quality offered by other chips.

Tomoyuki Suzuki, head of Sony's imaging-device unit at the time, pushed for the development of smaller and faster sensors that take sharper images before smartphone demand began surging, according to Takeda. Suzuki is now president of the company's software design group.

The latest version of the chip used in the Xperia Z smartphone is smaller than its predecessors and records images in low light or with strong backlight.

Slowing Smartphones

Sony customizes chips for customers with circuitry based on buyers' needs. The chip is used in the iPhones 5 and 4S and Galaxy S4, according to research from SMBC Nikko Securities.

The company has spent 220 billion yen since 2010 to boost production capacity of the chips at its two plants on Japan's southern Kyushu island. It has another image-sensor facility in Thailand.

Sony garnered 32 percent of the imaging-sensor market revenue in 2012, according to Techno Systems. Santa Clara, California-based Omnivision Technologies Inc. ranked second with 14.4 percent, followed by Samsung at 12.9 percent.

Slowing demand for high-end handsets, the most-profitable segment of the $358 billion mobile-phone market, may pressure Sony to cut prices for its sensors, said Ryosuke Katsura, an analyst at UBS in Tokyo. Global smartphone revenue will gain 22 percent in 2013, narrower than the 41 percent seen for annual shipment unit volumes, due to falling prices, UBS estimates.

Sony probably will continue selling the chip to rivals to boost profits and keep factories working at capacity as smartphone competition intensifies, Katsura said.

"What matters most for Sony is to maximize profit while it faces the reality that its Xperia models aren't quite competitive in the global arena," he said. "That likely won't change with competition in the smartphone market looking like it will intensify."

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