Dear Mr. Berko:

I’m fascinated by Sony Corp.’s Reader. It’s an electronic book, and my broker tells me that it contains 12,000 titles. He believes that this Reader will be even more popular than Apple’s iPod, which, as you know, is making a fortune. My broker believes the Reader will be Sony’s blockbuster product and wants me to buy 500 shares. He thinks Sony could trade over $100 a share in the next 12 months. Please comment.

M.R., Vancouver, Wash.

Dear M.R.:

I’m familiar with Sony Corp.’s (SNE-$47.30) Reader, and I’m absolutely, completely and without question, positively underwhelmed. At $400 (the cost of 65 paperbacks at Sam’s Club), owning this toy makes as much sense as playing Beethoven’s Fifth on a Steinway while wearing gloves.

According to our “geek” client, who knows everything about tech stuff, this Reader weighs 10 ounces and tries to imitate the feel and look of a real book. However, if SNE’s management believes it can convert liquid crystals, microchips and plastics into a “real-book feel,” those boys must be functionally delusional. And though SNE’s Reader expects to offer 12,000 titles that can be loaded into one of those things, the cost per title will be precisely what you’d pay for the softcover book at Barnes & Noble or Borders.

I think your broker’s bonkers. The Reader has zero chance of becoming a “blockbuster product” for the $67 billion revenue Sony. At a wholesale price of $300 (assume the markup is $100), Sony would have to sell 3.3 million of these things to gross $1 billion, which is about 1.5 percent of its expected 2006 revenues. At a net profit of $40 per Reader, SNE would earn about $132 million, which is less than 1 percent of the company’s expected 2006 earnings of $1.6 billion.

It’s a giant leap in stupidity to assume that Sony’s Reader will create a cult the way Apple’s iPod did by playing music for tune-looney teenagers. I strongly doubt there are 3 million “real readers” who would shell out $400 for this thing.

Most real readers like to keep their books or give them to a friend. Most real readers enjoy underlining or highlighting passages for later reference. Most real readers like the smell and feel of real paper and make notes in the book margins. Most real readers like to riffle backward to an earmarked page or to a preplaced bookmark for clarification or reference. And most real readers like the feel of real ink, a real cover and real binding. Though poker can also be played on a hand-held device, real gamblers, like real readers, prefer the real thing.

I don’t like that just five years ago SNE was trading at $160 a share when revenues were almost $60 billion and its Walkman was a rage of the age. I don’t like SNE because its net profit margins are less than 1 percent, which is embarrassingly below the 4.2 percent industry average. I don’t like SNE because its operating margins of 6.2 percent are way below the industry average of 15.2 percent, and its return on capital of 2.8 percent is terribly below the industry average of 6.1 percent.

I don’t like SNE because I don’t believe management knows how to use the company’s unique entertainment assets to increase its share of the home entertainment market. I don’t care for SNE because new management seems unwilling to sell non-core operations and won’t restructure its unwieldy business model. I don’t like SNE because its huge electronics segment (66 percent of revenues) remains a low-margin business. I don’t like SNE because sales at its music segment continue to decline. I don’t like SNE because I think management may be spending too much money, time and talent on developing its Reader, which I think will be a huge flop. And finally, I don’t like SNE because I do not have confidence in its management’s skills to address these concerns.

But fair is fair, and I could be wrong. So I feel compelled to tell you that Thomson Research has a solid “buy” on SNE, that Thomas White International rates SNE as “favorable,” that Standard & Poor’s ranks SNE as a “hold,” that Ford Equity Research ranks it as “neutral” and that Ativo Research rates SNE as “most unfavorable.”

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service