Now, Sony's divisions are finally beginning to work together and share a common agenda, Kutaragi said at the Foreign Correspondents Club in Tokyo.
"It's just starting," he told reporters. "We are growing up."
High-ranking Sony officials have rarely publicly said their proprietary views were a mistake. Kutaragi, who has long been viewed as a candidate to lead Sony, was unusually direct in acknowledging Sony had made an error and blaming proprietary concerns from its entertainment division.
Sony's music players initially did not support MP3 files and only played Sony's own format called Atrac.
Kutaragi said Sony's original spirit of innovative technology had grown "diluted."
"We have to concentrate on our original nature - challenging and creating," he said.
Once the powerhouse of global electronics, exemplified in its Walkman, Sony has lost some of its glamour lately, losing out in profitability and market share to cheaper Asian rivals.
Kutaragi - known as the "Father of the PlayStation" for making the game machine a pillar of Sony's business - said the new handheld, PSP or PlayStation Portable, will grow into a global platform for enjoying music and movies as well as games.
Sony is boosting production to one million a month this spring to keep up with demand for the PlayStation Portable, which has sold 800,000 since going on sale Dec. 12 in Japan, Kutaragi said. It is set to go on sale in the United States and Europe this spring.