Season 3, Episode 3: The Sonos IPO

Transcript from https://podmenti.com/t/4b416aa3d01d4e32

Record.
All right.
Where does the word record come from?
We accord again.
Yeah.

That's great.

Welcome to Season 3, Episode 3 of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert, I'm David Rosenthal, and we are your hosts. Today we are covering the IPO of a company that has devices littering my home in the most wonderful way, Sonos.
So Sonos
was founded with a clear mission, and that was to fill every home with music, or so says their S one. And today we will decide based on their very recent IPO last month, you know, how to go. And we will forecast what does it look like in the future for this IPO to
sort of look like an A plus in retrospect, and uh you know, what does it look like if
it was a failure in retrospect. And what are the things that have to evolve in the landscape of home audio and in the actions of the company in order to play out either of those scenarios.
It is a unusually
clear and compelling mission.
May or may not have been the company's original mission. You'll just have to tune in to find out. So I want to start with some fun facts because I think they're very interesting about the company. So the first one is Sonos did not sell a speaker until seven years into the company's existence.
Which is a little shocking based on the company that we know today to think about, you know, two years of no product and then five years of non speaker products really just bridges, amplifiers, um, ability to bring non uh bring digital music to any home in your room. Yep.

And then here's another just banana stat.
to tell you how loyal the customer base is and how much Sonos invests in their backwards compatibility, ninety three percent of the speakers that it has sold over the last thirteen years are still active today.
Yeah, that is crazy.
In all this research, that thing jumped out at me, like
So the iPhone is not yet thirteen years old. The iPhone is only ten years old. How many ten year old iPhones are still active?
Yeah.
It's uh I don't know, zero percent. I mean it rounds to zero percent. Yeah. Uh I believe the actual stat is that ninety three percent of
the company's products received and installed an over the air update in the last twelve months. Which is even more banana is that products from, you know, original products are still being supported with new
Firmware updates from the company.
Yeah.
Totally nuts.
Well, if you're new to the show, you can check out our Slack at acquire.fm. Uh that's where you can find real time discussion of the biggest tech news and chat with David and I. Tech news like the wild hour by hour news and tweets trickling out of Elon Musk and Tesla yesterday, which by the time we release this will have developed two or three more news cycles.
And we will actually know what's going on, or maybe not. But as of now, what we know is that Elon believes he has secured the funding to take the company properly.
private and has felt so confident in that that it should be announced on Twitter publicly to the world. I actually heard a rumor that Elon, you know, there's all this speculation now did he violate any, you know, securities laws by tweeting about this. He's now considering, instead of using Twitter, that he's just gonna use the acquired Slack channel.
for uh future Tesla related announcements. Can neither confirm nor deny. With the density of concentration of people interested in the news, I would say not on a reach perspective, but on a density of interest perspective, it's probably a pretty good platform for that. Great platform. So join us at acquire.fm.
All right listeners.
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Alright, David.
You ready to take us into the history and facts? Let's do it.
One note before we start on the history and facts. Sonos actually has a a unusually good, I would say, though a bit biased, corporate history on their website, which we will uh
Link to in the show notes. Some, certainly not all, of this history comes from, but
They really do a nice job telling the story and like going into all sorts of detail and history throughout the various phases. Um much more than your average company. So kudos to Sonos for or whoever their internal corporate historian is.
Make sure you check it out if you want more detail straight from the horse's mouth, as it were.
And for a company that is so incredibly driven by creating these fantastic experiences and, you know, really the best sound and the best experience of listening to sound, it really shows in things like this where they they care a lot about telling the story the right way. There's really great pictures, it's well laid out. As David, you say
we're here to be the judge of sort of uh how it all really went down and pull in as many sources as we can, but it's a really nice piece and I think it reflects sort of the culture of the company a lot.
Well and you know.
One uh recurring theme on Acquired is
There are many versions of the truth when it comes to startup histories. So their version is particularly well told on their website.
But diving into our version.
The company that would become Sonos
was incorporated in August two thousand two
That was quite a long time ago.
In Santa Barbara, California.
Not.
Silicon Valley. For those unfamiliar with California geography, Santa Barbara is kind of between San Francisco and LA, uh much closer to LA, and is a a great town, great place to visit, but but kind of a beach town, not like a bustling capital of industry like San Francisco or LA.
But nonetheless, company was incorporated there, and it was incorporated as Rincon Audio Inc.
Which I was wasn't able to confirm, but but I assume that is for Rincon Beach in Santa Barbara, which is one of the most famous surf spots in the world.
Of course another attraction to Santa Barbara. But
They would change their name to
the Sonos that we know and love today. In May
Two thousand four.
Yeah.
And a little fun aside story on that. So this was obviously immediately after the dot com crash when the company that would become Sonos was was founded. And so a lot of the
kind of service providers to the technology industry were like really struggling for business. So even though these guys were a brand new startup, they were able to get
David Plosic, I believe it's how you pronounce his last name, who is the founder of Lexicon branding, which is basically
the best in the business kind of globally branding firm, especially for tech companies, to do a project with them to come up with the official name for the company. So these guys, David and Lexicon came up with the name Pentium for Intel. Uh they came up with the Swiffer. They came up with Blackberry.
They came up with the power book for Apple and and get this, this is the best part.
Totally related on theme here.
They came up with the Zune.
Wa yeah. How awesome is that.
A lot of good track records until that last one.
Until that last especially because
Shoot, I believe I don't have this in my notes, but I think I remember reading Robbie Bach is now a um a board member of Sonos.
Huh.
Small world.
It all comes back home. To Microsoft. Anyway, because
It was the dot com bust and like
no tech company's had any money. He gives them a great deal. They're able to Lexicon gives them a great deal. They're able to land them. And apparently it was a super long process coming up with the name. The company kept rejecting everything that they came up with.
The Lexicon's about to just quit and fire them as a customer.
And then they come up with Sonos and everybody's like, That's it. And that's how the company became Sonos. It's funny how long before I've ever owned a Sonos device
I always thought the name was brilliant. Like it it's it's one of those things where
the newest branding, which w we should put a link in the show notes to the original Sonos branding. And then interestingly the brand that served as a bridge between the original branding and the current branding. Like the branding is excellent, the palindromatic nature of the name is excellent. You can'cause some of these speakers you can flip upside down and it still says Sonos.
Yeah, it's just a really nice

quite been able to figure out exactly what this means, but it's also a name that if you turn it sideways, like vertically, it's still
Works. It's not exactly the same'cause the Ns and S are flipped, but like it's it's still very um
Uh legible. There's a term for this, but I don't know if they were thinking of that in the uh initially, uh given that their products would eventually be both vertical and horizontal. But a really, really great name. Yeah, and we'll just while we're dwelling on their branding stuff here for a second, even though we're jumping way far ahead.
Which it only took us what all of five minutes in order to jump way far ahead. The twenty fifteen refresh of their brand came with a
super cool sort of burst pattern that that was a bunch of tiny little lines shooting out of the center of the sonos, where if you scrolled it on a digital screen, and I think this might be because of the screen refresh rate, I'm not totally sure why.
it looks like sound waves. When you're just holding it still, you're kind of like, okay, that's kind of a cool pattern around Sonos. They're wacky. And then you scroll it and you can kind of see these like you know when you look in the top right corner of your Mac at the little speaker with the three lines coming out of it. It's like those little lines sort of coming out of the logo when it's in motion.
It's harnessing sort of like the artifact of L C D or L E D screens. So we'll link to that in the show notes too.
You should try, it's cool.
Very, very emblematic of Sonos and their culture.
But who are these Sonos guys? So there are four founders of
Sonos. John McFarlane, who was the CEO from founding in two thousand two until last year, twenty seventeen. Craig Shellburn, who
Tom Cullen and Trung Mai.
How did they all come together? So McFarland, the CEO, he had moved to Santa Barbara in 1990 to get his PhD in electrical engineering from UC Santa Barbara.
He ends up dropping out and he's a pretty visionary uh guy. He ends up dropping out of his PhD program in nineteen ninety two and he founds an internet company with
Three other people.
Craig, Tom, and Trunk, who become his co founders of of Sonos, called software.com. I guess domain names were um easier to come by back then.
Software dot com ends up of course
Going public in the dot com boom in nineteen ninety nine. Merges with
Phone dot com The synergies were, you know.
You have software.com, we have phone dot com. Of course, it makes sense. They rename the company OpenWave. And and actually it did sort of make sense because software.com provided kinda
email servers and and infrastructure to
email providers and particularly
early mobile email providers. So like and and I should say phone.com did um I believe a browser, like a a WAP based browser for phones. So OpenWave, uh, which is the merger of these two companies becomes actually a pretty big company and uh one of the first
you know, pioneers of of the mobile smart not smart uh internet on phones.
Blast from the past.
Of course though.
the dot com crash happens in two thousand one. All of the
Former software dot com folks. Leave Open Wave and uh
decide they need to they want to figure out what to do next. But they had
An insight from that experience, and particularly as the company became open wave, uh and focused on cell phone providers that
networks and then particularly wireless and wireless networks were like a big technology wave that was coming in.
wireless networks were gonna be ubiquitous. You could already see it in Wi-Fi networks in homes, consumers were were just starting to install, even though a lot of people still had dial up
Broadband penetration was still fairly low in the US, but Wi Fi was like a big thing and they could see this coming.
So
John is kinda has the vision, sees this trend happening, and he pitches
The other three guys.

Not
A mus digital music.
Mm.
Um
Wireless network
for airplanes. Essentially his vision is to create go-go. Hilariously
Everybody else is like, That's a terrible idea. Who would do that?
One recent fact that I know about Go Go, which I can't remember if I said this on the Tesla episode, is they're like one of the top twenty most shorted
Stocks relative to their market cap.
Yeah.
So lots of people continue to think it's a terrible idea.
Well, having just taken a long flight, um and used not Go Go Go, but another one of the myriad competitors, the product is still
Terrible.
But
A necessity. So anyway, the other three are like, No, that's a terrible idea. So they're trying to figure out what else they can do. They realize that, um
You know, they all love music and they all have houses now, I presume, after the IPO and then the merger with phone dot com. Presumably they all made, you know
quite a bit of money. Hopefully they didn't lose it all in the dot com bust. Uh they bought houses in Santa Barbara and they're all trying to get music systems in their in their houses, multi room music systems, and it's
Just a total pain.
So they start jamming on that.
They also see, you know, these are the days as we've talked about on other episodes of Napster and digital music and MP3s really starting to come up and become mainstream. And they think, okay, well, maybe there's an intersection between these two big trends of wireless networks becoming ubiquitous and the digitization of music and MP3s.
So that leads to
The clear vision that we talked about earlier.
Of
Creating devices.
that will enable music lovers to play any song in any room in their homes.
And essentially they wanna be the Dropbox of of home audio, even though Dropbox doesn't exist yet. They want it their devices to just work.
That's kind of a mind blowing concept. I mean, now we live in this world of smart speakers, and even before that, like
before Alexa and Google Home like this.
My Sonos one just uh I'm not sure.

So perfect.
So before these people who live in our speakers came around, it still uh call it three, four years ago, didn't seem that crazy that oh, of course it's sort of easy to uh have speakers playing wirelessly in your home. In two thousand two
Th this is so crazy foreign. I mean, the people that were able to have a setup in their home where it was easy for them to play
music in every room in their home or different music in different rooms, like that's a twenty to fifty thousand dollar installation at the time of building the house to create this wired system to make that work. This is this is brand new, pioneering completely inventive technology.
I mean, I remember back in these days, I was in high school, you know, five point one surround sound home theater systems were all the rage and if you went to Best Buy or Circuit City or whatnot, they were hawking all this stuff and I remember
You know, for our family room and then other rooms in the house be like, Oh, we need the five point one and you buy these speakers and these amps and you run wires or you know, under the carpets or maybe you drill into the wall and like it's just a nightmare.
Well, and that was just for T V setup. I mean the notion of music in different rooms was like, you know, way, way more complicated. And in fact, Sonos, even fast forward real quick to today, like even though they have this really great five point one offering, they're still at their core not really focused on that. And it's really about this multi multi room audio.
So
That's the vision that they
ultimately found the company, Rincone Audio, around in late two thousand two. But there's
Just kinda one problem. Well, there are a couple of problems, but one major problem
for all of this vision to work, you know, it's kind of based on this concept of
Digital audio.
There are no streaming services yet. Like Napster exists, NP threes exist, you know, people are ripping their CDs into NP threes and putting on their hard drives, but like
Exactly what I just said. They're ripping MP3s onto their hard drives on their computers. So how are you gonna get around
That's it.
So they're undaunted though. They want to figure out how to make this work. And they do have the Wi-Fi wave going for them. So many houses are especially houses that would consider doing this, you know, have Wi Fi networks. They decide they're essentially gonna build Linux PCs.
That connect to
uh these existing Wi-Fi networks that consumers will have in their homes and repurpose them as as connected devices. So they're not gonna have hard drives, they're not gonna store MP3s on the devices, but because they are full Linux PCs inside, they can join the network, they can network to your existing PCs
That are your desktop or or
If you're really future thinking, that you have on your Wi-Fi network, and access your your MP3s.
from that PC and then play them on the Sonos network throughout the house.
Which is sort of mind blowing that they're able to accomplish that because just thinking about like for anyone who's had to ever
allow one computer to access files on another on a home network or through a home network over the internet, the amount of strange permission checkboxes that you have to enable
To the extent they made this easy for consumers, uh, they should be applauded a hundred times because that
having never used the original little controller thing that would auto find the MP three files and then list it for you and and let you select it, I have no idea how they made that easy.
Oh man. I mean
The technical challenges of doing this were immense. I mean w what I just described sitting here in twenty eighteen sounds like uh okay, whatever. But like
Think back to where you were in two thousand two and just try and imagine that, like
Mind blowing.
But they had a
an important architecture decision to make, which was do they want to go with
A sort of centralized system where they have a a primary speaker or or bridge or amplifier that serves as the kind of control hub for all of the replica ones that you would then add to the network. Or do they want to go with a
decentralized approach where each
Amplifier, speaker, bridge could make its own decisions. You could add and subtract them from the network seamlessly. You could sync and play music in multiple rooms and all that.
They ultimately decide that the latter, the decentralized approach, is much better
from a user and consumer perspective. So they decide to go that route.
Unfortunately though, to do that they
figure out that they really need to use a technology mesh networking. Now today in 2018 mesh networking is all the rage, you know, all any what new Wi-Fi router you buy, uh it's gonna use mesh networking. It's superior. We're recording this over mesh networking in my house right now. Indeed, indeed, same here. However, again, this is 2002.
None of this technology exists yet. Mesh networking is this obscure thing that is only being used by the military on battlefields. It is nowhere to be found in commercialized technology. It's not productized at all. There are no standards.
So Sonos has to
basically invent all of this themselves. Fortunately, uh they had John and a team of PhDs in electrical engineering from U C Santa Barbara, so they were equipped to do so. Uh but it was very difficult. And as a result, it takes
multiple years, as Ben alluded to at the top of the show, from
kind of the start of the company until they actually have
Any kind of working prototype.
built. And so it wasn't until 2004 that they have just a just a prototype of the first product, which ends up being called the ZP One Hundred, the Zone Player.
One hundred. This was before the rebrand. They needed to re enlist those uh Lexicon guys. Yeah, I know. The Lexicon guys were like, We're done with you. We'll give you a company name and nothing else. But the ZP one hundred is as we alluded to, it's it's a networked amplifier for existing speakers. So
If y you have speakers already in your house, uh, this replaces your amp that that powers them. So you still have to hook up speaker wire to the speakers. And this got rebranded as the connect amp for anyone who's familiar with sort of what this would become in today's product line. Yeah, which is crazy. You can still buy it today.
I think lots of people still do. In fact, I know someone who's building a house right now and they have all these speakers that they want to use and they don't want to go buy a whole bunch of new Sono speakers. So this is the right answer.
Yep.
Yeah.
McFarlane
Takes this.
Prototype.
He brings it to CES in two thousand fourteen. People think it's really interesting. And then later in the year he goes to the All Things D Conference, uh, which this is before Kara Swisher and Walt Mossberg left the Wall Street Journal to start
uh recode. This is when they were still doing all things D within within W SJ. And uh he goes to the conference and demos it there. People love it. It's the same
D show where Steve Jobs goes on stage in a keynote. I don't know if it was a keynote or I think it was an interview with either Kara or Walt, and he introduces Apple's Airport Express wifi router, which is also gonna have an audio jack plug on it and is Apple's solution for home audio.
Super clue. And it's clear that Sonos is
The way better experience.
my personal history with this is having uh a set of Bose computer speakers that I used growing up that I then brought to college that I then brought to Seattle and I moved out here. And my solution before going with the Sonos one was like, you know, as a diehard Apple person
I think I had a some Apple routerized the airport something, and I would airplay music from my computer through the router to the speakers, and it was terrible. Like it would have this three second delay when I decided to stop or start anything, you know, fast forward to today.
the newest and best Sono stuff is finally, finally actually getting airplay integration because Apple took forever to get Airplay Two out. So we'll hold judgment on the home pod. We'll revisit that later, but Apple has always had a little bit of a uh overzealous
journey with wireless audio than what actually manifested. Well in the airport express you you could only control it from your PC, right? From your computer. Yeah. Well because phones won't run a thing, so yeah.
Yeah, it's not like they shipped a little controller for that.
Yeah, there is no controller. No controller. So so a fun aside here, so as John is demoing his prototype, he uses the song he uses to demo it is The Beastie Boys No Sleep Till Brooklyn.
Produced by Rick Rubin, a super famous producer, who ends up becoming an advisor to the company later. Which is cool. But also fun. This is also on the the Sono's corporate history on the website. When they were testing it, they ended up playing the band Ten Thousand Maniacs.
And the song Three AM by Matchbox Twenty.
over and over and over and over and over again because the Sonos UI for the controller was everything was alphabetical and those were the that was the number one band and the number one
Song listed alphabetic. So funny. That was true for I mean like I remember on my original iPod playing three doors down an overrepresentative amount of time because it was the first thing in my library by artists.
Uh downsides of the click wheel user interface. So they finally ship the Z P one hundred to the public in January two thousand five.
Great reception by the tech press.
Walt Mossberg calls it quote.
easily the best music streaming product I have seen and tested.
So
Awesome. The vision has come true. They have shipped this Apple like amazing product. And boy has the definition of music streaming changed. Yeah. Um
You would think people would rush to buy them, Sonos thought people would rush to buy them.
People don't rush to buy them. And there are a couple of reasons for this. I mean, sales are okay. Like the company's not gonna go under, but they're not also gonna be, you know, the next uh unicorn here, even though that term is won't be coined for many years. Couple problems.
The biggest one is that so this is a device
intended for people who listen to music digitally, participating in the digital music revolution.
Who is participating in the digital music revolution at this point?
It is not
older people who own and are buying houses.
It's
Teenagers, it's college kids.
It's, you know, people who are definitely not gonna buy Sonos and don't own a house.
It's Ben and David who are rotating out what Napster songs they can fit on a a hundred megabytes of storage based on whatever they like at the moment.
Yeah, or or I guess at this point it's not Napster, it's uh Kaza, it's uh Limewire. Lime wire, yeah, all that stuff, you know. Anybody who's using Kazah and want lime wire at this point definitely is not buying. The other problem, you know, you could say like, oh well, but you know, these kids they are buying like MP3 players and stuff.
But the Z P one hundred, it costs twelve hundred dollars. So like I don't care how much of a you know young butting audiophile you are, you're not spending twelve hundred dollars on this thing.
That goes on for
A few more years and you know, they're they have this super
niche market of
Older adults who own homes who also care about digital music, but they're working on developing the next generation of products. A couple things happen.
Two thousand six, they had the ability to stream music directly from the world's first
actual streaming service, Rhapsody, which was um initially part of Real Networks, uh up in Seattle, it's pretty awesome. Like the sonos to the Z P one hundred, you can stream Rhapsody songs with no PC required, just directly
And your helmet kinda is like
the MVP of the experience we know and love today.
Yeah, wildly ahead of its time. And doing the research, yeah, I could not believe this solution existed in two thousand six. Yeah, nuts. Then in two thousand seven
Obviously something pretty important happens.
The iPhone launches. And that's gonna be
a mixed bag for Sonos as as we'll see in the coming years, but they do embrace it in the beginning. And and immediately after the app store opens in 2008, Sonos like within months launches a free app in the app store that completely replaces the controller, uh, which is sort of the scroll wheel device that you have to buy separately to control
the Z P one hundred with a free app for your iPhone and then now you can control
um your sonos system with your iPhone. So pretty awesome. Android, they launched the Android app a couple years later in twenty eleven. And then ultimately they phase out completely their own controller hardware in twenty twelve to go all in on on just apps. I'll say something very funny about this. So having gone full Sonos last November
I then had to go find a company called iPort, which makes Sonos compatible hardware.
to buy a controller for my Sono system because I have the five point one like sub and play bar and all that hooked up. When I'm watching TV, I don't want to have to take out my phone to turn up and down the volume when I'm watching a movie. That's amazing. The circle has completed itself. You're you're now like, you know
You are you are peak millennial. You know, it used to be millennials where like sitting in college dorm rooms would never use this. Now not only are we using it, we're like going back and buying third party hardware to get back to the original experience.
Yeah.
Uh so funny.
And to be clear, I think Sonos has a better answer for that, which is integrating with your actual uh remote control for your T V, but for whatever reason couldn't get that.
That to work.
Yeah.
That's such a good stuff. That's great. If only that were included in the S one prospectus, maybe they wouldn't have priced so low.
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Okay.
November two thousand nine.
They finally release what they've been working towards for years and and really is the holy grail product of the Sonos experience. At the time, they call it the zone player S five.
Man, they really needed that rebranding. It's now the play five. Uh it's an all in one Wi Fi speaker.
speaker integrated, directly connects to Wi Fi and the internet, can stream all of the uh well, n not Spotify yet. Spotify's um still small at this point, but
the music streaming services that exist, and it costs four hundred dollars. And this thing is big
Like for people that know about the Sonos ones or the play ones today, like this thing's a
Frickin behemoth.
Yeah, quite large.
But you know, four hundred dollars like, you know, large you're you're gonna put it in a home, but maybe you'd put this in an apartment. So this is Sonos's real first wedge into
mainstream. On the back of that, sales really start to pick up, and in March of twenty ten
Index Ventures invest twenty five million in the company.
it's very hard to find out how much money they raised, or well, you can find out how much money did they raise, but the history of their fundraising before then.
All we know is that they raised about forty million dollars along the way in the eight years between two thousand two and two thousand ten. It was from a venture firm called
B V Capital, which is now rebranded itself as Eventors, and also Angels, a bunch of angels. So we can't find out who m invested what, but interesting fact from the S1, there was an angel named Valder Coa.
who had been an exec at software.com with all the founders.
And he must have invested a ton in the company, because even at IBO, he still owns seven percent of the company, even despite all the delusion that is still yet to come. And interestingly, eventures was not a greater than five percent shareholder. We're gonna get to that in a minute. I believe they get bought out.
Interesting side fact. The person who leads the in this investment for Index, Mike Fulpe, and joins uh the board of Sonos, he had previously invested in software dot com when he was at Cisco. So he knew the team from that. The next year, in summer two thousand eleven,
Two big things happen. One, they come out with their next Wi-Fi enabled speaker, the Play Three, which is still sold today. Uh, and the price point for that is two ninety nine. So they're getting closer and closer down into the mainstream price point.
The much bigger thing is um they add support for Spotify in the summer of two thousand eleven.
Yeah, and it's worth pointing out a couple of things about one, these speakers and two uh sort of the pre-Spotify era. These speakers are really nice. They're designing them to sort of compete in the audiophile market and
In saying that, I know that's gonna be a sensitive term for a lot of people, so it's probably not quite playing in the market of the super high end audio hardware that you would find at a CES sort of in the private hotel suites and and people that um, you know, work in sound studios, but let's say they want some of that market and the next level down of people who
sort of truly love music in their home and who are really obsessed with creating high high quality sound in their home. And so yes, three and four hundred dollar speakers are expensive, but like they're they're very nice speakers.
The other thing is, yeah, twenty eleven is when they added Spotify. They already had Sirius as well, Sirius XM, or I can't remember if they had joined at that point, but that was in February of twenty eleven. So they started with uh Rhapsody, then Sirius, and now adding Spotify. You know, Spotify is not
a huge thing yet. And so it's not totally clear to them that, you know, this is a binary thing for us, but they are starting to plant the ear seeds of playing the Switzerland strategy across anybody who is providing music.
Yeah. Well and the other big big thing about Spotify, just like we talked about earlier in two thousand five, two thousand six, people who are listening to digital music are, you know, Ben and David in college. Spotify in two thousand eleven, two thousand twelve, two thousand thirteen, this is now where
millennials are listening to music and they're paying for it and they're engaging with it.
You know, heavily.
In twenty eleven they hadn't come to the US yet, right?
No, I'm sorry, they had, they had.
That was like two thousand nine or two thousand ten.
Yeah. Which actually that's an important thing that I didn't have in my notes that
It's important to note about Sonos.
The US is only about a third of the company's sales.
About two thirds of the company's sales.

Europe being the largest, uh, Pan Europe being the largest and and then Asia as well.
So it's very much an international
Company.
So
On the back of that.
They've now gotten into the two ninety nine price point.
Spotify is natively supported on the platform. Um, they're starting to get into the mainstream, they're starting to get into the younger millennial market.
In two thousand twelve.
KKR the
big, enormous, huge private equity fund.
They had started dabbling in tech investing and growth investing. They come in and they lead a hundred and thirty five million dollar.
investment in the company.
Interestingly.
Only forty five million of that is primary is money raised on the company's balance sheet.
Ninety million of it is secondary. So they are buying shares directly from Sonos shareholders as opposed to the company itself raising more money. And again, it's hard to parse exactly what happens. So that's twenty twelve. A couple of years later in 2014.
KKR leads another uh secondary round, so no primary, all secondary. The net of all of that is
is that B V slash Eventures pretty much completely exits the company. And as Ben mentioned, um and the S one, they're nowhere to be found on the cap table. They've been in the company for a long time now. They get liquidity, they get returns, but as we'll see at a, you know, much lower valuation than the company
Hands up.
Going public out.
The other thing that happens, now I don't know if it was in conjunction with KKR investing or if this was in the works separately anyway, but Sonos hires a guy from Rim, who had been the head of sales at Rim named Patrick Spence and
And Patrick comes over to Sonos and he joins as chief commercial officer, essentially head of sales for the company. That's gonna become important.
In a minute here. For anyone who's read the Prospectus. For anyone who's read the IPO Prospectus, yes. And
twenty thirteen, the next year.
We had mentioned when we were talking earlier about the five point one surround sound system in the home theater market, Sonos enters the home theater market itself, not just the music market with the play bar.
Soundbar product. And on the streaming side, by this point, I think in twenty twelve they'd added the Amazon Cloud Player for folks who uh remember that that music service. I think next year, maybe twenty thirteen, they added uh ten cents QQ music.
So they're really starting to build up this arsenal of wherever you get your music from, it's delivered over Sonos. So on sort of the upstream side of the business and then on the downstream getting very serious about all these different speaker offerings. Yeah. And they also add around this time.
Mog which um fans of the show and of tech history will know we have discussed. Uh Mog gets acquired by Beats, becomes Beats Music.
gets acquired by Apple becomes
Apple music, but more to come on that. The other device that they introduced in twenty thirteen is the Play One.
which is now a hundred and ninety nine dollars. It is a one speaker
The play one is one speaker, the play three is three speakers, the play five is five speakers, all housed in the box. They introduced the play one for$199. So now they are like solidly in the mainstream on the device side. And this play one is like totally company changing. They've now entered a market that isn't currently I mean, in what, twenty thirteen?
Uh it's not served very well. You know, two hundred dollar speakers, there are people who want two hundred dollar speakers in their home, and this is before the era of smart speakers. And so streaming starting to come online, it's really a key moment to have a speaker at a price point like that.
Yeah, and this is like
huge for the company. Explosive growth. They grow in that fiscal year. So the company has a September fiscal year end. So in
Fiscal year fourteen, which is from
October twenty thirteen to end of September twenty fourteen, revenue grows seventy-five percent.
the company on really on the back of the play one and all the um the the wave of um Spotify integration. So this is
Huge.
The company seems to be super well positioned.
All the investors must be thrilled, they're heading towards an IPO, things are going great.
We're now in November.
Of twenty fourteen.
super interesting time for the company and really interesting as we were doing research for this episode to um talk to folks who sort of did business with with Sonos at these different services.
people that were that were at the company, that were involved with the company, and um sort of get their perspective. At this point, streaming is totally taking off.
By the end of twenty fourteen, there were fifteen million paying subscribers on Spotify. The notion in the company is really, hey, we've got this two hundred dollar speaker that we just announced.

we actually have a meaningful share of the people who have Spotify accounts buying Sonos devices and really buying these two hundred dollar speakers, we can totally just ride that wave and draft off that and it's gonna be awesome.
And if if you do the math, like
If you're subscribing to Spotify, you're spending
What, hundred and fifty dollars a year ish on
Spotify. You're making that kind of commitment. Why wouldn't you spend one ninety nine and get
it in your home or your apartment with great sound.
Absolutely.
Some of us have definitely bought into that. So fast forward one year to twenty fifteen, Spotify is just blowing up.
And as it turns out, the major thing contributing to that is that smartphones have mass proliferation, data plans have gotten way cheaper, people like listening to these streaming services on their phones, which isn't great for Sonos, because what Sonos was sort of drafting off of was people using streaming services in the home.
And so at this point, Sonos's growth is not keeping pace. They're not keeping that large percentage of Spotify users that they previously had as Spotify continues to blow up. And so there there's sort of strategic crossroads where
as a company of people who are obsessed with the experience and truly uh you know autof audiophile or near audiophiles themselves, um, you know, what do you do to stay true to yourself?
And so what Sonos does is they continue to invest in super high audio quality, but you know, lots of people just do not care enough to buy a a hundred ninety nine network connected
uh speaker in in their house. Probably a lot of listeners know what we're talking about when we say audio file. But just to describe we do we're not saying audio F I L E like a file of audio. It's a lover of music. P H I L E uh someone who really loves music and cares about sound quality.
That's a that's probably a good uh good delineation. Good disclaimer. Yeah.
So what do Sonos do at this sort of uh existential point in their company's existence? Well, that year they release a$500 play five, the newer, better play five. They launch True Play, which is this, I think it's called True Play, this really beautiful way to tune your Sonos setup to your room.
Which is kind of a fun thing to do if you have someone else to hear this crazy sounds bouncing off the walls and tune it. Most people aren't gonna spend two hundred dollars on a speaker and they're sure as heck not gonna like

tune it to their room. And so they're advertising that year during the Walking Dead, uh, these very expensive ad spots, they are really just demonstrating this feature and showing off how crazy TruePlay is. And David, who is the music producer that you mentioned worked with with Sonos? Uh Rick Rubin.
Yeah, Rick Rubin is in these ads. And so it's, you know, they're they're sort of like paying Rick Rubin. He's walking around barefoot. He kinda it seems like this sort of strange sort of hippie high end thing. So Yeah. The world is shifting toward, you know, listening on mobile and they're introducing higher price point speakers.
they're spending a lot of money to market the TruePlay feature. They're not exactly moving to the lower price point and going mass market, and they're really showing that they're not willing to compromise. And to double down on on really showing that Spotify is launching Spotify Connect at this point, which is a really magical experience for a lot of people who uh who uh use it out there today.
And what that would enable is really easy native playing from Spotify directly to a Sonos without using the Sonos app and stuff like that. Sonos doesn't feel that Spotify Connect at that point provides a good enough experience for multi-room listening, which I really don't think it did. It would have been kind of a clue G solution and wouldn't have unlocked the power of all of
Sonosa's uh sort of multi-room flexibility offering. So they don't play ball with integrating with Spotify Connect at first, and they sort of roll their own. And I think they miss out on an opportunity to get Spotify sort of promoting them as hey, this is the best way to use Spotify.
by doing that. There was another piece in there too where I think it would have left some of their customers behind because it required custom hardware to be able to do the thing that Spotify wanted them to do, which a lot of their speakers didn't. And I think they eventually overcame that and figured out as a company how to do it without making it for their newer speakers only, but it really shows another value of theirs, which is not
discontinuing old hardware and making it so that every customer of theirs can have a really great experience. Yeah. Backward compatibility, you know, as evidenced by Z P one hundreds is still working out there, getting firmware updates.
This is a huge strategic challenge for the company. One final point I wanna make to bridge to where I know you're going is
Uh remember I was saying people aren't willing to pay two hundred dollars in in mass market for a network connected speaker.
Well it turns out they may be willing to pay two hundred dollars for a smart network connected speaker. What would they pay two hundred dollars for? That's a good question. Well, it's funny, I didn't know about the Walking Dead spots and commercials and like
How funny is that. I mean
This is gonna be really mean to Sonos, and I and I don't intend it that way'cause they do pull out of it, but like
They're advertising in during this period on The Walking Dead. Who is the Walking Dead? Sonos. For God's sakes. I mean, November twenty fourteen, as I was alluded to, a little company called Amazon
Makes a big announcement.
out of nowhere launches this crazy product that
People have no idea that it's what it's gonna do, what it's gonna work. On the heels of the failed firephone. Right on the heels of the failed firephone. Everybody's like Jeff Bezos is not a product guy. He doesn't understand anything. Consumer he doesn't get consumers.
They come out with
The Echo. Dun dun dun. November twenty fourteen.
Launches.
Introductor pricing for only for prime subscribers.
Of ninety nine dollars.
For
You know, this thing.
Does not sound as good as a play five or a play three or even a play one.
But like
It fills your room with audio. A a room filling tin can of audio. Yes. But you know
Yeah.
And most importantly, you just talk to it and it does stuff for you. David, that's the most millennial opinion of audio. Uh that's a great encapsulation, but it's loud. It's like the the number of people who still play on either crappy Bluetooth speakers, the I I heard a stat a while ago and I don't have it in front of me, but the number of people who play
podcasts and even music out of their phone speakers is disproportionately large. Like people just set it on the table and and play. And that's why Apple added all these like better speakers and double speakers to iPhones and iPads. Cause a lot of people just don't
care enough and they're like, eh, I can hear it.
Walk down Market Street in San Francisco. Like there are a lot of people, especially, you know, kids these days, just walking around playing speaker, you know, playing music or whatever out of their out of their phones. Convenience speeds quality. Yeah, indeed. Indeed.
Well
Turns out that Amazon and Bezos were actually onto something with uh
the echo and it's included uh Lady A, shall we say, so we don't um
enraged listeners in their homes all all throughout the the world here. Sonos does not see this coming.
At all. They are
Totally flat footed. You know, A, they've got the strategic challenge.
that Ben was just talking about of like
They're now weirdly going up market in a time where
You know, the market is moving.
Down market in terms of audio quality and accessibility everywhere. But when it comes to smart speakers and voice assistance,
they have done nothing. So like the history of the company was they were actually out ahead of the technology waves in terms of
Wireless connected speakers, but now they are
Way behind.
The company has always said they're about democratizing the ease of accessing music in the home, but there's a little bit of what I say is different than what I do that goes on because if it's really democratizing, then their execution should follow that
they make speakers available to the most people and make it the easiest possible experience in order to just play music, like sit there and yell at your speaker. But it's not totally clear what created the blind spot, but they really
have stayed premium and they really didn't do anything with voice and it kind of shocked them and the world when Amazon started doing something with voice.
And McFarland actually he talks about this in a interview. Um
This is a quote. We were late to recognize the impact of the echo and the echo dot. I mean the echo dot Amazon sells these things like when they go on sale for thirty bucks. Like
It's crazy. And voice overall.
I think the magic Amazon did was cleared that undefinable bar of usability. All the voice systems before that weren't.
But being able to walk into your home and say, I want to listen to KCLU or KCRW or whatever
Also telling that he's talking about radio stations here, not podcasts. Come on, John. Live in the twenty first century here. He says that's part of
An ultimate home music experience.
So we needed to get there.
We pivoted the company.
And that they did in a serious way.
Not right away, you'll notice.
November of twenty fourteen is when Alexa is first announced and the the echo is made available to Prime subscribers. And then it goes uh general availability in twenty fifteen.
I believe it's summer of twenty sixteen when Sonos sort of formally switches their strategy to
The burning platform. Yeah, to to to be sort of voice first and announce that they're going to have products with voice baked in and at the very least right away they're gonna start integrating their existing products if you have a um an Alexa in your home.
The product experience for that is if you bought an Echo and you have a Sonos system that uh, you know, let's say you have a play five and a and a play bar, um, you could say something like
Unnamed voice assistant. Uh play XYZ song on Playbar, and then it could play it on there. So you know, it's a it's a little bit of a uh stopgap solution before they eventually release their own Sonos ones and now the Sonos beam, which are voice baked in, but they're
Perhaps a little bit too late, but switching strategy in a big way. So yeah, it takes a long time. The Sonos one, which is essentially the play one, but with microphones in it, so you can actually talk to it, and it is
you know, uh Lady A um baked into it. And coming Google Assistant, we'll get to that as well. That launches in October twenty seventeen. And then the beam, which is the same thing in a soundbar format for home theater systems, that launches only last month in twenty eighteen.
Yeah, so we are in the middle of this, right now. We're in the middle of it. Yep.
Good time to go public. Well so a couple things.
I don't know uh w what exactly it was the result of could be a lot of things, but certainly missing this
Both of these strategic inflection points, as Andy Grove, uh famous CEO of Intel would would point them, would say, um, was not good.
McFarlane
announces in January twenty seventeen that he's gonna step down as CEO and Patrick Spence, who we mentioned earlier, who had come over from Rim when KKR invested, is gonna take over as CEO.
And McFarlane like he he stays in the
Company has an advisor, but he leaves the board. He he really hands the reins over to Spence. It's a pretty fulsome transition.
And then Spence, you know, from that
point forward is now leading the company.
into this new voice era.
So let's talk about that a little bit.
When they launched the one uh in October twenty seventeen and and announced the beam.
But they come out with a pretty interesting take on
The voice world.
They say they're gonna bake Amazon's voice assistant into the product. So you can talk to the speakers, they will work just like Echoes do. Which a Amazon announced super early on in the in the product development of of Alexa that they were gonna make the Alexa voice service open to anyone that wanted to include it in their device.
They also Sonos announces at the same time that they are in the future, it's not ready yet.
going to support Google Assistant.
As well.
So
You will be able to multi-home with your voice assistants if you go the Sonos route. Which which makes sense. You can see why an Alexa and why a Google want to do this because the their main goal is just get the most people interacting with their service. Amazon's gonna sell these
many different use cases of fairly inexpensive Alexa devices to get the biggest proliferation possible. And we think today they've shipped something like forty million or more of those. But you know, their strategy is really just get people talking to Amazon through whatever whatever they need to be and Google sort of the same way.
A really interesting potential, you know, argument to consumers, uh, if you are
Like Ben, and you're gonna outfit a home with um
smart speaker technology, do you want to lock yourself in to
the Amazon ecosystem or the Google ecosystem or anyone ecosystem, or
Do you wanna be able to use whatever and switch between them?
First of all, this is all future looking because we only know about what the Alexa integration actually looks like right now, because it's the only thing that's shipped. But I can tell you the sort of my consumer psychology around it.
I am not convinced there's any value to being able to real time or dynamically multi-home.
there probably won't be a scenario that arises where I'm like, ooh, I need to talk to Google Assistant now rather than talking to Alexa.
Crap, sorry, everyone. The psychology for me was really I don't know how this is all gonna play out yet, and I don't want to invest thousands of dollars into one ecosystem. So the longer I can stay neutral basically gives me option value as a consumer and and preserves my option value for longer. I'm
curious when Sonos talks about the value of having multiple voice assistants, are they really thinking about
the use case where people are gonna use multiple voice assistants, or is it really sort of this like peace of mind that people should choose them because it means they don't have to make a choice? And if we know anything from watching consumers over the years, it's if you give them the option to not choose and continue to make no decision for longer, they will.
Well, I made it
Decision to go
Full on Amazon ecosystem, but that was mostly driven by Prime Day this year, where these things were on sale for so cheap. I was like
Why not? Even if I don't like it, like I'm spending a couple hundred dollars on many devices, I can just
You know.
recycle them like and buy something new. But
I could see a world in the future where like Wave runs on Google apps. Like it has my calendar, it has my email. Like Amazon doesn't have any of that.
I would like to talk to Google and have it do things for me in the future.
At the same time I would also I really like the Amazon ecosystem, so
Anyway, it's a very interesting position that they almost like a save that they've gotten themselves into here. And and you can see how this strategy evolved because I think people who are newer to Sonos look at it and go, Oh, that's kind of an interesting business strategy. Like they're
not building their own voice assistant and they shouldn't,'cause it's a terribly expensive R D cost and it requires network effects. So
Two good ones out there. I'm gonna ignore Siri for the moment. Yeah.
Th a lot of people are at least were a little puzzled when uh Sonos first announced, you know, that we're gonna ha we're gonna integrate other people's voice things. But if you look at them historically and you think
The company's actually just looking at these voice assistants the same way that they looked at streaming music services, and that they're going to sort of be in the middle and be the bundling point um for all of these other offerings. It starts to make more sense from the company psychology of why they would do that, because they like Apple make money selling
hardware that's differentiated by software and services. They
just aren't necessarily providing all the services. The question is, and then that of course is is where we'll get to later in the crux of the company is how differentiated are their services and is their software really, and otherwise are you just sort of competing on on audio quality, uh, which is a little bit of a tougher vector to compete on now.
But as as we look to the history of the company, understand a lot about why they're making the str the decisions that they're making now.
Also, I do want to touch on Siri.
They've announced Siri integration. Apple obviously is in a very different position. Amazon makes money on you when you buy stuff. Google makes money on you when you search for stuff. And Apple makes money on you when you buy their hardware. And so for Apple, they released HomePod, which had limited adoption, which I think they probably knew, but didn't go gangbusters.
Siri is really exists as a way to differentiate Apple hardware. So that you should m buy more Apple hardware and invest more in the Apple ecosystem. It's not really in their best interest to um make that available to other people.
N not that Siri is itself better than any of these other services anyway, but the access to plug-in to Apple devices is differentiating. For example, if I were to tell Siri, and I'm gonna refrain from s addressing hey, if I were to tell Siri that you should add something to my reminders list.
It works really well. It is really nice. It's unfortunate that I can't bark at my uh Sonos one and tell it to add something to my reminders list because I won't see it on my phone. And so you can see how like a home pot is differentiated in that way.
what they have announced is that coming with Airplay Two, there's some limited Siri functionality. So when you look at the business models of Apple, Amazon, and Google, you can sort of see why Apple is really integrating less with Sonos than the other two companies are.
It's so frustrating as a consumer with this stuff,'cause like, or at least for me, like
I love the Amazon voice assistant and like I think it's really good. I haven't really played too much with the Google one.
Siri is just terrible in my experience. Like I hate it, but you know, especially like
I've got the cellular watch and like I go for a run.
I love having the cellular watch of like I think of things when I'm running. I'm like, Oh, remind me, you know, Siri remind me to do this. That's great. I would love to have, you know, much better
cross functional, cross ecosystem.
accessibility here just like we do on mobile and on the web.
Maybe there's a world where Sonos becomes that. You know, I don't know.
Yeah, there is definitely this trend that we saw before with Google Maps and Apple Maps, where it's it's sort of companies have a disagreement on whose customers they really are, and companies have a disagreement on on how they're thinking about those customers strategically, and then the consumers lose because of it. It's totally frustrating.
Yeah.
All right listeners.
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Well all right.
To
Bring the history and facts on home here. In the middle of all of this
The company announces they're going public. Interesting timing, but um I can shed a little light on the timing from talking to folks. Basically, there was a notion that hey, maybe we'll be acquired. Um that that could totally happen. And when Apple released the home pot, it was really like, Okay, Apple's decided to build not buy. We would sort of be the people that they would buy.
Um, Google already has a thing in market, Amazon has a thing in market, save sort of like an Android manufacturer, there's really no one left. We can be a standalone company, so let's go be one.
And I presume also at this point.
Investors, you know, certainly
Index invested back in twenty ten and KKR invested in twenty twelve and they have shorter, you know, time horizons for their investments. I I assume there was desire for liquidity on the investor front here. So July
6th 2018, they filed to go public. Rumors are that they expect a kind of two and a half to three billion dollar valuation.
The company did just under a billion dollars in revenue last year. They then a couple of weeks later, after the road shows, they announce their
pricing range of seventeen dollars to nineteen dollars a share, which is lower than that rumor. The midpoint there, eighteen dollars a share would be about one and three quarters billion valuation.
They end up pricing on the eve of the IPO at fifteen dollars a share under the range. So that gives it a market cap when they start trading of just under one and a half billion. They do pop on day one. They start trading on Thursday, uh last Thursday, August second. They closed it near twenty dollars.
And and then yesterday they closed at nineteen dollars and fifteen cents, market cap of just under two billion. But you know, it's interesting. This is not like a hot IPO here. No, and they actually only raised eighty eight million dollars in the IPO, the rest of the tender, that the the hundred and thirty million, because it was a two hundred and eight million dollar IPO.
actually came from existing shareholders. And so it's only eighty eight million of new cash into the company. Yeah, it was KKR, it was indexed, it was other investors and employees who were selling. That's also typically not a great sign into an IPO. But again, they I mean I'm sure there's huge desire for liquidity here. We'll we'll transition into narratives here, but just a couple of points to keep in mind uh that I want to draw out as we
do talk about narratives. They did about a billion dollars in revenue in twenty seventeen.
But they just haven't been growing very much. They've only had about ten percent revenue growth over the last couple of years, and you know, typically high flying IPOs are
You know, at least twenty percent revenue growth year over year, but really you want in the forty percent plus. I think it was a little higher. I think they were like eighteen percent revenue growth, but still ha half or a third of what you'd like to see.
They also disclose their revenue by uh s who their largest uh sales channels are.
Interestingly, Best Buy is their largest sales channel. Seventeen percent of Sono sales.
happen at Best Buy. Now remember, only about a third of their sales happen in North America. So like that may be a little more than a third, but you know, almost half of their North American sales are coming from Best Buy.
That's troubling. And you can read two things into that. Uh you can read uh in addition to me being troubling. One, you can read they're paying a lot of money to the channel because they're not retailing these things themselves from Sonos.com. They're probably spending fifty percent on a wholesaler and then another fifty percent to the retailer. There's just a huge markup when you have to go through a channel like Best Buy.
The other thing you should read into that is it's interesting that it's not coming through Apple or Amazon or Google because I'd say in an advantageous light for the company, it reduces the reliance you could think about those three companies as now supply chain.
for Sonos. They're they're sort of the component that Sonos builds into their smart speakers.
it's nice to not have your supplier or one of your suppliers also be your retailer. And so they found themselves in a nice place where they sort of have they're a Switzerland sort of bundler. They're and of course when I say Switzerland I'm I'm meaning sort of neutral third party.
Um, but they're a neutral third party bundler of these services. Their biggest sales channel is also a neutral third party, which is good,'cause if it was, you know, all on Amazon, then you'd start to get a little nervous that Amazon's gonna apply pressure to sort of squeeze Google out and vertically integrate it in some way. So I would say not good, not bad, that it's it's through Best Buy. But
Who shops at Best Buy? Like it's not millennials. It's not Spotify listeners, you know? So it's just it's interesting. Before switching fully into narratives, there's a couple key numbers to know. One is uh Sonos has nineteen million products.
in approximately seven million households around the world. Uh that nineteen million you can compare it to, you know, 40 million plus Alexa devices that have been sold. Again, sorry for saying the name. It's just interesting to sort of keep that in mind as you start to see the smart speaker, the low-end smart speaker segment grow very quickly.
It'll be interesting to see what the high end smart speaker grows at because the uh the way that I sort of see this going is there's tons and tons and tons of hundred and fifty dollar devices sold, and it might be a tougher road for Sono selling more expensive ones.
The other thing to know is that they're right around break even on net income. Um the six months leading up to the IPO, they were net income positive, but only by by about thirteen million. Um they were net income negative before that, and I I think they did some things, uh headcount reduction and other things as they approached the IPO in order to be net income positive. So
that may not have been in the same time frame, so d don't hold me to that. But the way you should think about this company is they're still kinda break even. If you look at like their price to earnings, it's something insane, like 70 X. So you should look really at their price to sales, which is just a hair under two X
Um so they did a a billion dollars of revenue right now. They're they're valued a little under two billion dollars. And what you should really look at in that number is they need to grow their profits a lot to really grow into that valuation and they're kind of priced reasonably based on revenue.
Growth is the question mark here. Yeah. Yeah. They're a company that's growing ten to twenty percent per year and they're definitely priced to grow. So
Should we lay out each side's narrative here? Yeah, absolutely. Let's start with Sonos. The company desperately wants to be seen as a software, not a hardware company. They are are really trying to avoid comparisons to Fitbit or to Jawbone. Um and and Jawbone. Oh man.
We could do a whole episode on that someday. Yeah.
uh manufacturer of devices. We have this like unbelievable pioneering technology that has really woven the whole home together. They're really trying to spin that story and and tell that that message. There's another intellectual property story that they're telling that is that they have a patent portfolio of six hundred and thirty issued patents and five hundred and seventy applications in progress. So
You know, we're an IP machine. We sort of invented this category of wireless multi room home audio and everyone else is just sort of like, you know, playing around in our backyard now and sure we're integrating with some of them because of the voice stuff is a title wave and we need to be there, but you know, we're the
We're the big guys here. We started here. We invented this wave. It's the it's the Steve Jobs line from the the iPhone keynote. And boy have we patented it. Sam Sugden. Yeah.
Um some other things Sonos is sort of espousing is that we have a non hardware growth story, so they haven't ruled out doing digital services business in the future, which it's not clear what they mean by that. Probably not a full assistant, but maybe a little little sort of uh
For programmers out there like subclasses of an assistant or being able to uh add additional sort of features to any given assistant just to create it's almost like customizing Android firmware, like to create differentiation on top of the core assistant that you inherit from it's like Xiaomi and the the Mi UI and Yeah, yeah.
Maybe they're thinking that's their own d streaming service. Not totally clear there either, but they've said they haven't ruled that out.
The
Other thing that they talk about a lot is that twenty seven percent of Sonos households own four or more products and sixty one percent of households have more than one. So their sort of retention and expand once they land is huge. So the bigger base they build, they don't have to reacquire that customer in the future and they can just sort of get cost free revenue, which is
Is nice. Um or at least acquisition cost.
The way they frame this, I you know.
I I think is is right, you know, and true is like
Our customers, people who try us, love us, you know. Once you get a Sonos
You use it forever and you buy more.
And so that sort of justifies extremely high sales and marketing costs. And the last message that they're really pounding that that that I've got is this is the first time I've seen this term. I don't know if it has existed before, but if it's something they coined in the S1, they regularly refer to the Sonic internet.
As the wave.
And that uh people are totally overwhelmed with screens and that voice is the answer and the the the quote is that they're well positioned for this.
As the leading home sound system for consumers
content partners and developers.
Sonic Internet.
I love the product. I I think I bought two to start and uh not gonna disclose how many I've bought now. So th that that's very that's a very real thing.
Well, before I open up any questions, that's Sonas's case.
You hit all mine except the only
Slightly.
different one I had that you covered a little bit is um they talk about this concept of like we're the only company in this whole space that puts the listener first. And if you look at
Google, if you look at Amazon, if you look at Apple, they are
Making choices, as as I expressed earlier, my frustration with some of the choices that those companies are making, that is not putting the listener first, that is putting their their own business models first. Sonos is making the argument
We put the listener first, and so we will let
Any open platform play ball with us. We will work tirelessly to make all assistants work and integrate, you know.
Easily in our platform. That's a great point. Their their incentives are aligned with the user. They're not trying to
make money from them in other ways after selling them a device.
Now should we move to the other side.
Yeah.
Well, let's we'll just trade bullet points back and forth. So the first one that I have seen that really speaks to me is this story that they're telling around growth.
A non hardware growth story.
isn't really there.
Uh were I a bear, I would say it's difficult to see them creating software or services that people will pay for on top of buying devices.
Yep.
Yeah, not only is is that
Not there, but like your growth story period is not there. You know, you're growing between ten to twenty percent like
Okay, you know.
Yeah, in a in a high end segment.
Which I only go into the next one'cause I think it comes from that. A high end segment. Awesome. Like you should think
Cool, we're selling Mercedes, like we'll we should have great margins. Uh they do, they make really nice gross margins. They sell above forty percent, I think in uh some of their categories at forty six percent in the last six months, but they're sixteen years in and they're just barely break even on a net income basis because they pay a ton in sales and marketing costs.
both to the channel through advertising
It's just expensive to acquire the customers they're trying to acquire.
Yeah, I mean this is a very considered decision. I mean
How many
Hours, days, months of research did you put into deciding
How you were gonna outfit your
Yeah, having conversations with other smart people that I respect and, you know, want to understand their perspective and
Yeah, a lot.
Yeah.
I have a few more. One is like Yeah, okay, like your your voice story, you know
It's interesting. This the Switzerland you've got a good one, but like you were way late and like this whole Switzerland thing is like uh you were you were way late to the market and like
You know, you keep saying Google Assistant is gonna ship.
I don't see any Google Assistant on any uh Sonos devices yet.
Is this really gonna be as easy as you say it is to
To fully integrate all these platforms.
Yeah, and the fear is that they really do get commoditized being a hardware maker when that's not where the money is and they're selling expensive hardware. So they end up looking a lot more like a Fitbit or a Jawbone than than a Spotify.
And the sort of bottom line for me is can they find the segment that's not price sensitive?
Cares a lot about audio quality.
cares about audio all over the home.
and and wants an agility between voice assistance.
It's it's tough for me to see that being a big segment, especially if you're not able to make money hand over a fist on on each customer.
My two others are
I think the loyalty point that Sonos makes is a really good one. That's crazy. You know, twenty seven percent of their customers have four or more speakers, you know, then you are case in point. Once you try it, you don't stop and you're hooked for life.
That's great, but
I feel like their business model is not aligned with that. Like they don't have a
A subscription
business model, you know. Um if like Spotify's business model is aligned with that. Like people start using Spotify, they love it. Great, they're paying Spotify every month. With Sonos, like
It's still dependent on them like coming out with new
products and adding them and like and the replacement
Cycles are so long on this, you know.
Now that I have a bunch and I'm almost like embarrassed by how many I have, but it's super awesome, like I'm kind of done paying that company money.
Yeah.
You know, they would have to come out with something like amazingly new.
that you would replace those, right? Like you're not gonna build a
addition on your house just to like buy more Sonos stuff.
And I was gonna ask you this during tech themes, but it's too apt right now to not do it.
So they sell hardware that's differentiated by software and services, which they bundle for free with the hardware.
Uh sounds a lot like Apple.
That's a huge growth business. I mean, first of all, they're selling a product that has perfect product market fit that they have a high margin on and everybody wants, which is different than Sonos, because Sonos only really gets the high end segment.
But I guess let's address some of the major differences. The refresh cycle is rapid for Apple. It's every two years or so for an iPhone.
Once I invest in that ecosystem, I kind of don't stop buying stuff. I mean, I'm buying an i an iPhone every two years, I'm buying a computer every three years, I'm buying a watch every once in a while, buying AirPods, I'm paying Apple because they're cheap for iCloud storage. I I'm buying apps and they're getting a cut of that. So not only is it fast refresh cycle on the hardware.
It's also that they have very real uh value they can offer through software and services that are willing to pay for. It's what Tim Cook is beating the drum on on every Apple earnings call is
Apple has two business models. They have the hardware business model, which benefits from a quick refresh cycle.
They also have the services business model, which is a you know, essentially a subscription or a pay as you go, you know, fee for fee for service business model. And uh, you know, that's generating ten plus billion dollars in revenue every quarter for them.
as Sonos tries to convince investors we are a software company, not just a hardware company, does that matter if they're not monetizing the software and services?
I think so. I think it matters a lot. Yeah. I mean it seems like even if you do all that software and services, you should still be valued like a hardware company unless you're
generating cash flows from those
Right.
My point is like your
Fair, like your product is great, like your services are great, but like your business model is not aligned with your product and services.
Uh.
And then the other quick one I had, I don't know how fair this is, uh if this is more me projecting than anything else, but
'Cause I do think speakers are interesting, but like also headphones and personal devices are also real interesting. Um see AirPods and Apple's acquisition of beats. Zonos doesn't do anything in that.
What makes sense now that they've locked me in as a customer to offer me where I'm like, here are hundreds of more dollars.
Well, um imagine AirPods that
You know, you could use
Amazon's assistant or Google's assistant or Siri or you know like that's compelling. Yeah.
It's so funny how I talk to my phone for some things and my speakers for others. And it it does feel like that should be unified.
Um particularly the notification point that I mentioned earlier. Like I can't ask my phone for a flash briefing and I can't ask my speakers for uh adding something to my to do list and it's super frustrating.
Yeah.
All right.
Those are my points.
Alright.
What happened otherwise?
I think we really covered this. I mean I think they basically needed to IPO
could have like a little uh McFarlane Elon style take public or take private or something or you know d buy buy outright. If you start to look around at who acquirers could have been
it would have been Amazon in twenty tw thirteen or fourteen deciding to instead of uh hiring their own hardware engineers to buy Sonos instead and then base it on that. And I think once they made the decision to start building that out the uh
uh Lady A ecosystem.
themselves they they weren't gonna buy.
By Sonos. Uh Google probably the same thing.
Amazon would have had to have made that decision even earlier. They started work on the Echo in twenty
Ten. Two thousand nine, two thousand ten.
So I don't I don't think that ever really would have been on the table.
Yeah, the only other one you could sort of see is a Android phone maker.
I think the most interesting one though is what if Apple had acquired Sonos instead of Beats?
Oh I see.
I was gonna make the comment said of building their own for the home pod, which they had all that expertise from the iPod Wi Fi or iPod Hi-Fi.
That's interesting, instead of beats.
The real reason they bought was Mog was the serving the streaming service. They bought it for the
Hardware in the headphones as well.
Sonos not having their own streaming service kind of made that a non starter, I think, for Apple.
And the beats connections into the music industry and contracts they had signed in order to really make Apple Music have a fighting chance against Spotify.
Rick Rubin is.
Great. I have uh tons of you know respect for him as an artist. But uh
He didn't have quite the same um
industry, uh he he wasn't involved in the business side in the same way that the Beats guys were.
This is quick sidebar. It's a revisit from a previous episode where we talked about sort of how Apple Music and Spotify were doing.
Spotify.
Like really seems to be ramping.
we we don't need to adjust any, you know, calls we made on previous episodes, but like Spotify seems to be sort of pulling away.
Well, I don't have great numbers in front of me, but I I think Spotify now has like seventy million paying subscribers and Apple Music is somewhere around forty.
Wow.
Interesting.
I remember I at least being more skeptical on Spotify and more bullish on Apple Music, but uh
I don't know if it sounded like I'm being very critical of Sonos.
I am on some fronts, but I think
They also are doing something really interesting, and I do see the value of, you know, open platforms and
Spotify is much more that on the music streaming side than Apple music is.
Well, we'll have to keep watching that battle and see how it plays out. Yeah. It's fun, like we didn't intend this um this way, but like we kinda have this mini series going of
Music, you know? From sound jam and iTunes to beats to Spotify to Sonos.
And we can give ourselves credit for sort of these like
accidental cool mini series.
Or we could probably look at household spend and just determine that we are gonna end up in mini series based on transportation, food, uh, you know, entertainment. Yep.
Yep.
Smartphones. Yeah. Yeah. Yeah.
Uh um Waves. Yeah, tech themes. Perfect Seg into
Tech themes.
And of course my first one is is technology waves, which is probably what you were gonna go with too. Yep.
And I'll just sort of name them and then we can talk about them. There was one they rode and fell off, and that was streaming services changing the way that audio is consumed. And then there's a second one they're trying to ride, which is voice assistance disrupting home audio. Yeah. Well, and I think what's interesting, there was one even before streaming, which was just wireless networking.
In general, and Wi Fi and homes. Yeah. I mean I think the big takeaway for me and like waves throughout this episode is just how important it is to time them correctly. Like Sonos has built a great company, they've got great products.
lower priced IPO than they wanted, but still like this a multi, you know, almost two billion dollar company. It's great.
This company could be so much more if they had timed
the streaming wave and the smart
voice assistant enabled speaker waves better.
They could be a twenty billion, forty billion, fifty billion dollar company.
Let's examine that. Uh how would you have timed streaming services better and what would you have changed? Because my view of it is they time streaming services perfectly, but
ended up just without an offering in the smartphone and headphone space and really only were in the home where and that's not where most of the listening was.
So you would have either had to go downmarket or diversify on product. I I would argue that they were too early on the streaming wave and that their DNA from the initial kind of
wireless networking wave of wanting to be like super high end
prevented them from like the correct strategic decision would have been in call it
twenty twelve, twenty thirteen to go all in on how do we get as many apartment living millennial
folks as possible who are Spotify subscribers and their core base. How do we get them to buy a Sonos product and get into the Sonos ecosystem? And kept relentlessly driving
Down.
market on cost or even just starting there as a company, versus like doing this weird like, Oh, we're gonna go back up market now.
Yeah. There no discounting premium product. Yeah. So you're you think the way you could have
really that way better would be to sort of appeal to the fatter part of the segment. Well, like you said, there's seventy million Spotify subscribers now, right? And there are seven million homes with sonos. Like that's one tenth penetration many years later. Like that should be like eighty percent penetration.
And then how would they have done voice assistance better? I mean
they would have had to start building their own, I think, in like twenty thirteen. Cause imagine if they had a hundred dollar product and they had their own voice assistant. I mean then these things would be everywhere, but I think the R D cost required for that it needs to come from a FAIN company.
And
I don't know that you could really do that as a private company. So absent the resources to do that.
could they be riding the voice assistant wave any better? Yeah, that's this one's harder because it's it's more out of their control. I don't I don't think they could have built it themselves. I think
they could have been faster to market on integrating Lady A and and Google and and Siri if they can, but
But that's that's outside of their control in a lot of ways.
There's another pattern I've noticed, which is kind of interesting. So breakthrough hardware company produces expensive device, then component costs come down and others are able to do it, leaving them sort of only with a small segment who cares about either brand or quality, or has some sort of ecosystem lock-in for some reason. And one I'm definitely thinking of is Jawbone, because
we used to see three hundred dollar jawbones who invented the portable USB speaker category and now they're eight dollars dangling from the checkout at at CVS.
Not that we're seeing exactly that in speakers, but after sort of poking around a little bit, the components have become a lot cheaper and there has become a lot more know how on how to build good audio systems. And so I think, you know, we're able to see people
Like Amazon run loss leader businesses on hardware or break even or small margin businesses on on the speaker hardware. And, you know, it may not be the greatest place to be to
be the one who invented the category and brought the cost down for everyone and then have someone sort of outcompete you strategically. And so of course then the only hope of combating this is really with network effects, like what sort of Fitbit was trying to do in the competitions and really building a strong brand and habit in consumers' lives. And my you know my mom has a Fitbit, so I want a Fitbit.
And the other way that you could sort of compete is with channel and supplier contracts like what Roku is doing, where Roku has relationships with Netflix and Hulu and and then they also have relationships with all the TVs that bundle them in. So they're sort of um making a few bucks on every TV that's sold and sort of diversifying the
the way that their platform is used without them having to sell all the devices themselves. We're seeing Sonos sort of try and do
All these things when you think about the channel relationships, they're definitely doing that with all the Fang companies, or at least Amazon and Google, the supplier contracts, you know, Roku did that with TCL and all these TV companies. Sonos just announced they're doing that collaboration with IKEA. It's unclear if that's the right sort of brand alignment for them to be
bundling uh premium product into an IKEA piece of furniture. So millennials. Bottom line, I guess when I take a deep breath here, how do they avoid
Going the the the path of the jawbone.
Yeah.
Yeah. Oh man. I had originally wanted to include a lot more jawbone in the history and facts as like a parallel path. I think we should just do a whole episode on Jawbone someday. Man.
That is a wild ride of a company. Fun fact, Jawbone and Airbnb shared an office building for several years. Talk about two divergent paths, but um
Anyway.
Yeah. And and amazing people at Jawbone. I mean, like true missionaries, visionaries, brilliant. The world is better for Jawbone having existed.
Yep. Yep.
Also a wild ride.
Well, minor tech theme uh footnote to this story, but I just think it's an interesting thing that um I've been thinking about this whole season three with Tesla and Xiaomi and now Sonos.
This idea of being the iPhone of something, and what I mean by that is
Over the air updates of hardware
Yeah.
and improving them. I hardware or or any experience. Improving a core
operating or hardware.
Seamlessly and quickly.
It's just such a powerful thing and like
Every company should do that. Like the the fact that Sonos is upgrading, adding features, adding you know, adding services to devices that are ten plus years old.
What a powerful like technology lever versus
Chevrolet or DM or you know, forward that's like
Oh, you know.
My car that I bought in two thousand five.
Still the same car I bought in two thousand five.
You know, you need to align your business model so that you make money uh continually from your customers as you're providing them value.
Which Tesla doesn't.
Sort of right now, but I think they are maybe.
Getting there in the future with charging and supercharger networks.
Jerry's still out a little bit there.
When we inevitably do one or several more Tesla episodes, uh we that it's an interesting lens to to use and and sort of keep revisiting of how are they continuing to make money off of their existing customers and the criteria that we laid out earlier in this episode is sort of
Is the refresh cycle fast enough? Are there services revenue? And is there enough
high value products that you can continue to sell them over time to to bridge the gap until the next refresh cycle.
Tesla could go either way right now. Um but I c I can see a path with the
Energy networks.
Um
I have one more.
In the S one, uh, Sono states that experts believe that half of all web searches will happen through voice within five years.
I read that as well. That is nuts. Like when you think about the implications of that, and sort of my my favorite one that I've thought about and don't have a great answer for is
When you search for something, you get
Results.
when you ask for something from an assistant you get an answer.
And results leave.
one to five spots for blue links.
that are paid.
And answers leave zero spots.
And it will be fascinating to see Google's business model.
Change if this proves to be true.
It's obvious why they're in the voice assistant market, if that's where search is going.
I just haven't come up from a product perspective with the answer of how you
sell advertising or m or monetized voice based sort of high intense search.
It's a bold claim. We'll see if it becomes true or not. But but you know, if it does, also interesting and I think explains a whole lot about
what's going on in this space, who is the company that stands the to gain the most from that future.
It's Amazon.
Because I think Amazon is no I believe they are no longer Google's biggest customer, but they're like one of their topic. Like
Amazon pays so much money to Google for AdWords for products. Amazon has shifted the mind share such that more than fifty percent of product searches start on Amazon now instead of on Google. Exactly. So anything Amazon can do to
Move.
consumer searching out of a world where they
you know, are paying any amount of paid search to Google, uh, is good for them.
Yeah, Amazon actually has the aligned business model with voice search and Google does not, because Google does not make money on the transaction, whereas Amazon does. Yep.
Indeed.
By Amazon.
Buy real estate in Seattle.
Well, uh one of us Wait, sorry, I shouldn't yell by Amazon. We should I don't I think like we actually should disclaim this is not a stock picking show. We don't recommend that you buy or sell stock based on our actions. I'm sure there's a more official way we could say this, but um that was clearly a good two, you know, buy Amazon if you want if you decide do the work and decide you wanna buy Amazon or
Or Seattle real estate or whatever. Um or HQ two real estate, wherever Why has that not been announced yet?
Toronto.
I don't know.
I Toronto or D C, but I'm still going Toronto.
Yeah. I thought it was supposed to come out w last Wednesday. I thought there was some like narrow down announcement that didn't didn't seem to happen.
Yeah, I don't know.
What are those guys doing over there at Amazon, guys and girls? Yeah. Um yeah.
All right. Greeting.
Should bring this home?
Yeah, so uh listeners who may not have caught the last couple episodes, um, in season three we d have decided that when w something happened very recently we will not just arbitrarily grade it, we will paint the picture of what an A plus looks like, uh how they could get there and then sort of paint
any other cases as well. You know, with historical acquisitions we have the the
data to be able to show that and and here it's really super speculative. The way that we tend to grade these things is what will they do with the money that they raised and will and and was it a good idea to IPO to raise that money? It was a good idea to IPO because they needed the liquidity and they weren't going to sell to anyone for the
uh evaluation comparable to what they could IPO for. So yes, they should have IPO'd. Um what will they do with the$88 million that they raised? I think largely continue to fund operations. That's not like this of cash gives us a new they needed money to to fund operations still because they're such a sort of cash flow narrow business.
I can see two ways where it becomes hugely successful. One is if they figure out how to either go down market or release things outside the home, like headphones, and they're able to be the way that lots more people
get access to multiple voice assistants if if they're able to sort of secure the contracts and relationships so that
I can realize my dream of be able to talk to the same device to set a reminder and to hear a flash briefing. The other way that they could become successful is if they do figure out a a real way to get services revenue off of me. And I I I don't know though what those are yet, but it's not unreasonable.
Uh-huh.
I think this could become a
I don't know, you name it. Five billion dollar market cap company.
Just
Um
Writing the natural
course of things and wave there on, which is like
millennials who subscribe to Spotify are getting older and buying homes and doing what you did, you know. And so sales will naturally increase because of that. But that's not an A plus. That's like a
Yeah.
So I think I agree on the A plus.
You know on the sea.
I think maybe it's that, but that the price points just remain so high that
People make the decision that I made of like uh I'm moving in San Francisco and uh to a bigger place and uh
wanna outfit it with smart speakers and Prime Day came along and I was like hmm.
Well
I could spend a couple thousand dollars and do this with Sonos or I could spend a couple hundred dollars and do this with Amazon. And I went with the latter.
Quite honestly, if it's just business as usual and and no there's no sort of strategic or material product change, it's probably in the C or D land. Again, our grading criteria is a little funky right now because it's not we're sort of gr at this point now grading the company, uh rather than grading the actual event of the IPO.
But sort of my prediction is that this becomes an
nice company that grows into uh it stays sort of between the one and a half to three
three and a half billion dollar valuation and and at some point deserves it.
There we have it. There we have it.

Carbouts?
Car outs. So the one I referenced on the Tesla episode that I wanted to do then, but I
Pulled back because we're already so far over time. Uh now now's a good time to do it. Brotopia by Emily Chang. I read it.
You all should read it too. Everyone should read it. I thought mistakenly I was like, Well, I've read all the headlines, like I'm super steeped in tech. I know if you know everything that's good, like I it felt like one of those books where like, yeah, I should read it, but you know, I already know what is written in there.
I read it and I was like
No, it's worth reading the whole thing. There's
Just so much more detail and stories and things that, you know, I didn't know and um
You know, it's not lost on us here at Acquire, either, that we're now in
Yeah, episode three of
season three and we've covered three really great interesting
companies here, which um, you know, we're proud of our work that we've done on them. But
There are
Yeah, no.
women that we've talked about at those companies, founders or or otherwise. Um and uh
That is definitely not lost on us. So everybody view it as your
Homework and opportunity. Read Brotopia.
Why now feeling it?
Silly uh recommending a podcast with a man.
Well that's okay too, but
I am the exact same camp that you were in thinking. I've read all the headlines, I've read a bunch of excerpts from the book, I'm sure I know, um, so
Homework it is.
My Carve Out is another podcast episode called Invest Like the Best, and this particular episode has the guest, Andy Ratcliffe. And so Andy is a founding partner of Benchmark and the CEO of Wealthfront. There's a lot of amazing things on that episode, and I'll give one anecdote, but the main takeaway on Andy is when that guy talks,
It's like these pithy statements of correctness.
And it's just like an amazing action packed forty minutes or whatever it is of
Great point, great point, great point.
And true intellectual honesty and value alignment. So he sort of admits
what he's not great at, or maybe like what benchmark decided not to do and what that enabled them to do by not doing something. And I think a lot of people try and pay lip service to being great at lots of things and it dilutes their message. And Andy's just so crystal clear on we are not that, we are this. We put energy behind being good at this.
And one interesting thing that he pointed out was a lesson that he learned from I think it was Judo, uh was the martial art, that all strengths are also weaknesses. And when you look at someone else's strength, how is that also a weakness for them that you can uh sort of exploit? And so when they were the scrappy upstart starting benchmark
They look at the big guys Kleiner Perkins and uh noticed that uh Kleiner had a
big team and when you sort of went to Kleiner, you sort of got the individual partner because there were so many people there that you sort of just had access to that one partner and that the benchmark was really about like you get all of us. It's five of us and you get all of us. And the other point on top of that when they were analyzing Kleiner was when you take investment from them, they aggressively try and uh
create deals between a lot of their portfolio companies. And of course, this is from 1995. That's great, but you may not necessarily want that. And so Benchmark's take was
Uh sure. We'll introduce you to people if you want, but like
We're not
Not gonna force anything, it's your company. And so by just looking at the things that make your enemies, it can um you can find ways in which you can differentiate and and be strong against them. And so I just thought that was uh
really cool and there's ten other awesome tidbits like that in the episode. So go listen to it. Yeah, so good. Uh Andy was uh one of my professors at uh in business school at Stanford and um
He's the real deal, and uh and it's it's such a good point. It's like clearly he is a disciple of Sun Tzu in the art of war. You know, know yourself, know your enemy, know the situation. That point also has
you know, stuck with me in starting wave and how we've positioned ourselves. Um
I'm sure you guys at PSL and and tech companies and startups are the same deal. I mean it's it's written all over this episode. Like you can't start something new and position yourself, you know, in the same way as the existing ecosystem. You have to be opposed to this is why bundling and unbundling is a tick tock cycle.
All right listeners.
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Alright, well
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We'll catch you next time.
Mm-hmm.