Season 3, Episode 3 The Sonos IPO

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal analyze the IPO of Sonos, a company that revolutionized home audio with its wireless multi-room speakers. Founded with the mission to fill every home with music, Sonos faced challenges transitioning from a hardware-focused company to competing in the software-driven world of streaming services and voice assistants. Despite a loyal customer base and a robust patent portfolio, Sonos' late entry into smart speakers and reliance on high-end products have limited its growth. With a market cap under $2 billion and a recent IPO that raised less than expected, Sonos must navigate the evolving landscape of home audio and voice technology to secure its future. The episode delves into Sonos' journey, strategic decisions, and the potential paths it could take to achieve success in the face of stiff competition from tech giants like Amazon, Google, and Apple.

• Acquired podcast hosts Ben Gilbert and David Rosenthal discuss Sonos IPO.
• Sonos' mission is to fill every home with music.
• Analysis of Sonos' IPO performance and future prospects.
• Consideration of how Sonos fits within the home audio landscape.

"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-1."

The quote introduces the subject of the episode, the Sonos IPO, and sets the tone for a detailed discussion on the company's mission and market performance.

• The mission of Sonos may not have been its original mission.
• The hosts will explore the evolution of Sonos' mission and its clarity.

"It is an 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."

This quote highlights the clarity of Sonos' mission statement, which is a focal point of the episode, and teases the listeners with the potential evolution of the company's mission.

• Sonos did not sell speakers until seven years after its inception.
• The company initially focused on non-speaker products like bridges and amplifiers.
• The shift to selling speakers marked a significant point in Sonos' history.

"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."

This quote emphasizes the surprising fact about Sonos' early years, providing insight into the company's initial product strategy.

• Sonos has a high rate of customer loyalty.
• Backwards compatibility is a significant investment for Sonos.
• The longevity of Sonos products is notable compared to other technology products.

"93% of the speakers that it has sold over the last 13 years are still active today."

The quote highlights the impressive customer retention and product longevity that Sonos has achieved, which is a testament to their commitment to backward compatibility.

• The hosts discuss real-time tech news on their Slack channel, Acquired FM.
• Elon Musk and Tesla's news are examples of the kind of discussions happening on the channel.
• The channel offers a concentrated audience interested in tech news.

"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."

This quote illustrates the dynamic nature of tech news and the platform's ability to engage with an interested audience in real-time discussions.

• Pilot is a partner of Acquired and provides accounting, tax, and bookkeeping services.
• Pilot is the largest startup-focused accounting firm in the US.
• The service aligns with Jeff Bezos' axiom of focusing on what improves the product and outsourcing the rest.

"Pilot is the one team for all of your company's accounting, tax, and bookkeeping needs, and in fact, now is the largest startup-focused accounting firm in the US."

The quote introduces Pilot as a significant service provider for startups, emphasizing its scale and the breadth of services offered to growing companies.

• Sonos has a detailed and engaging corporate history on its website.
• The company's internal historian has done a commendable job of storytelling.
• Sonos' branding and name have been carefully crafted, reflecting its mission and culture.

"Sonos actually has an unusually good, I would say, though a bit biased corporate history on their website, which we will link to in the show notes."

This quote acknowledges Sonos' effort in presenting its corporate history, suggesting it as a valuable resource for understanding the company's background.

• Sonos was founded by four individuals with a shared passion for music.
• The founders envisioned a system that would allow music lovers to play any song in any room.
• Sonos aimed to be a pioneer in the multi-room audio industry.

"So there are four founders of Sonos. John McFarland, who was the CEO from founding in 2002 until last year, 2017. Craig Shelburne, Tom Cullen, and Trung Mai."

The quote introduces the founders of Sonos and their roles, setting the stage for discussing the company's origin and its vision.

• Sonos faced significant technical challenges in developing its products.
• The company had to invent mesh networking for its devices.
• The ZP 100 was the first prototype, leading to the development of future Sonos products.

"So many houses, especially houses that would consider doing this, have wifi networks. They decide they're essentially going to build Linux pcs that connect to these existing Wifi networks that consumers will have in their homes and repurpose them as connected devices."

This quote explains the technical approach Sonos took to integrate its products into existing home networks, showcasing the innovative thinking behind its product development.

• The speaker mentions using an iPod and playing Three Doors Down frequently.
• This reflects the early digital music era and personal listening habits shaped by technology and media libraries.

"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 artist."

The quote describes early interactions with digital music libraries, where playback choices were often influenced by the alphabetical or default sorting of artists in the device.

• Sonos released the ZP 100 in January 2005, which received positive reviews from tech critics.
• Despite expectations, the product did not sell rapidly due to its target market mismatch.
• The digital music revolution was primarily driven by younger demographics who were less likely to afford the ZP 100.
• Sonos faced the challenge of appealing to a niche market of older, tech-savvy homeowners.

"So they finally ship the ZP 100 to the public in January 2005. Great reception by the tech press. Walt Mossberg calls it, quote, easily the best music streaming product I have seen and tested."

The quote highlights the critical acclaim received by the ZP 100 upon its release, suggesting a strong product that was well-received by experts in the field.

• Sonos was ahead of its time by integrating direct music streaming from services like Rhapsody in 2006.
• The company faced a turning point with the launch of the iPhone in 2007 and the subsequent opening of the App Store in 2008, leading to Sonos developing mobile apps to control their system.
• Sonos phased out their controller hardware in favor of app-based control by 2012, indicating a shift towards mobile integration.

"2006. They add the ability to stream music directly from the world's first actual streaming service, rhapsody, which was initially part of real networks up in Seattle."

The quote illustrates Sonos' early adoption of direct music streaming capabilities, positioning them as a forward-thinking company in the digital music landscape.

• Sonos targeted the audiophile market with high-quality speakers, despite the high price points.
• The company raised significant venture capital, with a notable investment of $25 million from Index Ventures in 2010.
• Sonos maintained a focus on backward compatibility and high-quality audio, even as the market shifted towards mobile and voice-controlled devices.

"In March of 2010, Index Ventures invests 25 million in the company."

This quote signifies a major financial milestone for Sonos, reflecting investor confidence in the company's market strategy and potential for growth.

• Sonos was late in recognizing the impact of smart speakers, particularly Amazon's Echo.
• The company pivoted to incorporate voice control into their products, launching the Sonos One with built-in microphones in October 2017.
• Sonos aimed to democratize music access in the home but faced challenges adapting to the rapidly evolving consumer preferences towards convenience over audio quality.

"We were late to recognize the impact of the echo and the Echo dot."

This admission from Sonos' leadership acknowledges the company's delayed response to the smart speaker trend, highlighting a strategic oversight in the face of emerging technology.

• In January 2017, John McFarland stepped down as CEO, and Patrick Spence took over, signaling a leadership transition amidst strategic challenges.
• Sonos aimed to lead the company into a new era of voice-controlled music experiences, emphasizing compatibility with Amazon's voice assistant and future integration with Google Assistant.

"McFarland announces in January 2017 that he's going to step down as CEO."

The quote marks a significant change in Sonos' executive leadership, coinciding with the company's strategic pivot towards voice control and smarter home integration.

• Sonos announces future support for Google Assistant, alongside existing Alexa integration.
• This allows consumers to multi-home with voice assistants if they choose Sonos products.
• The strategy behind voice assistant proliferation is to encourage user interaction with the respective services, whether it's Amazon's Alexa or Google Assistant.
• The concept of "multi-homing" with voice assistants is discussed in terms of consumer psychology and the value of maintaining optionality in an evolving market.

"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."

This quote explains Sonos's announcement and the future capability of their products to support multiple voice assistants, providing flexibility for consumers.

"Amazon is going to 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 40 million or more of those."

This quote highlights Amazon's strategy to maximize the adoption of Alexa by selling various inexpensive devices and their success in shipping a large number of units.

"The psychology for me was really, I don't know how this is all going to play out yet, and I don't want to invest thousands of dollars into one ecosystem."

The speaker expresses a reluctance to commit to a single ecosystem due to uncertainty about the future landscape of voice assistants and smart home technology.

• Sonos's decision not to build their own voice assistant is seen as a strategic move due to the high costs and the existence of established competitors.
• The comparison is made between Sonos's approach to voice assistants and its approach to streaming music services, aiming to be a central integration point.
• Sonos's hardware is differentiated by software and services, though it's debated how differentiated these truly are.
• The integration with Siri and Apple's distinct business model is discussed, highlighting the different incentives and strategies of Apple compared to Amazon and Google.

"A lot of people at least were a little puzzled when Sonos first announced that we're going to integrate other people's voice things."

This quote reflects initial confusion about Sonos's strategy to integrate external voice assistants rather than creating their own.

"They, like Apple, make money selling hardware that's differentiated by software and services. They just aren't necessarily providing all the services."

The quote compares Sonos to Apple in their business model of selling hardware differentiated by software, but notes that Sonos does not provide all the services themselves.

"Apple makes money on you when you buy their hardware. And so for Apple, they released HomePod, which had limited adoption."

This quote discusses Apple's hardware-focused business model and the limited success of the HomePod, illustrating Apple's different approach compared to Sonos.

• The discussion touches on consumer frustration with the limitations imposed by different ecosystems.
• The desire for better cross-functional and cross-ecosystem accessibility is expressed, with a hope that Sonos could potentially fulfill this role.
• The example of Apple Maps and Google Maps is used to illustrate how strategic disagreements between companies can negatively impact consumers.

"It's so frustrating as a consumer with this stuff because, or at least for like, I love the Amazon voice assistant and I think it's really good."

This quote expresses the speaker's frustration with the limitations of current ecosystems and their preference for Amazon's voice assistant.

"There is definitely this trend that we saw before with Google Maps and Apple Maps where it's sort of companies have a disagreement on whose customers they really are."

The quote draws a parallel between the current situation with voice assistants and the past issues with map services, highlighting the negative consequences for consumers when companies prioritize their own strategies over user experience.

• Sonos's decision to go public is contextualized with the release of Apple's HomePod and the realization that acquisition by a major player was unlikely.
• The company's revenue, growth rate, and the role of Best Buy as a major sales channel are discussed.
• Sonos's customer retention and expansion metrics are highlighted as strengths, but concerns are raised about the company's growth potential and reliance on hardware sales.
• The concept of the "sonic Internet" is introduced as part of Sonos's narrative, emphasizing a shift away from screens to voice interaction.

"The company announces they're going public. Interesting timing, but I can shed a little light on the timing from talking to folks."

This quote introduces the topic of Sonos's IPO and suggests that there is insider perspective on the timing of the decision.

"They did about a billion dollars in revenue in 2017, but they just haven't been growing very much."

The speaker points out Sonos's revenue figures and raises concerns about the company's modest growth rate, which could impact investor perceptions.

"They're really no one left. We can be a standalone company, so let's go be one."

The quote reflects the realization within Sonos that their path forward is to operate as an independent company, given the landscape of the market and the actions of potential acquirers.

• Sonos is recognized as a hardware company striving to be seen as a software company.
• The challenge lies in monetizing software and services to justify a software company valuation.
• Hardware companies are typically valued less than software companies unless they generate significant cash flows from their software services.

"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?" "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 things."

The quotes discuss the investor perception challenge faced by Sonos, emphasizing the need for monetizing software to be valued beyond a hardware company.

• The conversation explores Sonos's potential expansion into personal audio devices, like headphones.
• The integration of voice assistants into personal audio devices is seen as compelling.
• The current limitations in the interaction between phones and speakers are highlighted as a frustration for users.

"And then the other quick one I had, I don't know how fair this is if this is more me projecting than anything else, because I do think speakers are interesting, but also headphones and personal devices are also real interesting." "Well, imagine AirPods that you could use Amazon's assistant or Google's Assistant or Siri or, like, that's compelling yeah."

The quotes suggest that Sonos could expand its market reach by entering the personal audio space and integrating voice assistants, providing a more seamless user experience across devices.

• Discusses hypothetical scenarios where Sonos could have been acquired by major tech companies.
• The conversation speculates about what could have happened if Amazon or Apple had acquired Sonos.
• The acquisition of Beats by Apple is analyzed, with the conclusion that Sonos's lack of a streaming service made it a non-starter for Apple.

"What would have happened otherwise?" "I think the most interesting one though is what if Apple had acquired Sonos instead of beats?"

The quotes explore alternative historical outcomes, pondering the impact of potential acquisitions on Sonos's trajectory and the broader tech industry.

• The discussion reflects on the competition between Spotify and Apple Music.
• Spotify's growth in paying subscribers is noted, with a comparison to Apple Music's subscriber base.
• The value of open platforms is acknowledged, with Spotify seen as more open than Apple Music.

"Spotify really seems to be ramping. We don't need to adjust any calls we made on previous episodes, but Spotify seems to be sort of pulling away." "I have tons of respect for him as an artist, but he didn't have quite the same industry."

The quotes highlight the competitive landscape in music streaming, with an emphasis on Spotify's growth and the strategic implications for Sonos within this context.

• The importance of timing technology waves is emphasized, with Sonos's success and missed opportunities discussed.
• The conversation touches on the waves of wireless networking, streaming services, and voice assistants.
• Strategic decisions and market targeting are critiqued, suggesting that Sonos could have better capitalized on technology waves.

"Sonos has built a great company. They've got great products, lower priced IPo than they wanted. But still, this is a multi, almost $2 billion company." "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."

The quotes reflect on Sonos's timing in relation to technology trends, suggesting that different strategic choices could have significantly amplified their success.

• The conversation identifies a pattern where hardware innovators struggle as their market matures.
• The reduction in component costs and increased competition are noted as challenges.
• The potential for network effects, strong branding, and strategic partnerships are discussed as ways to combat these challenges.

"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."

This quote discusses the lifecycle of hardware companies and the challenges they face in maintaining a competitive edge as their innovations become mainstream and less costly to produce.

• The discussion concludes by evaluating Sonos's decision to IPO and the potential use of the funds raised.
• The IPO is seen as necessary for liquidity, with speculation on Sonos's ability to innovate and expand.
• The success of Sonos is tied to strategic changes and the ability to capture a larger market share.

"It was a good idea to IPO because they needed the liquidity and they weren't going to sell to anyone for the evaluation comparable to what they could IPO for." "What will they do with the 88 million that they raised? I think largely continue to fund operations."

The quotes summarize the reasoning behind Sonos's IPO and the potential paths to success, focusing on the company's strategic decisions post-IPO for growth and innovation.