This article originally appeared on July 6, 2018 by WIRED.
THERE ARE SMART speakers, which connect wirelessly to other devices, and then there’s the new era of smart speakers, designed to offer services through voice-controlled virtual assistants. Sonos, for a long time, was all about the former, having been a pioneer of high-quality, Wi-Fi–connected speaker systems. Now it has entered the next era with products like Sonos One and Sonos Beam, which are high-quality speakers that also happen to work with Amazon’s Alexa and other virtual assistants.
But Sonos’ partners are also rivals, and Sonos’ reliance on companies like Amazon, Apple, and Google makes it vulnerable, as it revealed in filing for an initial public offering Friday. To cite one example: Amazon can disable Alexa on Sonos devices anytime, with “limited notice,” according to the filing. And that’s just around voice control. One feature Sonos boasts of is that it offers the ability to stream around 100 different music and podcast services through its app. All of those services are controlled by others, not Sonos.
This dynamic isn’t unique to Sonos; China’s Lenovo and other device makers also rely on partners for services on their hardware. But it underscores the reality that the new era of smart devices isn’t just about asking Alexa to queue up a playlist for you. It’s increasingly about services. It’s an era in which tech giants like Amazon, Apple, and Google are positioned to dominate the smart home, whether that means music listening, TV streaming, or home security, because of their service businesses. Sonos’ agnostic approach—its vow to be the Switzerland of the smart home, as we’ve described it before—is noble, and arguably much better for consumers. But it’s also risky.
Sonos’ plans to go public were first reported by The Wall Street Journal in April. In its filing Friday, the Santa Barbara, California, company revealed that there were 19 million registered Sonos products in use as of March, in 6.9 million households around the world. In the fiscal year ended September 30, 2017, Sonos said it sold 3.9 million devices. By comparison, research firm Strategy Analytics says there were 32 million smart speakers shipped last year; it says Sonos ranked fourth, behind Amazon, Google, and Alibaba in number of shipments. But Sonos can also claim an enthusiastic fan base: People listen to a whopping 70 hours of streaming audio per month on Sonos, and 60 percent of customers are repeat buyers.
Sonos generated revenue of $992.5 million in 2017, up 10 percent from the year prior. In 2015, then-CEO John MacFarlane said that the company’s sales were around $1 billion; it turns out that was a bit of fancy math, as the company’s revenue was actually $844 million that year. Sonos has never posted an annual profit, a fact that tops its risk factors.
Below that, though, Sonos lays out the risks related to its software partnerships. “We are dependent on a number of technology partners for the development of our products, some of which have developed or may develop and sell voice-enabled speaker products of their own,” the filing says. The prime example (no pun intended) is Amazon; Sonos essentially borrows Alexa from Amazon, while Amazon makes its own less expensive smart speakers with Alexa. Then there’s the clause allowing Amazon to disable Alexa on Sonos devices with limited notice. If that were to happen, that $400 Sonos Beam with Alexa would become the Sonos Beam sans Alexa.
Another challenge for Sonos: Some rivals have their own retail channels, where they can promote their own products over Sonos’. Or they could remove Sonos products from their stores entirely. This is not unprecedented: Apple has cleared the competition from its shelves before, and Amazon’s ongoing spat with Google over Amazon’s refusal to sell Google hardware products in its store has resulted in a less-than-ideal YouTube experience on Amazon streaming devices.
The fact that YouTube, which is part of Google, no longer works natively on Amazon streaming devices is a good example of what could happen when tensions arise among the tech giants and why they’re all building their own integrated services. It also sums up how crappy the experience can be for consumers when giant tech companies push their own services, again and again. Apple’s integrated approach means there’s a simplicity in how things work, but it also means Apple promotes Apple Music above all else and has made its Siri-enabled smart speakers off limits to anyone with an Android phone.
Sonos has positioned itself as a purist—we make great speakers, and that’s why people love us—and as a promoter of other services. It also says that customers listen to approximately 80 percent more music after purchasing their first Sonos product. “What’s going to set them apart are these partnerships. They’ve built a kind of strategy moat around their business,” says Matt Pencek, a director at MorganFranklin Consulting. He cited a collaboration with Ikea as an example of an unconventional partnership that might fare well for Sonos in the long run. “But those partnerships also leave them exposed,” Pencek added.
When I asked Sonos CEO Patrick Spence in a recent interview whether Sonos would ever create or sell its own services, he replied that he “doesn’t think that’s in the best interest of the consumer.” Sonos has weighed this before, around streaming music, and now has been forced to confront the “services” question again with voice assistants. Spence said then the company is looking at opportunities to make the voice setup experience better but insisted Sonos “wouldn’t build an ask-anything assistant, like an Alexa or a Google Assistant.” Even if Sonos were to launch its own streaming music or voice-control services, it would be years behind the others.
Investors love the idea of services, with their recurring revenue stream, Spence acknowledged at the time. Sonos’ recurring services, he said, are building great products and getting people to buy more of them. It’s been successful at doing that. The question now is whether Sonos can maintain its status as an agnostic outlier or whether it will eventually have to use the same kind of services hooks that other tech companies employ.
About MorganFranklin Consulting:
MorganFranklin Consulting (http://www.morganfranklin.com) is a management and technology consulting firm that works with leading businesses and government to address critical finance, technology, and business objectives. The company is headquartered in the Washington D.C. area with regional offices in Atlanta, San Francisco, and San Diego.