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Re-cord. Alright. Where does the word record come from? We record again. Yeah, record again. That's great. Welcome to season three, episode three of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert. David Rosenfall. 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 there, S1. 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 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, ability to bring non- to 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. 93% of the speakers that it has sold over the last 13 years are still active today. Yeah, that is crazy. In all this research, that thing jumped out at me. So the iPhone is not yet 13 years old. The iPhone is only 10 years old. How many 10 year old iPhones are still active? Yeah. I don't know. 0%? I mean, it rounds to 0%. Yeah. I believe the actual stat is that 93% of the company has received and installed over the air update in the last 12 months. Which is even more bananas that products from 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 acquired.fm. 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, we'll 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 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 securities laws by tweeting about this? He's now considering instead of using Twitter that he's just going to use the acquired Slack channel for future Tesla related announcements. Can neither confirm nor deny. With the density of concentration of people interested in the news, I would say not under reach perspective, but on a density of interest perspective, it's probably a pretty good platform for that. Great platform. So join us at acquired.fm. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founders. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. It really is. We use your show for research a lot. I listened to your episode of the story of Akio Maria before we did our Sony episodes. This incredible primer. You know, he's actually a good example of why people listen to founders into acquired because all of history's greatest entrepreneurs and investors. They had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research. But I think this is one of the reasons why people love both of our shows and there's such good compliments is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaride. I've read five biographies of Edwin Land and I think I've made eight episodes of them because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes who were their heroes. And the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple. But Steve was still able to use those ideas and now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down to generations. Make sure they're not lost history. I love that. Well listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. All right, 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 unusually good, I would say, though a bit biased corporate history on their website, which we will 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, 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 or. 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 how it all really went down and pulling 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, I need one 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 2002. 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 much closer to LA and is a great town, great place to visit, 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 ink, which I was wasn't able to confirm, 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 2004, a couple years later. 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 brand new startup, they were able to get David Plasik, I believe it's how he pronounces 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. They came up with the swiffer. They came up with blackberry. They came up with the power book for Apple and get this is the best part totally related on them here. They came up with the zoom. 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 nose, but I think I remember reading Robbie Bach is now a board member of Sonos. It all comes back to Microsoft. Anyway, because it was the dot com bust and like no tech companies had any money gives them a great deal. They're able to lexicon gives them a great deal. They're able to land them. And apparently was a super long process coming up with the name the company kept rejecting everything that they came up with 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's one of those things where the newest branding, which we should put a link in the show notes to the original Sonos branding. And interestingly, the branding 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. Because some of these speakers you can flip upside down and it still says Sonos. It's just a really nice pleasing name. I haven't 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 still works. It's not exactly the same because the ends and asses are flipped, but like it's still very legible. There's a term for this, but I don't know if they were thinking of that in the initially given that their products would eventually be both vertical and horizontal, but a really, really great name. Yeah, and 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 2015 refresh of their brand came with a super cool sort of burst pattern 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 a 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 hard to say sort of like the artifact of LCD or LED screens. So we'll go into that in the show notes too. You should try it. 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 2002 until last year 2017 Craig Shelburn, Tom Cullen, and Trung Mai. How did they all come together? So McFarlane, 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 guy. He ends up dropping out of his PhD program in 1982 and he founds an internet company with three other people, Craig, Tom, and Trung, who become his co-founders of Sonos called software.com. I guess Tom A. Names were easier to come back then. Software.com ends up, of course, going public in the.com boom in 1999, merges with phone.com. The synergies were, you know, you have software.com, we have phone.com. Of course, it makes sense. They rename the company Open Wave. And actually it did sort of make sense because software.com provided kind of email servers and infrastructure to email providers, in particularly early mobile email providers. So like, and I should say phone.com did, I believe a browser, like a, a WAP based browser for phones. So Open Wave, which is the merger of these two companies, becomes actually a pretty big company and one of the first, you know, pioneers of the mobile smart, not smart internet on phones blast from the past. Of course, though, the.com crash happens in 2001, all of the former software.com folks leave Open Wave and decide they need to they want to figure out what to do next. But they had an insight from that experience, in particular, as the company became Open Wave and focused on cell phone providers that networks and in particularly wireless and wireless networks were like a big technology wave that was coming in wireless networks. We're going to be ubiquitous. You could already see it in Wi-Fi networks in homes. Consumers 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 kind of has the vision sees this trend happening and he pitches the other three guys on the idea for their next company, not a mused digital music service and hardware for the home. A 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 there like one of the top 20 most short hit stocks relative to their market cap. So lots of people continue to think it's a terrible idea. Well, having just taken a long flight and used not go go but another one of the myri competitors the product is still terrible but a necessity. So anyway, the other three are like no that's terrible idea. So they're trying to figure out what else they can do. They realize that you know they all love music and they all have houses now I presume after the IPO and then the merger with fun to come presumably they all made you know quite a bit of money. Hopefully they didn't lose it all in the dot com bust 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 trans 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 want to be the drop box of a home audio even though drop box 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 even before that like before Alexa and Google home like this my sonos one just so perfect. So before these people who live in our speakers came around it's still call it three four years ago didn't seem that crazy that of course it's sort of easy to have speakers playing Mario's in your home in 2002. That this is so crazy for it I mean the people that were able to have a set up 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 20 to $50,000 installation at the time of building the house to create this wired system to make that work. 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 by our circuit city or whatnot they were talking all this stuff and I remember you know for our family room and other rooms in the house feel like we need the 5.1 and you buy these speakers in these amps and you run wires or you know under the carpets or maybe you know the wall and like it's just a nightmare. Well now is just for TV setup I mean the notion of music in different rooms was like you know way way more complicated in fact so now even fast forward real quick to today even though they have this really great 5.1 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 rinko audio around in late 2002 but there's just kind of one problem other couple 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 no streaming services get like Napster exists MP3s exists you know people are ripping their CDs into MP3s 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 going to get around that. 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 have Wi-Fi networks they decide they're essentially going to build Linux PCs that connect to these existing Wi-Fi networks that consumers will have in their homes and repurpose them as as connected devices. So they're not going to have hard drives and not going to 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 you don't laptop if you're really future thinking that you have on your Wi-Fi network and access 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 check boxes that you have to enable to the extent they made this easy for consumers they should be applauded a hundred times because having never used the original little controller thing that would auto find the MP3 files and then list it for you 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 what I just described sitting here in 2018 sounds like okay whatever but like think back to where you were in 2002 and just try and imagine that like mind blowing. But they had an important architecture decision to make which was do they want to go with a sort of centralized system where they have a primary speaker 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 ladder that 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 called mesh networking now today in 2018 mesh networking is all the rage you know all any what new Wi-Fi router you buy is going to use mesh networking it's superior recording this over mesh networking 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 so knows has to basically invent all of this themselves fortunately they had john in a team of PhDs in electrical engineering from UC Santa Barbara so they were equipped to do so but it was very difficult. And as a result it takes multiple years has been 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 just a prototype of the first product which ends up being called the zp 100 the zone player 100. This was before the rebrand they needed to realist those lexicon guys to help the legs of guys were like we're done with you we'll give you a name and nothing else but the zp 100 is as we alluded to it's it's a networked amplifier for existing speakers so if you have speakers already in your house this replaces your amp 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 the 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 so no speakers so this is the right answer. Yep yep McFarland takes this prototype he brings it to c s in 2014 people think it's really interesting and then later in the year he goes to the all things de conference which this is before Keraswischer and Walt Mossberg left the Wall Street Journal to start recode this is when they were still doing all things d within within WSJ and 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's a keynote or I think it was an interview with either care or Walt and he introduces apples airport express Wi-Fi router which is also going to have an audio jack plug on the Apple solution for a lot of people super clueless and it's clear that sonos is the way better experience my personal history with this is having a set of Bose computer speakers that I used growing up that I then brought to college that I then brought to Seattle and moved out here and my solution before going with the sonos one was like you know as a die hard apple person I think I had some apple router is the airport something and I would airplane music from the computer through the router to the speakers and it was terrible like you would have this three second delay when I decided to stop or start anything you know fast forward today the newest and best sonos stuff is finally finally actually getting airplay integration because apple took forever to get a lot of airplay to out so will hold judgment on the home pod will revisit that later but Apple has always had a little bit of a over zealous journey with wireless audio then would actually manifested well in the airport express you you can only control it from your PC right from your computer yeah well that's not like they shipped a little controller for that yeah there is no controller no controller so so fun aside here so as John is demoing as prototype he uses the song he uses to demo it is the beastie boys no sleep till Brooklyn produced by Rick Rubin super famous producer who ends up becoming an advisor to the company later yeah cool but also fun this is also on the the sonos corporate history on the website when they were testing it they ended up playing the band 10,000 maniacs and the song 3 a.m. by matchbox 20 over and over and over and over and over because the sonos you I for the controller was everything was alphabetical and those were that that was the number one band and the number one song listed so funny that was true for I mean that like I remember on my original iPod playing three doors down over representatives of time because it was the first thing in my first I was the downsides of the click wheel user interface 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 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 yeah 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 reasons for this in sales are okay like the company is not going to go under but they're not also going to be you know the next 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 college kids it's you know people who are definitely not going to buy sonos and don't own a house it's been in David who are rotating out what Napster songs they can fit on 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 because it's a lime wire lime wire yeah all that stuff you know anybody who's using Kaza and what 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 MP three players and stuff but the zp 100 it costs 1200 dollars so like I don't care how much of a you know young budding audio file you are you're not spending 1200 dollars on this thing that goes on for a few more years and you know there they have this super niche market of older adult who own homes who also care about digital music but they're working on developing the next generation products a couple things happen 2006 they had the ability to stream music directly from the world's first actual streaming service rhapsody of which was initially part of real networks of in Seattle it's pretty awesome like the sonos the zp 100 you can stream rhapsody songs with no PC required just directly into your home it kind of is like the MVP of the experience we know and love today you know wildly ahead of its time 2006 and doing the research yeah I could not believe this solution existed 2006 yeah nuts then in 2007 obviously something pretty important happens the iPhone launches and that's going to be a mixed bag for sonos as as we'll see in the coming years but they do embrace it in the beginning and immediately after the app store opens in 2008 so no sleep within months launches a free app in the app store that completely replaces the controller which is sort of the scroll wheel device that you have to buy separately to control the zp 100 with free app for your iPhone and then now you can control your sonos system with your iPhone so pretty awesome Android they launch the android app a couple years later in 2011 and then ultimately they phase out completely their own controller hardware in 2012 to go all they're not 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 sonos system because I have the 5.1 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 now like you know you are you are peak millennial you know used to be millennials were like sitting in college dorm rooms would never use this now not only are we using it were like going back and buying third party hardware to get back to the experience so funny and to be clear I think sonos has a better answer for that which is integrating with your actual remote control for your TV before a reason couldn't get that that to work that's such a good story that's great if only that were included in the s1 prospectus maybe they wouldn't have priced so low for shadowing for shadowing okay November 2009 so in between that that time frame they finally release what they've been working towards for years 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 and it's an all in one Wi-Fi speaker speaker integrated directly connects to Wi-Fi in the internet can stream all of the well not to modify it's about a size 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 wants today like this things a brick and behemoth yeah quite large but you know four hundred dollars like you know large you're going to put it in a home but maybe you put this in an apartment so this is sonos is real first wedge into the mainstream on the back of that sales really start to pick up and in March of 2010 index ventures invest 25 million in the company it's very hard to find out how much money they raise or well you can find out how much money to raise but the history of their fundraising before then all we know is that they raised about 40 million dollars along the way in the eight years between 2002 and 2010 it was from a venture firm called BV capital which is now rebranded itself as e-ventures and also angels a bunch of angels so we can find out who invested what but interesting fact from the s one there was an angel named Valderkoa who had been an exec at software dot com with all the founders and he must have invested a ton in the company because even at IPO he still owns seven percent of the company even despite all the delusion that is still yet to come and interestingly ventures was not a greater than five percent shareholder we're going to get to that in a minute I believe they get bought out interesting side factoid the person who leads them this investment for index mic fulpie and joins the board of centers 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 2011 two big things happen one they come out with their next Wi-Fi enabled speaker the play three which is still sold today and the price point for that is 299 so they're getting closer and closer down into the mainstream price point the much bigger thing is they add support for Spotify in the summer of 2011 yeah and it's worth pointing out a couple of things about one these speakers into sort of the pre spotify era these speakers are really nice they're designing them to sort of compete in the audio file market and in saying that I know that's going to 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 people that 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 quality sound in their home and so yes three and four hundred dollars speakers are expensive but like they're very nice speakers the other thing is yeah 2011 is when they added spotify they already had serious as well serious XM or I can't remember if they had joined at that point but that was in February of 2011 so they started with a rhapsody then serious 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 early seeds of playing the Switzerland strategy across anybody who is providing music yeah well in the other big big thing about spotify just like we talked about earlier in 2005 2006 people who are listening to digital music are you know been in David in college spotify in 2011 2012 2013 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 2011 they hadn't come to the US yet right no I'm sorry they had they had that was like 2009 or 2010 yeah which actually that's an important thing that didn't have in my notes that is important to note about so knows the US is only about a third of the company's sales about two thirds of the company's sales come from international markets Europe being the largest pan Europe being the largest and then the US as well so it's very much an international company so on the back of that they've now gotten into the 299 price point spotify is natively supported on the platform they're starting to get into the mainstream they're starting to get into the younger market in 2012 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 135 million dollar investment in the company interestingly only 45 million that is primary is money raised on the company's balance sheet 90 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 2012 a couple years later in 2014 KKR leads another secondary round so no primary all secondary the net of all of that is that BV slash e ventures pretty much completely exits the company and has been mentioned and the S1 there 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 much lower valuation than the company ends up going public at 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 Patrick comes over to sonos and he joins as chief commercial officer essentially head of sales for the company that's going to become important in a minute here for anyone who's read the prospectus for anyone who's read the IP over sectors yes in 2013 the next year we mentioned when we were talking earlier about the 5.1 surround sound system in the home theater market sonos enters the home theater market itself not just the music market with the play bar sound bar product and on the streaming side by this point I think in 2012 they'd add the Amazon cloud player for folks who remember that music service I think next year maybe 2013 they added a 10 cents QQ music so the 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 had around this time mag which fans of the show and of tech history will know we have discussed mag 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 introduce in 2013 is the play one which is now $199 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 the introduce the play one for $199 so now they are like solidly in the mainstream on the device and this play one is like totally company changing they've now entered a market that isn't currently I mean in what 2013 13 it's not served very well you know $200 speakers there are people who want $200 speakers in their home and this is before the era of smart speakers and so streaming started to come online it's really a key moment to have a speaker to price point like that yeah and this is like huge for the company explosive growth they grow in that fiscal year the company has a September fiscal year and so in fiscal year 14 which is from October 2013 to end of September 2014 revenue grows 75% at the company on really on the back of the play one and all the the wave of spot by 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 2014 super interesting time for the company and really interesting as we are doing research for this episode to 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 sort of get their perspective at this point streaming is totally taking off by the end of 2014 that were 15 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 one ninety nine we actually have a meaningful share of the people who have spotify accounts buying sonos devices and really buying these two hundred hundred speakers we can totally just ride that wave and draft off that and it's going to be awesome and if you do the math like if you're subscribing to Spotify you're spending what hundred and fifty dollars a year is 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 plants 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 is 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 they're sort of strategic crossroads where as a company of people who are obsessed with the experience and truly auto audiophile or near audiophiles themselves 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 hundred ninety nine network connected speaker in their house probably a lot of listeners know what we're talking about when we say audio file but just to describe we did 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 someone who really loves music and cares about sound quality it's probably a good good delineation good disclaimer yeah so what is sonos do with this sort of existential point in their company's existence well that year they release a five hundred dollar 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 sonos to hear this crazy sounds bouncing off the walls and tune it most people aren't going to spend two hundred dollars on a speaker and they're sure as heck not going to like care enough to tune it to their room and so they're advertising that year during the walking dead these very expensive ad spots they are really just demonstrating this feature and showing off how crazy true play is and David who is the music producer that you mentioned worked with with sonos Rick Rubin yeah Rick Rubin is in these ads and so it's you know they're sort of like paying Rubin he's walking around barefoot 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 true play feature they're not exactly moving to lower price point and go going mass market and they're really showing that they're not willing to compromise and to double down on really showing that spotify is launching spotify connect at this point which is a really magical experience for a lot of people who 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 kluji salute and wouldn't have unlocked the power of all of sonos is 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 their to 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 I think that's a company had to do it without making it for their newer speakers only but it really shows another value of theirs which is not discontinued hard where and making it so that every customer of theirs can have a really great experience backward compatibility you know as evidence by zp 100 still working out there getting firmware updates this is a huge strategic challenge for the company final point I want to make to bridge to where I know you're going is remember I was saying people aren't willing to pay $200 in mass market for a network connected speaker what turns out they may be willing to pay $200 for a smart network connect to what would they pay $200 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 going to be really mean to Sonos and I don't intended that way because they do pull out of it but like they're advertising and during this period on the walking dead who is the walking dead it's so nice for God's sakes I mean November 2014 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 going to do what it's going to work on the heels of the failed fire phone right on the heels of the failed fire phone 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 don't don't don't know November 2014 launches introductory 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 room filling tin can yeah but you know it's loud and most importantly you just talk to it and it does stuff for you David that's the most millennial opinion of audio that's a great encapsulation but it's loud it's like that's the number of people who still play on either crappy bluetooth speakers that I've 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 the people just set it on a table and play and that's why apple added all these like better speakers and double speakers to iPhones and iPads because a lot of people just don't care enough and they're like yeah 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 convenient speeds quality yeah indeed indeed well turns out that Amazon and Bezos were actually onto something with the echo and it's included a lady a shall we say so we don't in rage listeners in their homes all throughout the the world here sonos does not see this coming at all there totally flat footed you know a they've got the strategic challenge that Ben was just talking about of like there 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 McFarlane actually he talks about this in an interview what is the 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 30 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 podcast come on John living the 21st 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 2014 is when Alexa is first announced and the echo is made available to prime subscribers and then it goes general availability in 2015 I believe it's summer of 2016 when Sonos sort of formally switches their strategy to the burning platform yeah 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 going to start integrating their existing products if you have a Alexa in your home the product experience for that is if you bought an echo and you have a sonos system that you know let's say you have a play five and a play bar you could say something like unnamed voice assistant play XYZ song on play bar and then it could play it on there so you know it's a little bit of a stopgap solution before they eventually release their own sonos ones and now the sonos beam which are voice baked in but there are 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 lady a baked into it and coming Google assistant will get to that as well that launches in October 2017 and then the beam which is the same thing in a sound bar format for home theater systems that launches only last month in 2018 yeah so we are in the middle of this right now in the middle of it yep good time to go public well so a couple things I don't know what exactly it was a result of could be a lot of things but certainly missing this both of the strategic inflection points as Andy Grove famous CEO of Intel would would point them would say was not good MacFarlane and then the one announces in January 2017 that he's going to step down as CEO and Patrick Spence who we mentioned earlier who would come over from rim when KK are invested is going to take over as CEO and my filing like he stays in the company as an advisor but he leaves the board he really reigns over to Spence it's a pretty full some 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 in October 2017 and and announce the beam they come out with a pretty interesting take on the voice world they say they're going to bake Amazon's voice assistant into the products you can talk to the speakers they will work just like echoes do which Amazon announced super early on in the in the product development of Alexa that they were going to make the Alexa voice service open to anyone that wanted to include it in their device they also so no synounces 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 assistance if you go the sonos route which which makes sense you can see why and Alexa and why Google want to do this because the their main goal is just get the most people with their service Amazon's going to sell these many different use cases of fairly inexpensive Alexa devices to get them biggest proliferation possible and we think today they've shipped something like 40 million or more of those but you know their strategies 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 if you are like Ben and you are going to help fit a home with smart speaker technology do you want to lock yourself in to the Amazon ecosystem with the Google ecosystem or anyone ecosystem or do you want to 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 shipped but I can tell you this 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 oh 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 going to 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 assistance are they really thinking about the use case where people are going to use multiple voice assistance or is it really sort of this like piece 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 that's if you give them the option to not choose and continue to make no decision for longer they will well I made a 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 you can buy something new 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 you can see how the strategy evolved because I think people who are newer to sonos look at it and go that's kind of an interesting business strategy like they're not building their own voice assistant and they shouldn't because it's a terribly expensive R&D cost and it requires network effects so and there's two good ones out there I'm right to ignore Siri for the moment and then we'll get to Siri yeah a lot of people are at least we're a little puzzled when sonos first announced you know they were going to have we're going to integrate other people's voice things but if you look at them historically and you think the companies actually just looking at these voice assistance 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 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 where we'll get to later in the crowd so 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 which is a little bit of a tougher vector to compete on now but as we look to the history of the company understand a lot about why they're making the decisions that they're making now also I do want to touch on Siri they've announced Siri integration apple obviously isn't 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 home pod 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 buy more apple hardware and invest more in the apple ecosystem not really in their best interest to make that available to other people not that Siri is itself better than any of these other services anyway but the access to plug into Apple devices is differentiating for example if I were to tell Siri and I'm going to refrain from 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 sonos one until it to add something to my reminders list because I won't see it on my phone and so you can see how like the home pod is differentiated in that way what they have announced is that coming with air play to 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 because like or least for me like I love the Amazon voice is so good that's on voice assistant and like I think it's really good I haven't really played too much with the Google one a series 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 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 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 and companies have a disagreement on how they're thinking about those customers strategically and then the consumers lose because of it it's totally frustrating yeah well all right to bring the history and facts on home here in the middle of all of this company announces they're going public interesting timing but I can shed a little light on the timing from talking to folks basically there was a notion that hey maybe that could be acquired that could totally happen and when apple released the home pod it was really like okay apples decided to build not buy we would sort of be the people that they would buy 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 investors back in 2010 and KK are invested in 2012 and they have shorter you know time horizons for their investments I assume there was desire for liquidity on the investor front here so July 6th 2018 they filed a go public rumors are that they expect a kind of 2 1 1 2 3 $1.00 billion valuation the company did just under a billion dollars in revenue last year they then a couple weeks later after the road show starts they announced the pricing range of $17 to $19 this year which is lower than that rumor the midpoint there $18 a share would be about one and 3 1.004 billion valuation they end up pricing on the eve of the IPO at $15 a share under the range 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 last Thursday August 2nd they closed it near $20 and and then yesterday they closed at $19 $15 market cap of just under 2 billion but you know it's interesting this was not like a hot IPO here no and they actually only raised $88 million in the IPO the rest of the vendor that the 130 million because it was a 208 million dollar IPO actually came from existing shareholders and so it's only 88 million of new cash into the company yeah it was K.K.R it was index it was other investors and employees who were selling that's also typically not a great sign into an IPO but again I mean I'm sure there's huge desire for liquidity here transition into narratives here but just a couple points to keep in mind there want to draw out as we do talk about narratives they did about a billion dollars in revenue in 2017 but they just haven't been growing very much they've only had about 10% revenue growth over the last couple years and you know typically high flying I POs are you know at least 20% revenue growth year but really you want in the 40% plus I think it was a little higher I think they're like 18% revenue growth but still half or a third of what you'd like to see they also disclose their revenue by who their largest sales channels are interestingly best by is the largest sales channel 17% of Sonos sales happen at best by 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 by that's troubling and you can read two things into that you can read an addition to me troubling one you can read they're paying a lot of money to the channel because they're not retelling these things themselves from Sonos.com they're probably spending 50% and a wholesale and then another 50% 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 a advantageous light for the company it reduces the reliant you can think about those three companies as now supply chain for Sonos 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 their Switzerland sort of bundler there and of course when I say Switzerland I'm meaning sort of neutral third party but they're a neutral third party bundler of these services their biggest sales channel is also a neutral third party which is good because if it was all on Amazon then you'd start to get a little nervous that Amazon's going to 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 through Best Buy but who shops at Best Buy? Like it's not millennials it's not Spotify listeners you know so it's interesting before switching fully into narratives there's a couple key numbers to know one is Sonos has 19 million products in approximately 7 million households around the world that 19 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 and smart speaker segment grow very quickly it'll be interesting to see what the high end smart speaker grows at because the way that I sort of see this going is there's tons and tons and tons of hundred hundred and fifty dollar devices sold and it might be a tougher road for Sonos selling more expensive ones the other thing to know is that they're right around break even on net income the six months leading up to the IPO they were net income positive but only by about 13 million they were net income negative before that and I think they did some things head count reduction or other things as they approach the IPO in order to be net income positive so that may not have been in the same time frame said don't hold me to that but the way you should think about this company is there's still kind of break even if you look at like their price to earnings it's something insane like 70X so you should look really at their price to sales which is just a hair under 2X so they did a billion dollars revenue right now they're they're valued a little under 2 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 there are company that's growing 10 to 20% per year and they're definitely priced to grow so well so we 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 really trying to avoid comparisons to $10 comparisons to Fitbit or to Jawbone and job bone oh bad do a whole episode on that someday yeah that they're pounding the strom of we are not just a manufacturer of devices we have this like unbelievable pioneering technology that is 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 630 patents and 570 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 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 boy have we patented it yeah yeah champsock yeah some other things Sonos is sort of a spousing 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 for programmers that they're like subclasses of an assistant or being able to add additional sort of features to any given assistant is to create it's almost like customizing Android firmware like to create differentiation on top of the core assistant that you inherit from like it's like Xiaomi and the me you I and yeah yeah maybe they're thinking that's our own streaming service not totally clear they're either but they've said they have ruled that out the other thing that they talk about a lot is that 27% of Sonos households own four or more products and 61% of households have more than one so they're 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 or at least acquisition cost the way they frame this I you know 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 was existed before but if it's something they coined in the S1 they regularly refer to the sonic internet as the wave and that people are totally overwhelmed with screens and that voices the answer and the the quotas that their well position for this as the leading home sound system for consumers content partners and developers sonic internet I love the product I think I bought two to start and not going to disclose how many I've bought now so that's very it's a very real thing well before I open up any questions that's so this is case you hit all mine except the only slightly different one I had that you covered a little bit is 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 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 so no system 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 assistance work and integrate you know easily in our platform it's a great point there 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 so 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 where I bear I would say it's difficult to see them creating software services that people will pay for on top of buying devices yeah yeah not only is that not there but like your growth story period is not there you know you're growing between 10 to 20% like okay you know yeah in a in a high-end segment which I'll go into the next one because I think it comes from that a high-end segment awesome like you should think cool we're selling Mercedes like well we should have great margins they do they make really nice gross margins they sell above 40% I think in some of their categories at 46% in the last six months but there's 16 years in and they're just barely break even on a net income basis because they pay a ton and sales and marketing costs both to the channel and 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 going to outfit here yeah how many 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 that's interesting this this what's like you've got a good one but like you were way late and like this whole Switzerland thing is like you were you were way late to the market and like you know you keep saying Google assistant is going to ship I don't see any Google assistant on any so no devices yet is this really going to 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 fit bit or a job on them then 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 wants an agility between voice assistance it's tough for me to see that being a big segment especially if you're not able to make money hand over a fest 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 27% of their customers have four more speakers you know Ben 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 subscription business model you know 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 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 going to build a addition on your house just to like you buy more sonos stuff and I was going to 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 in for free with the hardware 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 it everybody wants which is different than sonos because sonos only really gets the high and segment but I guess let's address some of the major differences the refresh cycle is rapid for apple is 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 iPhone every two years and buying a computer every three I'm buying a watch every once in a while buying AirPods I'm paying Apple because they're cheap for iCloud storage 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 value they can offer through software and services that I'm going to pay for it's what Tim Cook is beating the drum 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 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 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 things right that's 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 it's a great point and then the other quick one I had I don't know how far this is if this is more me projecting than anything else but because I do think speakers are interesting but like also headphones and personal devices are also real interesting see AirPods and Apple's acquisition of beats sonos doesn't do anything in that what makes sense now they've locked me in as a customer to offer me where I'm like here are hundreds of more dollars well 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 does feel like that should be unified 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 adding something to my to-do list and it's super frustrating yeah I those are my points all right what would happen otherwise I think we really covered this I mean I think they basically needed to IPO could have like a little McFarlane Elon style take public take private or something or you know by by outright if you start to look around who acquires could have been it would have been Amazon in 2013 or 14 deciding to instead of hiring their own hardware engineers to buy sonos instead and then base it on that I think once they made the decision to start building that out the LADA ecosystem themselves they they weren't going to buy by sonos Google probably the same thing Amazon would have had to have made that decision even earlier they started work on the echo in 2010 2009 2010 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 going to make the comments that 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 I don't think they would have though because the real reason they bought beats was mage was the serving the streaming service they bought it for the hardware and the headphones as well but 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 tons of respect for him as an artist but he didn't have quite the same industry 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 we talked about sort of how Apple music and Spotify work doing Spotify like really seems to be ramping 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 think Spotify now has like 70 million paying subscribers and Apple music is somewhere around 40 Wow interesting I remember I at least being more skeptical on Spotify and more bullish on Apple music but I don't know if it sounded like I'm being very critical of sonos I am in 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 on the music streaming side than Apple music is well we'll have to keep watching that bad on CO plays out yeah it's fun like we didn't intend this this way but like we kind of have this mini series going of music you know from sound jam and iTunes to beats Spotify to sound us 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 were going to end up in mini series based on transportation food you know entertainment Yep yep smartphones Yeah yeah yeah Waves yeah tech themes Perfect SIG into tech themes and of course my first one is is technology waves which is probably what you were going to go with Yeah and I'll just sort of name them and we can talk about them there was one they wrote 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 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 a big takeaway for me and like waves throughout this episode is just how important it is to time them correctly like sonus 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 20 billion 40 billion 50 billion dollar company Let's examine that how would you have timed streaming services better and what would you have changed because my view of it as 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 the listening was so you would either had to go down market or diversify on product 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 for like the correct strategic decision would have been in call it 2012 2013 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 a relentlessly driving down market on cost or even just starting there as a company versus like doing this weird like oh we're going to go back up market now Yeah there no discounting premium product yeah so you're you think the way you could have road that wave better would be to sort of appeal to the fatter part of the segment well like you said there's 70 millions Spotify subscribers now right and there are 7 million homes with sonos like that's one tenth penetration many years later like that should be like 80% 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 2013 because 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 fang 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 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 the media 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 what I'm definitely thinking of is job on because we used to see three hundred dollar job bones who invented the portable USB speaker category and now they're eight dollars dangling from the checkout at that 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 later businesses on hardware or break even or small margin businesses 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 and consumers lives and my you know my mom has a Fitbit so I want to 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 making a few bucks on every TV that sold and sort of diversifying the way that their platform is used without them having to sell all the devices themselves we're seeing so no 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 premium product into an IKEA piece of furniture so well millennials bottom line I guess when I take a deep breath here how do they avoid going the path of the job on yeah yeah oh man I originally wanted to include a lot more job bone in the history and faxes like a parallel path I think we should just do a whole episode on job on someday man that is a wild ride of a company fun fact job bone and Airbnb shared an office building for several years talk about two divergent paths but anyway yeah yeah and amazing people at job bone I mean like true missionaries visionaries brilliant the world is better for job bone having existed yep yep also a wild ride well minor tech team footnote to this story but I just think it's an interesting thing that 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 devices and improving them either hardware or any experience improving a core operating system or hardware seamlessly and quickly it's just such a powerful thing and like every company should do that like the fact that Sonos is upgrading adding features adding you know adding services to devices that are 10 plus years old would a powerful like technology lever versus Chevrolet or GM or you know Ford that's like oh you know my car that I bought in 2005 still the same car I bought in 2005 you know you need to align your business model so that you make money continually from your customers as you're providing the 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 it's an interesting lens to use 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 bridge the gap until the next refresh cycle Tesla could go either way right now but I can see a path with the energy networks I have one more in the S1 Sonos 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 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 monetize voice based sort of high-intense search It's a bold claim we'll see if it becomes true or not 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 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 top they like Amazon pays so much money to Google for adwords for products Amazon has shifted the mind share such that more than 50% of products 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 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 or as Amazon does Yep, indeed I am on by real estate in Seattle well one of us I should yell by Amazon which I think like we actually should disclaim this is not a stockpicking show we don't recommend that you buy or sell stocks based on our actions I'm sure there's a more official way we could say this but was clearly a joke to you know buy if you want if you decide do the work and decide you want to buy Amazon or Seattle real estate or whatever or HQ to real estate where ever why is that not been announced yet Toronto I don't know I Toronto DC but I'm still going Toronto yeah I thought it was supposed to come out last Wednesday I thought there was some like narrow down announcement that didn't seem to happen I don't know what are those guys doing over there Amazon guys and girls yeah yeah alright grading should bring this home yeah so listeners who may not have caught the last couple episodes in season three we did have decided that when something happened very recently we will not just arbitrarily great it we will paint the picture of what an A plus looks like how they could get there and then sort of paint any other cases as well you know with historical acquisitions we have the data to be able to show that 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 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 evaluation comparable to what they could IPO for so yes they should have IPO what will they do with the 88 million that they raised I think largely continue to fund operations that's not like this can't you can't you cash gives us a new they needed money 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 assistance if they're able to sort of secure the contracts and relationships so that I can realize my dream of being 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 real way to get services revenue off of me and I I don't know though what those are yet but it's not unreasonable I think this could become a I don't know you name it five billion dollar market cap company just on 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 B so I think I agree on the A plus you know on the C I think maybe it's that but that the price points just remain so high that people make a decision that I made of like I'm moving in San Francisco and to a bigger place and want to outfit it with smart speakers and prime day came along and I was like well I could spend a couple thousand dollars and do this with so no so 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 at this point now grading the company rather than grading the actual event of the IPO but sort of my prediction is that this becomes a nice company that grows into a 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 carve outs carve outs let's see I'll go first 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 now now is a good time to do it by Emily Chang I read it you all should read it to 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 it's good like I felt like one of those books were like yeah I should read it but you know I already know what is written in there and 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 you know it's not lost on us here at acquired either that we're now in episode three of season three and we've covered three really great interesting companies here which you know we're proud of our work that we've done on them there are you know no women that we've talked about at those companies founders or otherwise and that is definitely not lost on us so everybody view it as your homework and opportunity read brought to be a well I now feel silly recommending a podcast with a man well that's okay to put I am the exact same camp that you are in thinking I've read all the headlines I've read a bunch of excerpts from the book I'm sure I know so homework it is my carve out is another podcast episode called invest like the best and this particular episode has the guest Andy Rackliffe and so Andy has a founding partner of benchmark and the CEO of wealth front there's a lot of amazing things on that 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 40 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 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 deludes their message and Andy is 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 was the martial art that all strengths are also weaknesses and when you look at someone who else's strength how is that also a weakness for them that you can sort of exploit and so when they were the scrappy upstart starting benchmark they looked at the big guys Kleiner Perkins and notice that 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 access 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 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 benchmarks take was sure we'll introduce you to people if you want but like we're not we're not forced anything is your company and so by just looking at the things that make your enemies strong it can you can find ways in which you can differentiate and be strong against them and so I just thought that was really cool and there's 10 other awesome tidbits like that in the episode so go listen to it yeah so good Andy was one of my professors in business school at Stanford and he's the real deal and it's such a good place like clearly he has a disciple of Sun Siu in the art of war 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 I'm sure you guys at PSL and tech companies and startups are the same deal and 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 this is why bundling and unbundling is a tick-tock cycle all right well if you haven't subscribed and you want to hear more you can subscribe right now from wherever you're listening to this from your favorite podcast client or if you're on the web acquired.fm to sign up for our email list or join the Slack if you feel so inclined we would love a review on Apple podcasts or any love on on social media so thank you so much for listening and we'll catch you next time. Thanks for watching and I'll see you next time.