Sonos @ 15

Sonos_2015-LogoSonos, granddaddy of the connected home audio marketplace, is now 15 years old. Sonos was a pioneer that was so far ahead of its time, it inadvertently found itself as one of the key early drivers of streaming subscriptions. Visionary founders John MacFarlane and Tom Cullen had some long-term inkling that streaming would eventually be a major force for them, but their near-term vision was built on getting music downloads piped around the home. Now, 15 years on, Sonos has effectively achieved two missions: deploying iTunes around the home, as well as Spotify and co around the home. But now, the outlook is less clear. Sonos’s marketplace is complex and competitive more than ever. Furthermore, the departure of MacFarlane, a round of lay-offs and having ‘missed voice’, may have left Sonos looking less vibrant than it once did. So, where next for Sonos?

These are some of the key challenges Sonos faces:

  • Battle of the apps: Sonos hardware reflects the company’s obsession with elegance and attention to detail. But, as with so many hardware companies (in fact the majority of them), Sonos’s weak point is software. Apple makes seamless software-hardware integration look deceptively easy – it is, in fact, nigh on impossible to do well. The Sonos app works well enough, certainly much better than it used to, and the networking of devices is usually relatively pain free. But in the app economy, consumers expect apps to work perfectly, not ‘well enough’. They expect high-quality user experiences, not functional experiences with lots of clicks and swipes, which is what Sonos can feel like when doing activities like building playlists. In spite of this, the biggest software threat for Sonos is the very fact that it is a standalone app. A Spotify user does not want to have one app to use on the train, or in the car, and a different one to use in the home. This is what Sonos effectively does right now. Sonos’s new CEO, Patrick Spence, knows this needs fixing but the question is whether Sonos can make the fix before Spotify and co come up with their own fix.
  • Just play: Traditional home audio just works. You press play and there’s music. Sonos stood out way ahead of the pack – an admittedly poor quality pack – for out-of-the-box simplicity, though even now it remains a marker of good practice. However, the convenience benchmark for connected home audio still falls far short of traditional home audio. Sonos works most of the time, emphasis on most of the time. Every so often there’s a network problem; sometimes this is due to a firmware issue, other times it is the network itself. The network glitches of course aren’t Sonos’s fault but that doesn’t matter to the user experience. A CD player works every time, Wi-Fi or not. That is the convenience benchmark Sonos and all other connected audio players must meet. But even without Wi-Fi issues, pressing play is not always so straight forward because Sonos’s app experience is not on a par with its hardware experience.
  • Sonos…sonos….sonos…: Ok, that was meant to be an Echo. Yes, Amazon’s Alexa vehicle has totally shaken up the connected home audio space. And with Amazon Music integration, it sets a standard for what an integrated hardware-software service experience should be. One voice command pulls up a song in an instant, no having to select which music source to choose. Yet Echo is far from the end game. In fact, voice is not an ideal interface for music. It’s fine for when you know exactly what you want to play, it’s also pretty good for when you want to select a lean back experience e.g. ‘play me music to work out’ – but it struggles with the more nuanced use cases that lie in between. Voice is another thing that Spence knows needs fixing.
  • Good enough: And of course, the Echo is not a super high-quality audio experience. It’s a decent audio experience. Sonos might grumble at otherwise sophisticated users tolerating modest audio playback, but ever since the advent of MP3s and iPod earbuds, convenience trumps quality for most when it comes to music. Even Sonos is guilty of playing the convenience game. Though its speaker quality has improved, Sonos speakers are still a long way off the audio specs audiophiles seek. And yet, even this isn’t the biggest challenge for Sonos. The core problem Sonos faces is that the likes of Amazon, Google and even Apple are not focused on winning the home audio race, instead they view smart speakers as a beachhead for controlling the smart home. That is the war, home audio is the first battle. Just as Apple used the iPod as the first step towards winning the personal digital life war, smart speakers are being used in the same way in the home.

Under attack from all sides

There are countless other challenges too. Sonos’s mission of filling rooms with audio might not actually be what most people want. A smart speaker in the kitchen and a sound bar under the TV might be enough for most, and those may be best served via a native hardware / software / content ecosystem like Amazon’s Prime. At the bottom end of the market, cheap Bluetooth speakers are flooding the market, while for those consumers who do value audio quality over convenience, incumbent audio companies like Bose, Panasonic and Sony are all upping their games. (In virtually all markets MIDiA tracks, Bose wireless speakers are more widely adopted than Sonos.)

Foundations for success

Sonos is also upping its game and tweaking its strategy. The recently launched PlayBase shows both high-quality product design and a recognition that TV is the next big battle Sonos needs to fight, having already made good ground with its PlayBar. Sonos needs all the strategic nous and product excellence it can get. It has the low-end and high-end squeezing it in a pincer movement, while the big tech companies carpet bomb its heartland simply to gain a foothold in the smart home. Five years ago, Sonos was the golden child of its market. Now it is a company with a very strong brand in need of some laser focussed positioning in a remarkably competitive field. Sonos has enviable foundations, it now needs to build a new house.

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The Three Eras Of Paid Streaming

Streaming has driven such a revenue renaissance within the major record labels that the financial markets are now falling over themselves to work out where they can invest in the market, and indeed whether they should. For large financial institutions, there are not many companies that are big enough to be worth investing in. Vivendi is pretty much it. Some have positions in Sony, but as the music division is a smaller part of Sony’s overall business than it is for Vivendi, a position in Sony is only an indirect position in the music business.

The other bet of course is Spotify. With demand exceeding supply these look like good times to be on the sell side of music stocks, though it is worth noting that some hedge funds are also exploring betting against both Vivendi and Spotify. Nonetheless, the likely outcome is that there will be a flurry of activity around big music company stocks, with streaming as the fuel in the engine. With this in mind it is worth contextualizing where streaming is right now and where it fits within the longer term evolution of the market.

the 3 eras of streaming

The evolution of paid streaming can be segmented into three key phases:

  1. Market Entry: This is when streaming was getting going and desktop is still a big part of the streaming experience. Only a small minority of users paid and those that did were tech savvy, music aficionados. As such they skewed young-ish male and very much towards music super fans. These were people who liked to dive deep into music discovery, investing time and effort to search out cool new music, and whose tastes typically skewed towards indie artists. It meant that both indie artists and back catalogue over indexed in the early days of streaming. Because so many of these early adopters had previously been high spending music buyers, streaming revenue growth being smaller than the decline of legacy formats emerged as the dominant trend. $40 a month consumers were becoming $9.99 a month consumers.
  2. Surge: This is the ongoing and present phase. This is the inflection point on the s-curve, where more numerous early followers adopt. The rapid revenue and subscriber growth will continue for the remainder of 2017 and much of 2018. The demographics are shifting, with gender distribution roughly even, but there is a very strong focus on 25-35 year olds who value paid streaming for the ability to listen to music on their phone whenever and wherever they are. Curation and playlists have become more important in order to help serve the needs of these more mainstream users—still strong music fans— but not quite the train spotter obsessives that drive phase one. A growing number of these users are increasing their monthly spend up to $9.99, helping ensure streaming drives market level growth.
  3. Maturation: As with all technology trends, the phases overlap. We are already part way into phase three: the maturing of the market. With saturation among the 25-35 year-old music super fans on the horizon in many western markets, the next wave of adoption will be driven by widening out the base either side of the 25-35 year-old heartland. This means converting the fast growing adoption among Gen Z with new products such as unbundled playlists. At the other end of the age equation, it means converting older consumers— audiences for whom listening to music on the go on smartphones is only part (or even none) of their music listening behaviour. Car technologies such as interactive dashboards and home technologies such as Amazon’s echo will be key to unlocking these consumers. Lean back experiences will become even more important than they are now with voice and AI (personalizing with context of time, place and personal habits) becoming key.

It has been a great 18 months for streaming and strong growth lies ahead in the near term that will require little more effort than ‘more of the same’. But beyond that, for western markets, new, more nuanced approaches will be required. In some markets such as Sweden, where more than 90% of the paid opportunity has already been tapped, we need this phase three approach right now. Alongside all this, many emerging markets are only just edging towards phase 2. What is crucial for rights holders and streaming services alike is not to slacken on the necessary western market innovation if growth from emerging markets starts delivering major scale. Simplicity of product offering got us to where we are but a more sophisticated approach is needed for the next era of paid streaming.

NOTE: I’m going on summer vacation so this will be the last post from me for a couple of weeks.