Sonos – Sounds of sameness

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Sonos will become just like Android handset makers. 

• Sonos has announced that it will support Spotify Connect and Amazon Echo in a climb down which sets Sonos on a path to becoming just another speaker company.
• Sonos makes great speakers which have proven to be very popular with audio buffs which combined with its ability to easily play music anywhere in the house has been a major differentiator.
• However, other companies are catching up and offering similar functionality with great quality speakers but at much lower prices.
• Sonos’ strategy to deal with this has been to lock its users into its ecosystem and only allowing them to use popular services such as Spotify, Amazon and so on via its own app.
• The idea was to create a compelling user experience such that users would choose a Sonos even if something of equivalent quality was available at the same price point.
• Unfortunately, this is where it has all come unstuck as Sonos’ ecosystem delivers a frustrating, buggy and substandard user experience that I think users would not use if they had a choice.
• The signs of trouble began late in 2014 when it had a disappointing holiday season which has been further impacted by the success of the Amazon Echo during 2015.
• This resulted in a round of layoffs in Q1 2016 strongly indicating that the current strategy has not been working and that something new was needed.
• By enabling both Spotify Connect and Amazon Echo Sonos has removed the requirement for users to use its software which I think is a sign that it is giving up on trying to create user preference around an ecosystem.
• Because Amazon Echo and Spotify Connect are keen to work with any speaker on the market, Sonos’ differentiation now becomes: audio quality, design and its multi-room function.
• None of these are sustainable differentiators and I see the competition quickly catching up with Sonos and in many cases, beating it on price.
• This is exactly the dilemma the Android handset makers hace to deal with and all of these, with the exception of Samsung, make 2-4% operating margins in the best instance.
• Sonos’ only chance is to either:
  • First: invest in cool new hardware features and stay ahead of its competition to maintain its price premium or
  • Second: to go for volume and gain scale advantages by significantly outselling its rivals.
• Unfortunately, I suspect that Sonos’ management is not dynamic and bold enough to quickly start down either of these paths with result likely to be weak revenue growth and low margins.
• This will leave Sonos’ investors pretty unhappy and likely to sell out as soon as the first decent bid comes along.
• Sonos would make a good tuck-in acquisition for any company trying to create a cross device ecosystem and its brand is very well known.
• I see Samsung, Apple, LeEco, Sony and Amazon all as potential acquirers.