Looking beyond hardware, Sonos launches its first streaming service

Sonos launched its first audio service Tuesday, called Sonos Radio. It promises free and exclusive music programming across a few dozen stations. Many of these stations will be supported by advertising — a new business for Sonos, which the company is entering at a time when the ad business is feeling the pressure of an evolving economic downturn.

However, for Sonos, the radio service also represents a new opportunity to lean more heavily into product partnerships like its existing relationship with Ikea, and expand to new product categories, including automotive. As such, it's an interesting example for a consumer electronics company using services not only to generate revenue but also as a way to expand its core business.

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Sonos Radio: 33 stations, most with ads

Sonos Radio is launching as a new section within the existing Sonos mobile app Tuesday. The section offers consumers access to existing radio streams from terrestrial and internet broadcasters, while also highlighting Sonos-exclusive stations. These include the company's flagship station, dubbed Sonos Sound System, as well as a few select artist stations curated by musicians like Radiohead's Thom Yorke and Talking Heads legend David Byrne.

The company's signature stations are being complemented by around 30 genre stations programmed by Sonos staffers, with titles like "Reggae Roots," " R&B Collective" and "New Lords of Metal." These genre stations will feature some ad breaks, while Sonos Sound System and the company's dedicated artist stations will be presented without advertising.

Sonos Radio General Manager Ryan Taylor told Protocol that the company first began sketching out plans for the new service some 18 months ago. It struck a partnership with online music veteran Napster to power the catalog and streaming technology, but Sonos is doing all of the programming in-house. Taylor stressed that the company wasn't using any algorithms to compile its radio stations and promised a radiolike experience, complete with artists and hosts talking about new releases. "They're not playlists, they're actually radio stations," he said.

Sonos doesn't make much money with Ikea speakers — yet

Founded in 2002, Sonos has exclusively focused on audio hardware for most of its existence. In recent months, the company signaled that it was looking to expand into services, with Sonos CEO Patrick Spence telling Protocol in February: "There's great opportunity there. We're excited."

One reason that Sonos is expanding into services now is its partnership with Ikea. The furniture giant began selling Sonos-powered speakers in its stores last summer. Those products aren't just cheaper than traditional Sonos speakers, they're also made by Ikea, with Sonos only supplying some of the electronics to power the streaming experience. As a result, the company gets a lot less money per speaker sold. In its fiscal first quarter, Sonos generated $562 million by selling its own hardware products but received less than $34 million from Ikea and other companies paying for the use of its technology.

On the flip side, partnerships like the one with Ikea have the potential to grow Sonos' customer base massively beyond the 10 million households that currently own Sonos speakers. Thanks to Sonos Radio, the company now has a way to monetize that customer base for years after they purchase speakers, and also benefit from a trend of radio advertisers shifting their ad dollars from terrestrial to digital audio. Media research company Borrell Associates predicted last year that traditional radio advertising would decline by 4.4% in 2020, whereas digital radio ad spend would grow by a whopping 27%.

Sonos' bet on advertising is similar to the strategy employed by Roku. The company is best known for its streaming devices but makes most of its money from advertising. However, Roku was also recently forced to withdraw its 2020 financial guidance in light of the COVID-19 crisis. Sonos' Taylor freely admitted that it was not the best time to launch an ad-supported service. The advertising market is under heavy pressure from the COVID-19 shutdowns, with travel, automotive and other key advertisers pulling back just as the usage of ad-supported services is up.

Even so, Sonos seems committed to these services in the long run. The company retooled its New York retail location, adding a radio studio, to become the operations center for Sonos Radio. And while Sonos Radio currently doesn't include any podcasts, it may down the road launch its own dedicated podcast offering as well. "This is a first step for us," Taylor said.

Transitioning from home to everywhere

Beyond providing a much-needed additional revenue stream for Sonos, the new radio offering also serves another function for the company: A free signature service like Sonos Radio makes it easier for new users to get value from a Sonos speaker right out of the box, making the company's products more approachable to casual listeners who may not yet pay for a premium music service.

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That, in turn, may be important for taking Sonos to the next level. Company executives have long talked about their desire to expand Sonos beyond the home, and there have been reports that Sonos could partner with a headphone maker, or even a car manufacturer, to power streaming on the go. Especially in an automotive context, Sonos may encounter consumers who are unfamiliar not only with the company but with music streaming in general. Having free, curated content ready to go when that hypothetical Sonos-powered car stereo turns on could be key to making such partnerships work.

Without commenting on specifics, Taylor reiterated that the company was still committed to expansion. "We are transitioning from home to everywhere," he said.