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Sonos is betting big on a post-pandemic future, and tougher antitrust policies to boot

Sonos CEO Patrick Spence has high hopes for the new administration's antitrust policies, arguing they should benefit us as citizens, not just consumers.

Sonos is betting big on a post-pandemic future, and tougher antitrust policies to boot

Sonos's new speaker seems made for our post-pandemic future.

Photo: Sonos

Are you ready for the pandemic to be over? So is Sonos.

The smart speaker maker weathered COVID-19 unexpectedly well, with consumers snapping up sound bars and speakers to make those long days at home a little more bearable, which turned the 2020 holiday quarter into the best quarter in the company's 18-year history. "It's been a very strange, but very successful year for us," said Sonos CEO Patrick Spence.

Now, Sonos is ready for things to change. The company introduced a new small and portable speaker Tuesday, called the Roam, that seems made for our post-pandemic future. And with the Biden administration appointing antitrust experts like Tim Wu, Spence believes there may be a chance for a policy reset. In an interview with Protocol, Spence talked about his hopes for new antitrust policies, the company's plans for the coming years and why Sonos decided to fast-track the Roam speaker in the face of the pandemic.

One of the surprise winners of the lockdown was the Sonos Move, a portable $400 speaker the size of a small space heater. "That became a big product for people because they're going out to their yard or patio, I suspect," Spence said. With the Roam, Sonos is now betting that its customers are itching to venture a little further. Priced at $169, the Sonos Roam is the company's first fully portable Bluetooth speaker that doubles as a full-fledged member of the Sonos smart speaker family when within reach of a home Wi-Fi network.

"We actually prioritized [it] over other products on our roadmap when we hit the pandemic last summer," Spence said. "We couldn't have seen when things would be reopening. But with Roam, we did say: 'OK, let's get it out a little sooner.' And we were willing to push something else out that we thought would be less suited for the moment."

With the Roam, Sonos also has the potential to grow its audience. "It gives us the opportunity to speak to a new customer," said Ryan Richards, Sonos Global's product marketing director. Traditionally, the company has targeted wealthier households; Spence is scheduled to reveal at an investor event Tuesday that it is currently in 9% of the affluent homes in its existing markets. With the exception of cheaper Sonos-powered speakers made by Ikea, the Roam is the first Sonos speaker selling for less than $200.

"$169 isn't cheap," Spence said. "But in a world of thousand-dollar iPhones, it is something that is accessible for people." That also means Sonos can more easily target students and others who may not have wanted to spend hundreds of dollars on a home hi-fi system just yet. "It will appeal to a younger demographic," Spence said, adding: "We want to quadruple the number of people actually using our products and services."

Sonos has long relied on its existing customers to drive a significant chunk of its sales, with consumers adding to their home hi-fi system over time. With Move and now Roam, the company expects that trend to continue. Right now, the 11 million existing Sonos households own close to three of the company's speakers on average. In the coming years, Sonos wants that number to be more like four or six, which will allow the company to reach $2.25 billion in revenue in fiscal year 2024.

Part of that number will also be a modest but growing contribution from the company's still nascent services business. Sonos Radio, the company's ad-supported radio service that launched last April, has become the third most-listened-to music service on Sonos speakers. Its paid HD tier, launched in November, has seen "good traction," according to Spence, who laid out plans to reach 500,000 Sonos Radio HD subscribers, without specifying when exactly that may be.

Succeeding with those ambitious goals depends on Sonos beating its competition, which now includes everyone from traditional hi-fi brands to Bluetooth speaker makers to tech giants like Google and Amazon. The company has publicly feuded with the latter two, alleging anti-competitive behavior, and currently is in court against Google over alleged patent infringements.

That might be why Sonos has a very different take on the new administration's anticipated stance toward Big Tech than some of its industry compatriots. In our conversation, Spence expressed optimism about the recent appointment of Tim Wu to the National Economic Council, saying it signaled a "different perspective" on antitrust issues than the one held by the previous administration.

He also had high praise for Rep. David Cicilline, who chairs the Subcommittee on Antitrust, Commercial and Administrative Law, in front of which Spence testified in January 2020; he said that it was key for the administration to take steps against anti-competitive behavior. He pointed to tech companies blocking Sonos from using multiple voice assistants on their products, and pricing their speakers below cost, which Spence in the past called out as illegal predatory pricing.

Spence also argued that tech giants use what he called "efficient infringement" to steamroll smaller competitors that may not have the resources to fight patent infringement lawsuits, or simply didn't patent all the technologies they developed. "It's principles that we've had in the system. We just haven't enforced them as a country," he said, adding that there may also be a need for additional safeguards. "Hopefully we'll come up with some new ones to just make sure that we are spurring more companies, competition and entrepreneurship."

Ultimately, he said, creating an equal playing field requires a different mindset from everyone, consumers included — a mindset that isn't just focused on the cheapest possible sticker price. "Consumers are also citizens who need jobs," Spence said. "We're all part of the same system. My hope is that people think through the system and understand that it has to work for us as citizens, not just as consumers. A lower price doesn't necessarily mean that the whole system is going to be healthy and that it's going to work for everybody."

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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