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Sonos CEO Patrick Spence talked to Protocol about the company's experiments with services: "There's great opportunity there. We're excited."

Photo: David Paul Morris/Bloomberg via Getty Images
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It sued Google. It infuriated customers. Here’s what’s next for Sonos.

Sonos CEO Patrick Spence sees 'great opportunity' in selling services.

The past couple of weeks have been a rollercoaster ride for Sonos. The smart speaker maker ended 2019 with a record quarter, selling close to 3 million devices, and growing its fiscal Q1 revenue by 13%. Sonos faced backlash from some of its most loyal customers over a decision to end support for older devices. Out of the blue, it sued Google for patent infringement.

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There's another development that hasn't gotten nearly as much attention — but could prove just as important for Sonos in the long run.

In the last quarter, it quietly began experimenting with services as a way to generate recurring revenue. It's a notable change for a company long focused on hardware sales alone. But talking to CEO Patrick Spence, you get the sense that he sees it as crucial to the future of Sonos. "There's great opportunity there," he told Protocol on Wednesday. "We're excited."

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Making new plans

Sonos began trialing a service called Flex in the Netherlands last quarter. Flex offers consumers the option to rent Sonos speakers, starting at €15 ($16.50) per month. "Basically, buying Sonos as a service," Spence explained. Separately, Sonos also recently began reselling dedicated music services to stores, hairdressers and other businesses in the last couple of months.

And you can expect more tests soon. "We definitely see the opportunity for services that can augment the opportunity for our customers," he said. "You'll see us experiment with some things, and you'll see us scale them based on what's working."

That's a very different way of doing business for Sonos, which in the past put all its energy into delivering physical products that have to be flawless at launch. Developing services is a much more iterative process. "We'll test and learn," Spence said. "Even culturally for us, this is different."

When Sonos launched 18 years ago, executives made the decision to focus on hardware and leave the services to others. The company positioned itself as a kind of Switzerland of digital audio — ready to work with anyone and everyone. Even with its new focus on software, don't expect Sonos to try to directly compete with Spotify or Apple Music. "I would be cautious about jumping into something that somebody already does," Spence said.

Why Sonos is getting into services

The hardware-only business model worked well while Sonos was the lone innovator in a space dominated by slow-moving giants, selling internet-connected speakers for $500 a pop to enthusiasts with deep pockets.

Now, Sonos speakers are competing with a flood of cheaper products, including devices from companies like Google and Amazon that are happy to forgo profits to increase their market share. The company's best answer has been a partnership with Ikea, which began selling Sonos-powered speakers for as little as $100 last summer.

Sonos specifically called out Ikea as a "strong contributor to growth" in its letter to investors Wednesday, and Spence said that the partnership played a big part in introducing Sonos to new consumers — who then go out and buy additional speakers, both from Ikea and Sonos itself. "This has been a hit, and we're very, very pleased with it," Spence said.

However, a closer look at the numbers also shows that there is a limit to Ikea's impact on its bottom line: Sonos device sales increased by 22% year-over-year last quarter, but revenue only grew by 13%. What's more, the company booked less than $34 million in "partner products and other revenue," a category that includes fees Ikea pays Sonos for using its technology.

In other words: Ikea may be bringing in lots of new customers, but those customers aren't worth all that much to the company — yet.

Appeasing critics, fighting giants

Services could also add new value to speakers consumers bought years ago — and possibly placate people upset about its ending support for some legacy devices.

After public outcry, Spence promised to keep updating legacy devices with bug fixes and patches going forward. "We've gotta be more mindful how we communicate these changes," he told Protocol, while also promising that the company wouldn't discontinue support for additional speakers any time soon. "We don't foresee that being an issue for the other products."

Sonos hasn't said what kind of features it will roll out in May when it discontinues support for older speakers. However, Spence said that it continues to work with companies like Apple, Amazon and Google, even after Sonos sued the latter over alleged patent infringement. "We haven't seen any change in our relationship," he said.

In the past, Sonos has tried to resolve intellectual property issues amicably. "We just reached a point with Google where it wasn't going anywhere," Spence said. He added that he had gotten a lot of support from both consumers and industry insiders after the lawsuit was announced. "These concerns seem to be pretty widespread," he said. "I feel like it is our duty to shine a light on these things."

Software eating sound

But while Spence admitted that the Google lawsuit will likely go on for a long time, he seemed confident that the company had the resources to fight the legal battle without skimping on product development.

"Sonos is the story of software eating audio," said Spence in a reference to Marc Andreessen's old adage about software eating the world. Now, the priority for Sonos is to figure out what else it can do with its software.

"That's a journey we started two years ago," Spence said. "You'll see the fruits of that over the coming years."

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