The Sonos IPO

Ben and David are (almost) live on the scene covering the plucky Southern California “camera company”… uh wait, wrong episode… we mean *speaker* company’s IPO! Continuing the long Acquired tradition of analyzing companies at the intersection of music, tech and business, we discuss the past, present and future of Sonos in world where speakers actually now… speak! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links: Sonos own corporate history https://www.sonos.com/en-us/how-it-startedCarve Outs: Ben: Andy Rachleff on the Invest like the Best podcast http://investorfieldguide.com/andy/David: Brotopia https://www.amazon.com/Brotopia-Breaking-Boys-Silicon-Valley-ebook/dp/B074LQKJJC by Emily Chang

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Record.

• 0:02David Rosenthal?

  All right.

• 0:03Ben Gilbert?

  Where does the word record come from? We record again.

• 0:07David Rosenthal?

  Yeah, cord again.

• 0:11David Rosenthal?

  That's great.

• 0:23Ben Gilbert?

  Welcome to season three, episode three of Acquired, the show about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:30David Rosenthal?

  I'm David Rosenthal.

• 0:32Ben Gilbert?

  And we are your hosts. Today, we are covering the IPO of a company that has devices littering my home in the most wonderful way, Sonos. So Sonos was founded with a clear mission, and that was to fill every home with music, or so says their S1. And today, we will decide, based on their very recent IPO last month, you know, how to go. And we will forecast, what does it look like in the future for this IPO to sort of look like an A+ in retrospect? And, you know, what does it look like if it was a failure in retrospect? And what are the things that have to evolve in the landscape of home audio and in the actions of the company in order to play out either of those scenarios?

• 1:15David Rosenthal?

  It is a unusually clear and compelling mission, may or may not have been the company's original mission. You'll just have to tune in to find out.

• 1:24Ben Gilbert?

  So I want to start with some fun facts, because I think they're very interesting about the company. So the first one is, Sonos did not sell a speaker until seven years into the company's existence, which is a little shocking, based on the company that we know today, to think about, you know, two years of no product, and then five years of non-speaker products, really just bridges, amplifiers, ability to bring non-

• 1:46David Rosenthal?

  To bring digital music to any home in your room.

• 1:49Ben Gilbert?

  Yep. And then here's another just bananas stat, to tell you how loyal the customer base is, and how much Sonos invests in their backwards compatibility. 93% of the speakers that it has sold over the last 13 years are still active today.

• 2:03David Rosenthal?

  Yeah, that is crazy.

• 2:05Ben Gilbert?

  In all this research, that thing jumped out at me like, so the iPhone is not yet 13 years old. iPhone is only 10 years old. How many 10 year old iPhones are still active?

• 2:15David Rosenthal?

  Yeah.

• 2:15Ben Gilbert?

  It's, I don't know, zero percent, I mean, it rounds to 0%.

• 2:18David Rosenthal?

  Yeah. I believe the actual stat is that 93% of the company's products received and installed an over the air update in the last 12 months, which is even more bananas that products from, you know, original products are still being supported with new firmware updates from the company.

• 2:38Ben Gilbert?

  Yeah, totally nuts. Well, if you're new to the show, you can check out our Slack at acquired.fm. That's where you can find real time discussion of the biggest tech news and chat with David and I. Tech news like the wild hour by hour news and tweets trickling out of Elon Musk and Tesla yesterday, which by the time we release this, we'll have developed two or three more news cycles and we will actually know what's going on or maybe not. But as of now, what we know is that Elon believes he has secured the funding to take the company private and has felt so confident in that, that it should be announced on Twitter publicly to the world.

• 3:14David Rosenthal?

  I actually heard a rumor that Elon, you know, there's all this speculation now, did he violate any securities laws by tweeting about this? He's now considering, instead of using Twitter, that he's just going to use the acquired Slack channel for future Tesla related announcements. Can neither confirm nor deny.

• 3:32Ben Gilbert?

  With the density of concentration of people interested in the news, I would say, not on a reach perspective, but on a density of interest perspective, it's probably a pretty good platform for that.

• 3:41David Rosenthal?

  Great platform.

• 3:43Ben Gilbert?

  So join us at acquired.fm. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore.

• 4:05David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 4:26Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:48David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 5:06Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A.com/acquired for $1,000 off, and just tell them that Ben and David sent you. All right, David, you ready to take us into the history and facts?

• 5:37David Rosenthal?

  Let's do it. One note before we start on the history and facts. Sonos actually has a unusually good, I would say, though a bit biased, corporate history on their website, which we will link to in the show notes. Some, certainly not all, of this history comes from, but they really do a nice job telling the story and like going into all sorts of detail and history throughout the various phases, much more than your average company. So kudos to Sonos for, or whoever their internal corporate historian is. Make sure you check it out if you want more detail straight from the horse's mouth, as it were.

• 6:11Ben Gilbert?

  And for a company that is so incredibly driven by creating these fantastic experiences and really the best sound and the best experience of listening to sound, it really shows in things like this where they care a lot about telling the story the right way. There's really great pictures. It's well laid out. As David, you say, we're here to be the judge of how it all really went down and pulling as many sources as we can. But it's a really nice piece. And I think it reflects the culture of the company a lot.

• 6:39David Rosenthal?

  Well, and you know, one recurring theme on Acquired is there are many versions of the truth when it comes to startup histories. So their version is particularly well told on their website. But diving into our version, the company that would become Sonos was incorporated in August 2002, that was quite a long time ago, in Santa Barbara, California, not Silicon Valley. For those unfamiliar with California geography, Santa Barbara is between San Francisco and LA, much closer to LA, and is a great town, great place to visit, but kind of a beach town, not like a bustling capital of industry like San Francisco or LA. But nonetheless,

• 7:23David Rosenthal?

  company was incorporated there. And it was incorporated as Rincon Audio, Inc., which I wasn't able to confirm, but I assume that is for Rincon Beach in Santa Barbara, which is one of the most famous surf spots in the world. Of course, another attraction to Santa Barbara. But they would change their name to the Sonos that we know and love today in May 2004, a couple of years later. And a little fun aside story on that. So this was obviously immediately after the dot com crash, when the company that would become Sonos was founded. And so a lot of the service providers to the technology industry were really struggling for business. So even though these guys were a brand new startup,

• 8:06David Rosenthal?

  they were able to get David Plasic, I believe is how you pronounce his last name, who is the founder of Lexicon Branding, which is basically the best in the business globally branding firm, especially for tech companies, to do a project. With them to come up with their official name for the company. So these guys, David and Lexicon came up with the name Pentium for Intel. They came up with the Swiffer. They came up with BlackBerry. They came up with the PowerBook for Apple. And get this, this is the best part, totally related on theme here. They came up with the Zune.

• 8:42Ben Gilbert?

  Whoa.

• 8:43David Rosenthal?

  Yeah. How awesome is that?

• 8:47Ben Gilbert?

  Lot of good track records until that last one.

• 8:50David Rosenthal?

  Until that last, especially because, shoot, I believe I don't have this in my notes, but I think I remember reading Robbie Bach is now a a board member of Sonos.

• 8:59Ben Gilbert?

  Huh. Small world.

• 9:02David Rosenthal?

  It all comes back home to Microsoft.

• 9:06David Rosenthal?

  Anyway, because it was the dot com bust and like, no tech companies had any money. He gives them a great deal. They're able to, Lexicon gives them a great deal. They're able to land them. And apparently it was a super long process coming up with the name. The company kept rejecting everything that they came up with. Lexicon's about to just quit and fire them as a customer. And then they come up with Sonos and everybody's like, that's it.

• 9:30David Rosenthal?

  And that's how the company became Sonos.

• 9:31Ben Gilbert?

  It's funny how long before I've ever owned a Sonos device. I always thought the name was brilliant. Like it's one of those things where the newest branding, which we should put a link in the show notes to the original Sonos branding. And then interestingly, the branding that served as a bridge between the original branding and the current branding, like the branding is excellent. The palindramatic nature of the name is excellent. You can, because some of these speakers, you can flip upside down and it still says Sonos. Yeah, it's just a really nice, pleasing name.

• 10:00David Rosenthal?

  I haven't quite been able to figure out exactly what this means, but it's also a name that if you turn it sideways, like vertically, it still works. It's not exactly the same because the N's and S's are flipped, but like it's, it's still very legible. There's a term for this, but I don't know if they were thinking of that in the initially, given that their products would eventually be both vertical and horizontal. But a really, really great name.

• 10:27Ben Gilbert?

  Yeah. And just while we're dwelling on their branding stuff here for a second, even though we're jumping way far. Ahead, which it only took us, what, all of five minutes in order to jump way far ahead. The 2015 refresh of their brand came with a super cool sort of burst pattern that that was a bunch of tiny little lines shooting out of the center of the Sonos, where if you scrolled it on a digital screen, and I think this might be because of the screen refresh rate, I'm not totally sure why, it looks like sound waves. When you're just holding it still, you're kind of like, okay, that's kind of a cool pattern around Sonos, they're wacky. And then you scroll it and you can kind of see these like, you know, when you look in the top right corner of your Mac at the little speaker with the three lines coming out of it, it's like those little lines sort of

• 11:09Ben Gilbert?

  coming out of the logo when it's in motion. It's harnessing sort of like the artifact of LCD or LED screens. So we'll link to that in the show notes, too. You should try it, it's cool.

• 11:19David Rosenthal?

  Very, very emblematic of Sonos and their culture. But who are these Sonos guys? So there are four founders of Sonos, John McFarlane, who was the CEO from founding in 2002 until last year, 2017, Craig Shelburne, Tom Cullen, and Trung Mai. How did they all come together? So McFarlane, the CEO, he had moved to Santa Barbara in 1990 to get his PhD in electrical engineering from UC Santa Barbara. He ends up dropping out, and he's a pretty visionary guy, he ends up dropping out of his PhD program in 1992, and he founds an internet company with three other people, Craig, Tom, and Trung, who become his co-founders

• 12:03David Rosenthal?

  of Sonos, called Software.com. I guess domain names were easier to come by back then. Software.com ends up, of course, going public in the dot com boom in 1999, merges with Phone.com. The synergies were, you know, you have Software.com, we have Phone.com. Of course, it makes sense. They rename the company OpenWave. And actually, it did sort of make sense because Software.com provided kind of... Email servers and infrastructure to email providers, and particularly early mobile email providers.

• 12:42David Rosenthal?

  So like, and I should say, phone.com did, I believe, a browser, like a WAP-based browser for phones. So OpenWave, which is the merger of these two companies, becomes actually a pretty big company and one of the first pioneers of the mobile smart, not smart, internet on phones. Blast from the past. Of course, though, the dot com crash happens in 2001. All of the former software.com folks leave OpenWave and decide they need to, they want to figure out what to do next. But they had an insight from that experience, in particular, as the company became OpenWave and focused on cellphone providers, that networks, and in particular wireless,

• 13:25David Rosenthal?

  and wireless networks were like a big technology wave that was coming. And wireless networks were going to be ubiquitous. You could already see it in Wi-Fi networks in homes. Consumers were just starting to install, even though a lot of people still had dial-up. Broadband penetration was still fairly low in the US, but Wi-Fi was like a big thing, and they could see this coming. So John is, kind of has the vision, sees this trend happening. And he pitches the other three guys on the idea for their next company. Not a digital music service and hardware for the home. A wireless network for airplanes. Essentially, his vision is to create GoGo.

• 14:09David Rosenthal?

  Hilariously, everybody else is like, that's a terrible idea.

• 14:14David Rosenthal?

  Who would do that?

• 14:15Ben Gilbert?

  One recent fact that I know about GoGo, which I can't remember if I said this on the Tesla episode, is they're like one of the top 20 most shorted stocks relative to their market cap.

• 14:28Ben Gilbert?

  So lots of people continue to think it's a terrible idea.

• 14:31David Rosenthal?

  Well, having just taken a long flight and used not GoGo, but another one of the myriad competitors, the product is still terrible, but a necessity. So anyway, the other three are like, no, that's a terrible idea. So they're trying to figure out what else they can do. They realize that, you know, they all love music and they all have houses. Now, I presume after the IPO and then the merger with Phone.com, presumably they all made, you know, quite a bit of money. Hopefully they didn't lose it all in the dot com bust. They bought houses in Santa Barbara and they're all trying to get music systems in their, in their houses, multi-room music systems, and it's just a total pain. So they start jamming on that. They also see, you know, these are the days, as we've talked about on other episodes of

• 15:15David Rosenthal?

  Napster and digital music and MP3s really starting to come up and become mainstream. And they think, okay, well, maybe there's an intersection between these two big trends of wireless networks becoming ubiquitous and the digitization of music and MP3s. So that leads to the clear vision that we talked about earlier of creating devices that will enable music lovers to play any song in any room in their homes. And essentially, they want to be the Dropbox of, of home audio, even though Dropbox doesn't exist yet. They want it, their devices to just work.

• 15:49Ben Gilbert?

  That's kind of a mind blowing concept. I mean, now we live in this world of smart speakers. And even before that, like before Alexa and Google Home, like this, my Sonos one just, uh,

• 16:01David Rosenthal?

  I'm not sure. So perfect.

• 16:05Ben Gilbert?

  So before these people who live in our speakers came around, it's still, call it three, four years ago, didn't seem that crazy that, oh, of course, it's sort of easy to have speakers playing wirelessly in your home. In 2002, that, this is so crazy foreign. I mean, the people that were able to have a setup in their home where it was easy for them to play music in every room in their home or different music in different rooms, like that's a $20,000 to $50,000 installation at the time of building the house to create this wired system to make that work. This is, this is brand new, pioneering, completely inventive technology.

• 16:45David Rosenthal?

  I mean, I remember back in these days, I was in high school, you know, 5.1 surround sound home theater systems were all the rage. And if you went to Best Buy or Circuit City or whatnot, they were hawking all this stuff. And I remember, you know, for our family room and then other rooms in the house be like, oh, we need the 5.1. And you buy these speakers and these amps and you run wires, you know, under the carpets or maybe you drill into the wall and like, it's just a nightmare.

• 17:11Ben Gilbert?

  Well, and that was just for TV setup. I mean, the notion of music in different rooms was like, you know, way, way more complicated. And in fact, Sonos, even fast forward real quick to today, like even though they have this really great 5.1 offering, they're still at their core, not really focused on that. And it's really about this multi, multi-room audio.

• 17:28David Rosenthal?

  So that's the vision that they ultimately found the company, Ringtone Audio, around in late 2002. But there's just kind of one problem. Well, there are a couple of problems, but one major problem. For all of this vision to work, you know, it's kind of based on this concept of digital audio. There are no streaming services yet, like Napster exists, MP3s exists, you know, people are ripping their CDs into MP3s and putting on their hard drives. But like, exactly what I just said, they're ripping MP3s onto their hard drives on their computers. So how are you going to get around that? So they're undaunted, though. They want to figure out how to make this work. And they do have the Wi-Fi wave going for them.

• 18:11David Rosenthal?

  So many houses are, especially houses that would consider doing this, you know, have Wi-Fi networks, they decide they're essentially going to build Linux PCs that connect to these existing Wi-Fi networks that consumers will have in their homes and repurpose them as connected devices. So they're not going to have hard drives, they're not going to store MP3s on the devices. But because they are full Linux PCs inside, they can join the network, they can network to your existing PCs that are your desktop or laptop, if you're really future thinking, that you have on your Wi-Fi network and access your MP3s from that PC and then play them on the Sonos network throughout the house.

• 18:53Ben Gilbert?

  Which is sort of mind blowing that they're able to accomplish that because just thinking about like for anyone who's had to ever allow one computer to access files on another on a home network or through a home network over the internet, the amount of strange permission checkboxes that you have to enable, to the extent they made this easy for consumers, they should be applauded 100 times because having never used the original little controller thing that would auto find the MP3 files and then list it for you and let you select it, I have no idea how they made that easy.

• 19:24David Rosenthal?

  Oh, man. I mean, the technical challenges of doing this were immense. I mean, what I just described, sitting here in 2018, sounds like, huh, okay, whatever. But like, think back to where you were in 2002 and just try and imagine that, like, mind blowing. But they had an important architecture decision to make, which was, do they want to go with a sort of centralized system where they have a primary speaker or, or bridge or amplifier that serves as the kind of control hub for all of the replica ones that you would then add to the network? Or do they want to go with a decentralized approach where each amplifier,

• 20:06David Rosenthal?

  speaker, bridge could make its own decisions? You could add and subtract them from the network seamlessly. You could sync and play music in multiple rooms and all that. They ultimately decided that the latter, the decentralized approach, is much better from a user and consumer perspective. So they decided to go that route. Unfortunately, though, to do that, they figure out that they really need to use a technology called mesh networking. Now, today, in 2018, mesh networking is all the rage. You know, all any new wifi router you buy, it's going to use mesh networking, it's superior.

• 20:40Ben Gilbert?

  We're recording this over mesh networking in my house right now.

• 20:43David Rosenthal?

  Indeed, indeed. Same here. However, again, this is 2002. None of this technology exists yet. Mesh networking is this obscure thing that is only being used by the military on battlefields.

• 20:56David Rosenthal?

  It is nowhere to be found in commercialized technology. It's not productized at all. There are no standards. So Sonos has to basically invent all of this themselves. Fortunately, they had John and a team of PhDs in electrical engineering from UC Santa Barbara. So they were equipped to do so, but it was very difficult. And as a result, it takes multiple years, as Ben alluded to at the top of the show, from kind of the start of the company until they actually have any kind of working prototype built. And so it wasn't until 2004 that they have just a, just a prototype of the first product, which ends up being called the ZP 100, the Zone Player 100. This was before the rebrand.

• 21:41Ben Gilbert?

  They needed to reenlist those lexicon guys to come and help them.

• 21:45David Rosenthal?

  The lexicon guys were like, we're done with you. We'll give you a company name and nothing else. But the ZP 100 is, as we alluded to, it's, it's a networked amplifier for existing speakers. So if you have speakers already in your house, this replaces your amp that, that powers them. So you still have to hook up speaker wire to the speakers.

• 22:04Ben Gilbert?

  And this got rebranded as the Connect Amp for anyone who's familiar with sort of what this would become in today's product line.

• 22:10David Rosenthal?

  Yeah, which is crazy. You can still buy it today.

• 22:13Ben Gilbert?

  I think lots of people still do. In fact, I know someone who's building a house right now and they have all these speakers that they want to use and they don't want to go buy a whole bunch of new Sonos speakers. So this is the right answer.

• 22:24David Rosenthal?

  Yep, yep. McFarlane takes this prototype. He brings it to CES in 2014. People think it's really interesting. And then later in the year, he goes to the All Things D conference, which this is before Kara Swisher and Walt Mossberg left the Wall Street Journal to start Recode. This is when they were still doing All Things D within, within WSJ. And he goes to the conference and demos it there. People love it. It's the same D show where Steve Jobs goes onstage in a keynote. I don't know if it was a keynote or I think it was an interview with either Kara or Walt. And he introduces Apple's Airport Express Wi-Fi router, which is also going to have an audio jack plug on it and is Apple's solution for home audio.

• 23:10David Rosenthal?

  Super kluge and it's clear that Sonos is the way better experience.

• 23:15Ben Gilbert?

  My personal history with this is having a set of Bose computer speakers that I used growing up that I then brought to college, that I then brought to Seattle and I moved out here. And my solution before going with the Sonos one was like, you know, as a diehard Apple person, I think I had some Apple router, I was at the airport, something, and I would AirPlay music from my computer through the router to the speakers and it was terrible. Like it would have this three second delay when I decided to stop or start anything. You know, fast forward to today, the newest and best Sonos stuff is finally, finally actually getting AirPlay integration because Apple took forever to get AirPlay 2 out. So we'll hold judgment on the HomePod. We'll revisit that later, but Apple has always had a little

• 23:57Ben Gilbert?

  bit of a overzealous journey with wireless audio than what actually manifested.

• 24:03David Rosenthal?

  Well, in the Airport Express, you could only control it from your PC, right? From your computer?

• 24:07Ben Gilbert?

  Yeah, well, because phones weren't a thing. So yeah, yeah, it's not like they shipped a little controller for that.

• 24:12David Rosenthal?

  Yeah, there was no controller, no controller. So, so fun aside here. So as John is demoing this prototype, he uses, the song he uses to demo it is the Beastie Boys, "No Sleep Till Brooklyn," produced by Rick Rubin, a super famous producer who ends up becoming an advisor to the company later.

• 24:29Ben Gilbert?

  Whoa, yeah.

• 24:29David Rosenthal?

  Which is cool, but also fun. This is also on the Sonos corporate history on the website. When they were testing it, they ended up playing the band 10,000 Maniacs and the song 3am by Matchbox 20 over and over and over and over and over again because the Sonos UI for the controller was, everything was alphabetical and those were the, that was the number one band and the number one song listed alphabetically.

• 24:55Ben Gilbert?

  So funny. That was true for, I mean, like I remember on my original iPod playing Three Doors Down, an overrepresented amount of time because it was the first thing in my library by artist.

• 25:07David Rosenthal?

  Downsides of the click wheel user interface. So they finally ship the ZP 100 to the public in January 2005. Great reception by the tech press. Walt Mossberg calls it, quote, "Easily the best music streaming product I have seen and tested." So awesome. The vision has come true. They have shipped this Apple-like amazing product.

• 25:32Ben Gilbert?

  And boy, has the definition of music streaming changed.

• 25:35David Rosenthal?

  Yeah, yeah, indeed. You would think people would rush to buy them. Sonos thought people would rush to buy them. People don't rush to buy them. And there are a couple of reasons for this. Sales are okay. Like, the company's not going to go under, but they're not also going to be, you know, the next unicorn here, even though that term is, won't be coined for many years. A couple of problems. The biggest one is that, so this is a device intended for people who listen to music digitally, participating in the digital music revolution. Who is participating in the digital music revolution at this point? It is not older people who own and are buying houses.

• 26:15David Rosenthal?

  It's teenagers, it's college kids, it's, you know, people who are definitely not going to buy Sonos and don't own a house.

• 26:23Ben Gilbert?

  It's Ben and David who are rotating out what Napster songs they can fit on 100 megabytes of storage, based on whatever they like at the moment.

• 26:31David Rosenthal?

  Yeah, or I guess at this point, it's not Napster, it's Kazaa, it's...

• 26:36Ben Gilbert?

  LimeWire.

• 26:37David Rosenthal?

  LimeWire, yeah, all that stuff, you know. Anybody who's using Kazaa and LimeWire at this point, definitely is not buying a house. The other problem, you know, you could say like, "Oh, well, but, you know, these kids, they are buying like MP3 players and stuff." But the ZP 100, it costs $1,200. So like, I don't care how much of a, you know, young budding audiophile you are, you're not spending $1,200 on this thing. That goes on for a few more years and, you know, they're, they have this super niche market of older adults who own homes who also care about digital music. But they're working on developing the next generation of products. A couple of things happened. 2006, they... Add the ability to stream music directly from the world's first actual streaming service,

• 27:21David Rosenthal?

  Rhapsody, which was initially part of Real Networks up in Seattle. It's pretty awesome. Like the Sonos, the ZP100, you can stream Rhapsody songs with no PC required, just directly into your home. It kind of is like the MVP of the experience we know and love today.

• 27:39Ben Gilbert?

  Yeah, wildly ahead of its time.

• 27:41David Rosenthal?

  This is 2006.

• 27:43Ben Gilbert?

  And doing the research, yeah, I could not believe this solution existed in 2006.

• 27:47David Rosenthal?

  Yeah, nuts. Then in 2007, obviously, something pretty important happens. The iPhone launches and that's going to be a mixed bag for Sonos as we'll see in the coming years. But they do embrace it in the beginning and immediately after the App Store opens in 2008, Sonos like within months launches a free app in the App Store that completely replaces the controller, which is sort of the scroll wheel device that you have to buy separately to control the ZP100 with a free app for your iPhone. And then now you can control your Sonos system with your iPhone. So pretty awesome. Android, they launched the Android app a couple of years later in 2011. And then ultimately they phase out completely their own controller hardware in 2012 to go all in on just apps.

• 28:31Ben Gilbert?

  I'll say something very funny about this. So having gone full Sonos last November, I then had to go find a company called iPort, which makes Sonos compatible hardware to buy a controller for my Sonos system because I have the 5.1 like sub and playbar and all that hooked up. When I'm watching TV, I don't want to have to take out my phone to turn up and down the volume when I'm watching a movie.

• 28:55David Rosenthal?

  That's amazing. The circle has completed itself. You're now like, you know, you're peak millennial. You know, it used to be millennials where like sitting in college dorm rooms would never use this. Now, not only are we using it, we're like going back and buying third-party hardware to get back to the original experience.

• 29:14Ben Gilbert?

  Yep.

• 29:16David Rosenthal?

  So funny.

• 29:17Ben Gilbert?

  And to be clear, I think Sonos has a better answer for that, which is integrating with your actual remote control for your TV, but for whatever reason couldn't get that to work.

• 29:26David Rosenthal?

  That's such a good story.

• 29:29David Rosenthal?

  That's great. If only that were included in the S1 prospectus, maybe they wouldn't have priced so low.

• 29:36David Rosenthal?

  Foreshadowing.

• 29:38Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 29:52David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 30:06Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 30:16David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 30:34Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 30:50David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 31:07Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 31:16David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. Okay, November 2009, they finally release what they've been working towards for years and really is the holy grail product of the Sonos Experience. At the time, they call it the Zone Player S5. Man, they really needed that rebranding.

• 31:43Ben Gilbert?

  Boom.

• 31:44David Rosenthal?

  It's now the Play5. It's an all-in-one Wi-Fi speaker, speaker-integrated, directly connects to Wi-Fi and the internet, can stream all of the, well, not Spotify yet, Spotify's still small at this point, but the music streaming services that exist, and it costs $400.

• 32:02Ben Gilbert?

  And this thing is big. Like, for people that know about the Sonos Ones or the Play Ones today, like, this thing's a frickin' behemoth.

• 32:09David Rosenthal?

  Yeah, quite large, but, you know, $400, like, you know, large, you're gonna put it in a home, but maybe you'd put this in an apartment. So this is Sonos's real first wedge into the mainstream. On the back of that, sales really start to pick up, and in March of 2010, Index Ventures invests 25 million in the company. It's very hard to find out how much money they raised, or, well, you can find out how much money did they raise, but the history of their fundraising before then. All we know is that they raised about $40 million along the way in the eight years between 2002 and 2010. It was from a venture firm called BV Capital, which is now rebranded itself as eVentures, and also Angels, a bunch

• 32:50David Rosenthal?

  of Angels. So we can't find out who invested what, but interesting fact from the S1, there was an angel named Valdir Coa, who had been an exec at software.com with all the founders, and he must have invested a ton in the company, because even at IPO, he still owns 7% of the company, even despite all of the dilution that is still yet to come.

• 33:12Ben Gilbert?

  And interestingly, eVentures was not a greater than 5% shareholder.

• 33:16David Rosenthal?

  We're gonna get to that in a minute. I believe they get bought out. Interesting side factoid, the person who leads this investment for Index, Mike Fulpie, and joins the board of Sonos, he had previously invested in software.com when he was at Cisco, so he knew the team from that. The next year, in summer 2011, two big things happened. One, they come out with their next Wi-Fi enabled speaker, the Play 3, which is still sold today, and the price point for that is $299. So they're getting closer and closer down into the mainstream price point. The much bigger thing is they add support for Spotify in the summer of 2011.

• 33:54Ben Gilbert?

  Yeah, and it's worth pointing out a couple of things about, one, these speakers, and two, sort of the pre-Spotify era. These speakers are really nice. They're designing them to sort of compete in the audio file market. And in saying that, I know that's going to be a sensitive term for a lot of people. So it's probably not quite playing in the market of the super high-end audio hardware that you would find at a CES, sort of in the private hotel suites and people that, you know, work in sound studios. But let's say they want some of that market and the next level down of people who sort of truly love music in their home and who are really obsessed with creating high-quality sound in their home. And so, yes, $300, $400 speakers are expensive, but like, they're very nice speakers. The other thing is, yeah, 2011 is when they added Spotify.

• 34:39Ben Gilbert?

  They already had Sirius as well, Sirius XM, or I can't remember if they had joined at that point, but that was in February of 2011. So they started with Rhapsody, then Sirius, and now adding Spotify. You know, Spotify is not a huge thing yet, and so it's not totally clear to them that, you know, this is a binary thing for us. But they are starting to plant the early seeds of playing the Switzerland strategy across anybody who is providing music.

• 35:06David Rosenthal?

  Yeah. Well, and the other big, big thing about Spotify, just like we talked about earlier in 2005, 2006, people who are listening to digital music are, you know, Ben and David in college. Spotify in 2011, 2012, 2013, this is now where millennials are listening to music, and they're paying for it, and they're engaging with it, you know, heavily.

• 35:31Ben Gilbert?

  In 2011, they hadn't come to the US yet, right? No, I'm sorry, they had, they had. That was like 2009 or 2010.

• 35:37David Rosenthal?

  Yeah, which actually, that's an important thing that I didn't have in my notes that is important to note about Sonos. The US is only about a third of the company's sales. About 2/3 of the company's sales come from international markets, Europe being the largest, Pan Europe being the largest, and then Asia as well. So it's very much an international company. So on the back of that, they've now gotten into the 299 price point. Spotify is natively supported on the platform. They're starting to get into the mainstream. They're starting to get into the younger millennial market. In 2012, KKR, the big, enormous,

• 36:17David Rosenthal?

  huge private equity fund, they had started dabbling in tech investing and growth investing. They come in and they lead a $135 million investment in the company. Interestingly, only 45 million of that is primary, is money raised on the company's balance sheet. 90 million of it is secondary. So they are buying shares directly from Sonos shareholders as opposed to the company itself raising more money. And again, it's hard to parse exactly what happens. So that's 2012. A couple of years later, in 2014, KKR leads another secondary round. So no primary, all secondary. The net of all of that is

• 36:57David Rosenthal?

  that BV slash eVentures pretty much completely exits the company. And as Ben mentioned, in the S1, they're nowhere to be found on the cap table. They've been in the company for a long time now. They get liquidity, they get returns. But as we'll see, at a much lower valuation than the company ends up going public at. The other thing that happens, now, I don't know if it was in conjunction with KKR investing, or if this was in the works separately anyway, but Sonos hires a guy from RIM, who had been the head of sales at RIM, named Patrick Spence. And Patrick comes over to Sonos and he joins as chief commercial officer, essentially head of sales for the company. That's going to become important in a minute here.

• 37:38Ben Gilbert?

  For anyone who's read the prospectus.

• 37:40David Rosenthal?

  For anyone who's read the IPO prospectus, yes. In 2013, the next year, we had mentioned when we were talking earlier about the 5.1 surround sound system in the home theater market. Sonos enters the home theater market itself, not just the music market with the Playbar soundbar product.

• 37:55Ben Gilbert?

  And on the streaming side, by this point, I think in 2012, they'd added the Amazon Cloud Player for folks who remember that, that music service. I think next year, maybe 2013, they added Tencent's QQ Music. So they're really starting to build up this arsenal of wherever you get your music from, it's delivered over Sonos. So on sort of the upstream side of the business and then on the downstream, getting very serious about all these different speaker offerings.

• 38:19David Rosenthal?

  Yeah. And they also had around this time, Mog, which fans of the show and of tech history will know, we have discussed, Mog gets acquired by Beats, becomes Beats Music, gets acquired by Apple, becomes Apple Music, but more to come on that. The other device that they introduced in 2013 is the Play One, which is now $199. It is a one speaker. The Play One is one speaker, the Play Three is three speakers, the Play Five is five speakers, all housed in the box. They introduced the Play One for $199. So now they are like solidly in the mainstream on the device side.

• 38:55Ben Gilbert?

  And this Play One is like totally company changing. They've now entered a market that isn't currently, I mean, in what, 2013? It's not served very well, you know, $200 speakers. There are people who want $200 speakers in their home, and this is before the era of smart speakers. And so streaming is starting to come online. It's really a key moment to have a speaker at a price point like that.

• 39:16David Rosenthal?

  Yeah, and this is like huge for the company. Explosive growth. They grow in that fiscal year. So the company has a September fiscal year end. So in fiscal year 14, which is from October 2013 to end of September 2014, revenue grows 75% at the company, really on the back of the Play One and all the wave of Spotify integration. So this is huge. The company seems to be super well positioned. All the investors must be thrilled. They're heading towards an IPO. Things are going great. We're now in November of 2014.

• 39:57Ben Gilbert?

  Super interesting time for the company and really interesting as we were doing research for this episode to talk to folks who sort of did business with Sonos at these different services, people that were at the company, that were involved with the company, and sort of get their perspective. At this point, streaming is totally taking off. By the end of 2014, there were 15 million paying subscribers on Spotify. The notion in the company is really, hey, we've got this $200 speaker that we just announced, $199. We actually have a meaningful share of the people who have Spotify accounts buying Sonos devices and really buying these $200 speakers. We can totally just ride that wave and draft off that, and it's going to be awesome.

• 40:38David Rosenthal?

  And if you do the math, like, if you're subscribing to Spotify, you're spending, what, $150 a year-ish on Spotify? You're making that kind of commitment. Why wouldn't you spend $199 and get it in your home or your apartment with great sound?

• 40:55Ben Gilbert?

  Absolutely. Some of us have definitely bought into that.

• 41:00Ben Gilbert?

  So, fast forward one year to 2015, Spotify is just blowing up. And as it turns out, the major thing contributing to that is that smartphones have mass proliferation, data plans have gotten way cheaper, people like listening to these streaming services on their phones, which isn't great for Sonos. Because what Sonos was sort of drafting off of was people using streaming services in the home. And so, at this point, Sonos's growth is not keeping pace. They're not keeping that large percentage of Spotify users that they previously had as Spotify continues to blow up. And so, there's sort of strategic crossroads where, as a company of people who are obsessed with the experience and

• 41:40Ben Gilbert?

  truly, you know, audiophile or near audiophiles themselves, you know, what do you do to stay true to yourself? And so, what Sonos does is they continue to invest in super high audio quality, but, you know, lots of people just do not care enough to buy a $199 network-connected speaker in their house.

• 41:59David Rosenthal?

  Probably a lot of listeners know what we're talking about when we say audiophile, but just to describe, we're not saying audio F-I-L-E, like a file of audio.

• 42:08Ben Gilbert?

  It's a lover of music.

• 42:10David Rosenthal?

  P H I L E, someone who really loves music and cares about sound quality.

• 42:14Ben Gilbert?

  That's a, it's probably a good, a good delineation.

• 42:17David Rosenthal?

  Good disclaimer.

• 42:18Ben Gilbert?

  So what does Sonos do at this sort of existential point in their company's existence? Well, that year they release a $500 Play 5, the newer, better Play 5. They launched TruePlay, which is this, I think it's called TruePlay, this really beautiful way to tune your Sonos setup to your room, which is kind of a fun thing to do if you have Sonos to hear this crazy sounds bouncing off the walls and tune it. Most people aren't going to spend $200 on a speaker and they're sure as heck not going to like, care enough to tune it to their room. And so they're advertising that year during The Walking Dead, these very expensive ad spots. They are really just demonstrating this feature and showing off how crazy TruePlay is.

• 43:00Ben Gilbert?

  And David, who is the music producer that you mentioned worked with, with Sonos?

• 43:04David Rosenthal?

  Rick Rubin.

• 43:05Ben Gilbert?

  Yeah, Rick Rubin is in these ads. And so it's, you know, they're, they're sort of like paying Rick Rubin. He's walking around barefoot. It seems like this sort of strange sort of hippie high end thing.

• 43:15David Rosenthal?

  He's a walking dead.

• 43:16Ben Gilbert?

  So, yeah, the world is shifting toward, you know, listening on mobile and they're introducing higher price point speakers. They're spending a lot of money to market the TruePlay feature. They're not exactly moving to the lower price point and going mass market. And they're really showing that they're not willing to compromise. And to double down on, on really showing that Spotify is launching Spotify Connect at this point, which is a really magical experience for a lot of people who, who use it out there today. And what that would enable is really easy native playing from Spotify directly to a Sonos without using the Sonos app and stuff like that. Sonos doesn't feel that Spotify Connect at that point, provides a good enough experience for multi-room listening, which I really don't think it did.

• 43:58Ben Gilbert?

  It would have been kind of a kluge solution and wouldn't have unlocked the power of all of Sonos's sort of multi-room flexibility offering. So they don't play ball with integrating with Spotify Connect at first and they sort of roll their own. And I think they miss out on an opportunity to get Spotify sort of promoting them as, hey, this is the best way to use Spotify. By doing that, there was another piece in there too, where I think it would have left some of their customers behind because it required custom hardware to be able to do the thing that Spotify wanted them to do, which a lot of their speakers didn't. And I think they eventually overcame that and figured out as a company how to do it without making it for their newer speakers only, but it really shows another value of theirs, which is not discontinuing old hardware and making it so that every customer of theirs can have a really great experience.

• 44:41David Rosenthal?

  Yeah, backward compatibility, you know, as evidenced by ZP100s is still working out there, getting firmware updates. This is a huge strategic challenge for the company.

• 44:51Ben Gilbert?

  One final point I want to make to bridge to where I know you're going is

• 44:56Ben Gilbert?

  remember I was saying people aren't willing to pay $200 in in mass market for a network connected speaker. Well, it turns out they may be willing to pay $200 for a smart network connected speaker.

• 45:07David Rosenthal?

  What would they pay $200 for? That's a good question. Well, it's funny. I didn't know about the Walking Dead spots and commercials and like, how funny is that? I mean, this is going to be really mean to Sonos and I don't intend it that way because they do pull out of it, but like, they're advertising and during this period on The Walking Dead. Who is The Walking Dead? It's Sonos, for God's sakes. I mean, November 2014, as I was alluded to, a little company called Amazon makes a big announcement out of nowhere, launches this crazy product that people have no idea that it's what it's going to do, what it's going to work.

• 45:45Ben Gilbert?

  Right on the heels of the failed Fire Phone.

• 45:48David Rosenthal?

  Right on the heels of the failed Fire Phone. Everybody's like Jeff Bezos is not a product guy. He doesn't understand anything. Consumer, he doesn't get consumers. They come out with the Echo. Dun dun dun. November 2014 launches introductory pricing for only for Prime subscribers of $99 for, you know, this thing does not sound as good as a Play 5 or a Play 3 or even a Play 1, but like it fills your room with audio.

• 46:20Ben Gilbert?

  A room filling tin can of audio.

• 46:23David Rosenthal?

  But you know, it's loud and most importantly, you just talk to it. And it does stuff for you.

• 46:30Ben Gilbert?

  David, that's the most millennial opinion of audio. It's a great encapsulation, but it's loud. It's like the number of people who still play on either crappy Bluetooth speakers that I heard a stat a while ago, and I don't have it in front of me, but the number of people who play podcasts and even music out of their phone speakers is disproportionately large. Like, people just set it on a table and play. And that's why Apple added all these like better speakers and double speakers to iPhones and iPads. Because a lot of people just don't care enough and they're like, eh, I can hear it.

• 47:01David Rosenthal?

  Walk down Market Street in San Francisco, like, there are a lot of people, especially, you know, kids these days, just walking around playing speaker, you know, playing music or whatever out of their, out of their phones.

• 47:12Ben Gilbert?

  Convenience beats quality.

• 47:14David Rosenthal?

  Yeah, indeed, indeed. Well, turns out that Amazon and Bezos were actually on to something with the Echo and it's included Lady A, shall we say, so we don't enrage listeners in their homes all throughout the world here. Sonos does not see this coming at all. They are totally flat footed. You know, A, they've got the strategic challenge that Ben was just talking about of like, they're now weirdly going up market in a time where, you know, the market is moving down market in terms of audio quality and accessibility everywhere. But when it comes to smart speakers and voice assistants, they have done nothing.

• 47:56David Rosenthal?

  So like, the history of the company was they were actually out ahead of the technology waves in terms of wireless connected speakers, but now they are way behind.

• 48:06Ben Gilbert?

  The company has always said they're about democratizing the ease of accessing music in the home. But there's a little bit of what I say is different than what I do that goes on. Because if it's really democratizing, then their execution should follow that they make speakers available to the most people and make it the easiest possible experience in order to just play music, like, sit there and yell at your speaker. But it's not totally clear what created the blind spot, but they really have stayed premium and they really didn't do anything with voice and it kind of shocked them and the world when Amazon started doing something with voice.

• 48:42David Rosenthal?

  And McFarlane, actually, he talks about this in an interview.

• 48:47David Rosenthal?

  This is a quote, "We were late to recognize the impact of the Echo and the Echo Dot." I mean, Echo Dot, Amazon sells these things like when they go on sale for 30 bucks. Like, it's crazy. And voice overall, I think the magic Amazon did was clear that undefinable bar of usability. All the voice systems before that weren't, but being able to walk into your home and say, "I want to listen to KCLU or KCRW or whatever," also telling that he's talking about radio stations here, not podcasts. Come on, John. Live in the 21st century here. He says, "That's part of an ultimate home music experience. So we needed to get there. We pivoted the company."

• 49:25Ben Gilbert?

  And that they did in a serious way. Not right away, you'll notice. November of 2014 is when Alexa is first announced and the Echo is made available to Prime subscribers.

• 49:38David Rosenthal?

  And then it goes general availability in 2015?

• 49:41Ben Gilbert?

  I believe it's summer of 2016 when Sonos sort of formally switches their strategy to-

• 49:47David Rosenthal?

  The burning platform.

• 49:49Ben Gilbert?

  Yeah, to be sort of voice first and announce that they're going to have products with voice baked in. And at the very least, right away, they're going to start integrating their existing products if you have an Alexa in your home. The product experience for that is if you bought an Echo and you have a Sonos system that, you know, let's say you have a Play 5 and a Play Bar, you could say something like, unnamed voice assistant, play XYZ song on Play Bar, and then it could play it on there. So, you know, it's a little bit of a stopgap solution before they eventually released their own Sonos Ones and now the Sonos Beam, which are voice baked in, but they're perhaps a little bit too late, but switching strategy in a big way.

• 50:33David Rosenthal?

  So, yeah, it takes a long time. The Sonos One, which is essentially the Play One, but with microphones in it. So you can actually talk to it and it is, you know, Lady A baked into it. And coming, Google Assistant, we'll get to that as well. That launches in October 2017. And then the Beam, which is the same thing in a soundbar format for home theater systems, that launches only last month in 2018.

• 50:58Ben Gilbert?

  Yeah, so we are in the middle of this right now.

• 51:00David Rosenthal?

  We're in the middle of it. Yep. Good time to go public. Well, so a couple of things. I don't know what exactly it was a result of, could be a lot of things, but certainly missing this, both of these strategic inflection points, as Andy Grove, famous CEO of Intel, would point them, would say, was not good. McFarlane announces in January 2017 that he's going to step down as CEO, and Patrick Spence, who we mentioned earlier, who had come over from RIM when KKR invested, is going to take over as CEO. And McFarlane, like, he stays in the company as an advisor, but he leaves the board. He really hands the reins over to Spence. It's a pretty fulsome transition.

• 51:42David Rosenthal?

  And then Spence, you know, from that point forward, is now leading the company into this new voice era. So let's talk about that a little bit. When they launched the One in October 2017 and announced the Beam, they come out with a pretty interesting take on the voice world. They say they're going to bake Amazon's voice assistant into the products. You can talk to the speakers, they will work just like Echoes do.

• 52:07Ben Gilbert?

  Which Amazon announced super early on in the, in the product development of Alexa, that they were going to make the Alexa voice service open to anyone that wanted to include it in their device.

• 52:18David Rosenthal?

  They also, Sonos announces, at the same time, that they are, in the future, it's not ready yet, going to support Google Assistant as well. So you will be able to multi-home with your voice assistants if you go the Sonos route.

• 52:34Ben Gilbert?

  Which, which makes sense. You can see why an Alexa and why a Google want to do this, because their main goal is just get the most people interacting with their service. Amazon's going to sell these many different use cases of fairly inexpensive Alexa devices to get the biggest proliferation possible. And we think today, they've shipped something like 40 million or more of those. But, you know, their strategy is really just get people talking to Amazon through whatever, whatever they need to be, and Google sort of the same way.

• 52:59David Rosenthal?

  A really interesting potential, you know, argument to consumers. If you are like Ben, and you're going to outfit a home with smart speaker technology, do you want to lock yourself in to the Amazon ecosystem, or the Google ecosystem, or anyone ecosystem? Or do you want to be able to use whatever and switch between them?

• 53:23Ben Gilbert?

  First of all, this is all future looking because we only know about what the Alexa integration actually looks like right now because it's the only thing that shipped. But I can tell you the sort of my consumer psychology around it. I am not convinced there's any value to being able to real time or dynamically multi-home. There probably won't be a scenario that arises where I'm like, oh, I need to talk to Google Assistant now rather than talking to Alexa. Crap, sorry, everyone. The psychology for me was really, I don't know how this is all going to play out yet, and I don't want to invest thousands of dollars into one ecosystem. So the longer I can stay neutral basically gives me option value as a consumer and preserves my option value for longer. I'm curious, when Sonos talks about the value of having multiple voice assistants, are

• 54:08Ben Gilbert?

  they really thinking about the use case where people are going to use multiple voice assistants? Or is it really sort of this like peace of mind that people should choose them because it means they don't have to make a choice? And if we know anything from watching consumers over the years, it's if you give them the option to not choose and continue to make no decision for longer, they will.

• 54:25David Rosenthal?

  Well, I've made the decision to go full on Amazon ecosystem, but that was mostly driven by Prime Day this year where these things were on sale for so cheap. I was like, why not? Even if I don't like it, like I'm spending a couple hundred dollars on many devices. I can just, you know, recycle them, like and buy something new. But I could see a world in the future where like Wave runs on Google Apps. Like it has my calendar, it has my email. Like Amazon doesn't have any of that. I would like to talk to Google and have it do things for me in the future. At the same time, I would also, I really like the Amazon ecosystem. So anyway, it's a very interesting position that they, almost like a save that they've gotten themselves into here.

• 55:09Ben Gilbert?

  And you can see how this strategy evolved because I think people who are newer to Sonos look at it and go, oh, that's kind of an interesting business strategy. Like they're not building their own voice assistant and they shouldn't because it's a terribly expensive R and D cost and it requires network effects. So. Two good ones out there. I'm going to ignore Siri for the moment. And then we'll get to Siri. Yeah. A lot of people are, at least were a little puzzled when Sonos first announced, you know, that we're going to have, we're going to integrate other people's voice things. But if you look at them historically and you think the company is actually just looking at these voice assistants the same way that they looked at streaming music services and that they're going to sort of be in the middle and be the bundling point for all of these other offerings.

• 55:51Ben Gilbert?

  It starts to make more sense from the company psychology of why they would do that. Because they, like Apple, make money selling hardware that's differentiated by software and services. They just aren't necessarily providing all the services. The question is, and then that of course is where we'll get to later in the crux of the company is, how differentiated are their services and is their software really? And otherwise, are you just sort of competing on, on audio quality, which is a little bit of a tougher vector to compete on now. But as we look to the history of the company, understand a lot about why they're making those, the decisions that they're making now. Also, I do want to touch on Siri. They've announced Siri integration. Apple obviously is in a very different position. Amazon makes money on you when you buy stuff. Google makes money on you when you search for stuff.

• 56:36Ben Gilbert?

  And Apple makes money on you when you buy their hardware. And so for Apple, they released HomePod, which had limited adoption, which I think they probably knew, but didn't go gangbusters. Siri is really, exists as a way to differentiate Apple hardware. So that you should buy more Apple hardware and invest more in the Apple ecosystem. It's not really in their best interest to make that available to other people. Not that Siri is itself better than any of these other services anyway, but the access to plug into Apple devices is differentiating. For example, if I were to tell Siri, and I'm going to refrain from addressing, hey, if I were to tell Siri that you should add something to my reminders list. It works really well. It is really nice.

• 57:18Ben Gilbert?

  It's unfortunate that I can't bark at my Sonos one and tell it to add something to my reminders list because I won't see it on my phone. And so you can see how like the HomePod is differentiated in that way. What they have announced is that coming with AirPlay 2, there's some limited Siri functionality. So when you look at the business models of Apple, Amazon and Google, you can sort of see why Apple is really integrating less with Sonos than the other two companies are.

• 57:45David Rosenthal?

  It's so frustrating as a consumer with this stuff because like, or at least for me, like, I love the Amazon voice assistant and like, I think it's really good. I haven't really played too much with the Google one. Siri is just terrible in my experience. Like, I hate it, but you know, especially like, I've got the cellular watch and like, I go for a run. I love having the cellular watch of like, I think of things when I'm running. I'm like, oh, remind me, you know, Siri, remind me to do this. That's great. I would love to have, you know, much better cross-functional, cross-ecosystem accessibility here, just like we do on mobile and on the web. Maybe there's a world where Sonos becomes that, you know? I don't know.

• 58:24Ben Gilbert?

  Yeah, there is definitely this trend that we saw before with Google Maps and Apple Maps, where it's, it's sort of, companies have a disagreement on whose customers they really are, and companies have a disagreement on, on how they're thinking about those customers strategically, and then the consumers lose because of it. It's totally frustrating.

• 58:42David Rosenthal?

  Yeah.

• 58:43Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 58:56David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 59:13Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 59:28David Rosenthal?

  And that's how you get features that customers love, like Tabular Review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 59:52Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:00:11David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:00:41Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 1:01:06David Rosenthal?

  Well, all right, to bring the history and facts on home here. In the middle of all of this, the company announces they're going public. Interesting timing, but.

• 1:01:17Ben Gilbert?

  I can shed a little light on the timing from talking to folks. Basically, there was a notion that, hey, maybe we'll be acquired. That that could totally happen. And when Apple released the HomePod, it was really like, okay, Apple's decided to build, not buy. We would sort of be the people that they would buy. Google already has a thing in market. Amazon has a thing in market. Save sort of like an Android manufacturer. There's really no one left. We can be a standalone company, so let's go be one.

• 1:01:42David Rosenthal?

  And I presume also at this point, investors, you know, certainly Index invested back in 2010 and KKR invested in 2012 and they have shorter, you know, time horizons for their investments. I assume there was desire for liquidity on the investor front here. So July 6th, 2018, they filed to go public. Rumors are that they expect a kind of two and a half to $3 billion valuation. The company did just under $1 billion in revenue last year. They then, a couple of weeks later, after the roadshow starts, they announced that. Pricing range of $17 to $19 a share, which is lower than that rumor. The midpoint there, $18 a share would be about 1 and 3/4 billion valuation.

• 1:02:26David Rosenthal?

  They end up pricing on the eve of the IPO at $15 a share, under the range. So that gives it a market cap when they start trading of just under 1 and 1/2 billion. They do pop on day one. They start trading on Thursday, last Thursday, August 2. They closed at near $20. And then yesterday, they closed at $19.15, market cap of just under 2 billion. But you know, it's interesting. This was not like a hot IPO here.

• 1:02:53Ben Gilbert?

  No, and they actually only raised $88 million in the IPO. The rest of the tender, that the 130 million, because it was a $208 million IPO, actually came from existing shareholders. And so it's only 88 million of new cash into the company.

• 1:03:07David Rosenthal?

  Yeah, it was KKR, it was Index, it was other investors and employees who were selling. That's also typically not a great sign into an IPO. But again, I mean, I'm sure there's huge desire for liquidity here. We'll transition into narratives here, but just a couple of points to keep in mind that I want to draw out as we do talk about narratives. They did about $1 billion in revenue in 2017, but they just haven't been growing very much. They've only had about 10% revenue growth over the last couple of years. And you know, typically high-flying IPOs are, you know, at least 20% revenue growth year over year, but really you want in the 40% plus.

• 1:03:40Ben Gilbert?

  I think it was a little higher. I think they were like 18% revenue growth, but still half or a third of what you'd like to see.

• 1:03:46David Rosenthal?

  They also disclose their revenue by who their largest sales channels are. Interestingly, Best Buy is their largest sales channel. 17% of Sonos' sales happen at Best Buy. Now, remember, only about a third of their sales happen in North America. So like, that may be a little more than a third, but you know, almost half of their North American sales are coming from Best Buy. That's troubling.

• 1:04:12Ben Gilbert?

  And you can read two things out of that. You can read, in addition to troubling, one, you can read, they're paying a lot of money to the channel because they're not retailing these things themselves from Sonos.com. They're probably spending 50% in a wholesale. And then another 50% to the retailer. There's just a huge markup when you have to go through a channel like Best Buy. The other thing you should read into that is it's interesting that it's not coming through Apple or Amazon or Google because I'd say in an advantageous light for the company, it reduces the reliant, you could think about those three companies as now supply chain for Sonos. They're sort of the component that Sonos builds into their smart speakers. It's nice to not have your supplier or one of your suppliers also be your retailer.

• 1:04:57Ben Gilbert?

  And so they found themselves in a nice place where they sort of have, they're a Switzerland sort of bundler. They're, and of course, when I say Switzerland, I'm meaning sort of neutral third party. But they're a neutral third party bundler of these services. Their biggest sales channel is also a neutral third party, which is good because if it was, you know, all on Amazon, then you'd start to get a little nervous that Amazon's going to apply pressure to sort of squeeze Google out and vertically integrate it in some way. So I would say not good, not bad that it's through Best Buy.

• 1:05:26David Rosenthal?

  But who shops at Best Buy? Like it's not millennials, it's not Spotify listeners, you know? So it's just, it's interesting.

• 1:05:35Ben Gilbert?

  Before switching fully into narratives, there's a couple of key numbers to know. One is Sonos has 19 million products in approximately 7 million households around the world. That 19 million, you can compare it to, you know, 40 million plus Alexa devices that have been sold. Again, sorry for saying the name. It's just interesting to sort of keep that in mind as you start to see the smart speaker, the low end smart speaker segment grow very quickly. It'll be interesting to see what the high end smart speaker grows at because the way that I sort of see this going is there's tons and tons and tons of hundred, $150 devices sold. And it might be a tougher road for Sonos selling more expensive ones. The other thing to know is that they're right around break even on net income.

• 1:06:17Ben Gilbert?

  The six months leading up to the IPO, they were net income positive, but only by about 13 million. They were net income negative before that. And I think they did some things, headcount reduction and other things as they approached the IPO in order to be net income positive. So that may not have been in the same timeframe, so don't hold me to that. But the way you should think about this company is they're still kind of break even. If you look at like their price to earnings, it's something insane like 70x. So you should look really at their price to sales, which is just a hair under 2x. So they did a billion dollars of revenue right now. They're valued a little under $2 billion. And what you should really look at in that number is they need to grow their profits a lot to really grow into that valuation. And they're kind of priced reasonably based on revenue.

• 1:07:03David Rosenthal?

  Growth is the question mark here.

• 1:07:05Ben Gilbert?

  Yeah, yeah, they're a company that's growing 10 to 20% per year and they're definitely priced to grow. So.

• 1:07:10David Rosenthal?

  Well, should we, should we lay out each side's narrative here?

• 1:07:13Ben Gilbert?

  Yeah, absolutely. Let's start with Sonos. The company desperately wants to be seen as a software, not a hardware company. They are really trying to avoid comparisons to Fitbit or to Jawbone.

• 1:07:25David Rosenthal?

  And.

• 1:07:27David Rosenthal?

  Oh, man. We could do a whole episode on that someday.

• 1:07:31Ben Gilbert?

  Yeah, they're pounding this drum of we are not just a manufacturer of devices. We have this like unbelievable pioneering technology that has really woven the whole home together. They're really trying to spin that story and tell that that message. There's another intellectual property story that they're telling that is that they have a patent portfolio of 630 issued patents and 570 applications in progress. So, you know, we're an IP machine. We sort of invented this category of wireless multi-room home audio. And everyone else is just sort of like, you know, playing around in our backyard now. And sure, we're integrating with some of them because of the voice stuff is a tidal wave and we need to be there. But, you know, we're the, we're the big guys here. We started here. We invented this wave.

• 1:08:12David Rosenthal?

  It's the, it's the Steve Jobs line from the iPhone keynote. And boy, have we patented it.

• 1:08:18Ben Gilbert?

  Yeah. Samsung.

• 1:08:23David Rosenthal?

  Yeah.

• 1:08:25Ben Gilbert?

  Some other things Sonos is sort of espousing is that we have a non hardware growth story. So they haven't ruled out doing digital services business in the future, which it's not clear what they mean by that. Probably not a full assistant, but maybe a little, little sort of for programmers out there, like subclasses of an assistant. Or being able to add additional sort of features to any given assistant just to create. It's almost like customizing Android firmware, like to create differentiation on top of the core assistant that you inherit.

• 1:08:54David Rosenthal?

  Yeah, it's like, it's like Xiaomi and the MI UI and.

• 1:08:57Ben Gilbert?

  Yeah, yeah. Maybe they're thinking it's our own streaming service, not totally clear there either, but they've said they haven't ruled that out. The other thing that they talk about a lot is that 27% of Sonos households own four or more products and 61% of households have more than one. So their sort of retention and expand once they land is huge. So the bigger base they build, they don't have to reacquire that customer in the future and they can just sort of get cost-free revenue, which is is nice, or at least acquisition costs.

• 1:09:28David Rosenthal?

  The way they frame this, I, you know, I think is is right, you know, and true is like, our customers, people who try us, love us, you know? Once you get a Sonos, you use it forever and you buy more.

• 1:09:42Ben Gilbert?

  And so that sort of justifies extremely high sales and marketing costs. And the last message that they're really pounding that that I've got is, this is the first time I've seen this term. I don't know if it has existed before, but if it's something they coined in the S1, they regularly refer to the sonic internet as the wave and that people are totally overwhelmed with screens and that voice is the answer. And the quote is that they're well positioned for this as the leading home sound system for consumers, content partners, and developers.

• 1:10:15David Rosenthal?

  Sonic internet.

• 1:10:17Ben Gilbert?

  I love the product. I think I bought two to start and not going to disclose how many I've bought now. So that's very, it's a very real thing. Well, before I open up any questions, that's Sonos's case.

• 1:10:29David Rosenthal?

  You hit all mine, except the only slightly different one I had that you covered a little bit is, they talk about this concept of like, we're the only company in this whole space that puts the listener first. And if you look at Google, if you look at Amazon, if you look at Apple, they are making choices, as I expressed earlier, my frustration with some of the choices that those companies are making, that is not putting the listener first, that is putting their their own business models first. Sonos is making the argument, we put the listener first, and so we will let any open platform play ball with us. We will work tirelessly to make all assistants work and integrate, you know, easily in our platform.

• 1:11:07Ben Gilbert?

  That's a great point. Their incentives are aligned with the user. They're not trying to make money from them in other ways after selling them a device.

• 1:11:14David Rosenthal?

  Now, should we move to the other side?

• 1:11:17Ben Gilbert?

  Yeah, well, let's, we'll just trade bullet points back and forth. So the first one that I have seen that really speaks to me is this story that they're telling around growth, a non hardware growth story, isn't really there. Were I a bear, I would say it's difficult to see them creating software or services that people will pay for on top of buying devices.

• 1:11:37David Rosenthal?

  Yep. Yeah. Not only is, is that not there, but like your growth story period is not there. You know, you're growing between 10 to 20% like, okay, you know?

• 1:11:47Ben Gilbert?

  Yeah. In a, in a high end segment, which I'll go into the next one, because I think it comes from that, a high end segment. Awesome. Like you should think, cool, we're selling Mercedes. Like, well, we should have great margins. They do. They make really nice gross margins. They sell above 40%. I think in some of their categories at 46% in the last six months. But they're 16 years in and they're just barely break even on a net income basis because they pay a ton in sales and marketing costs. Both to the channel and through advertising. It's just expensive to acquire the customers they're trying to acquire.

• 1:12:22David Rosenthal?

  Yep. I mean, this is a very considered decision. I mean, how many hours, days, months of research did you put into deciding how you were going to outfit your?

• 1:12:32Ben Gilbert?

  Yeah. How many conversations with other smart people that I respect and, you know, want to understand their perspective and yeah, a lot.

• 1:12:39David Rosenthal?

  Yeah. I have a few more. One is like, yeah, okay. Like your, your voice story, you know, it's interesting. This, this, which like you've got a good one, but like you were way late and like this whole Switzerland thing is like, uh, you were, you were way late to the market. And like, you know, you keep saying Google Assistant is going to ship. I don't see any Google Assistant on any Sonos devices yet. Is this really going to be as easy as you say it is to, to fully integrate all these platforms?

• 1:13:06Ben Gilbert?

  Yeah. And the fear is that they really do get commoditized being a hardware maker when that's not where the money is and they're selling expensive hardware. So they end up looking a lot more like a Fitbit or a Jawbone than, than a Spotify. And the sort of bottom line for me is can they find the segment that's not price sensitive, cares a lot about audio quality, cares about audio all over the home? And, and wants an agility between voice assistants. It's, it's tough for me to see that being a big segment, especially if you're not able to make money hand over fist on, on each customer.

• 1:13:42David Rosenthal?

  My two others are, I think the loyalty point that Sonos makes is a really good one. It's crazy, you know, 27% of their customers have four or more speakers, you know, Ben, you are a case in point. Once you try it, you don't stop and you're hooked for life. That's great, but I feel like their business model is not aligned with that. Like, they don't have a, a subscription business model, you know? If like Spotify's business model is aligned with that, like people start using Spotify, they love it, great, they're paying Spotify every month. With Sonos, like, it's still dependent on them, like, coming out with new products and adding them and like, and the replacement cycles are so long on this, you know?

• 1:14:21Ben Gilbert?

  Now that I have a bunch and I'm almost like embarrassed by how many I have, but it's super awesome, like, I'm kind of done paying that company money.

• 1:14:28David Rosenthal?

  Yeah, you know, they would have to come out with something like amazingly new that you would replace those, right? Like, you're not gonna build an addition on your house just to like buy more Sonos stuff.

• 1:14:39Ben Gilbert?

  And I was gonna ask you this during Tech Themes, but it's too apt right now to not do it. So they sell hardware that's differentiated by software and services, which they bundle in for free with the hardware. Sounds a lot like Apple. That's a huge growth business. I mean, first of all, they're selling a product that has perfect product market fit that they have a high margin on and everybody wants, which is different than Sonos because Sonos only really gets the high-end segment. But I guess let's address some of the major differences. The refresh cycle is rapid for Apple. It's every two years or so for an iPhone. Once I invest in that ecosystem, I kind of don't stop buying stuff. I mean, I'm buying an iPhone every two years, I'm buying a computer every three, I'm buying a watch every once in a while, buying AirPods. I'm paying Apple because they're cheap for iCloud storage.

• 1:15:24Ben Gilbert?

  I'm buying apps and they're getting a cut of that. So not only is it fast refresh cycle on the hardware, it's also that they have very real value they can offer through software and services that I'm willing to pay for.

• 1:15:35David Rosenthal?

  It's what Tim Cook is beating the drum on, on every Apple earnings call, is Apple has two business models. They have the hardware business model, which benefits from a quick refresh cycle. They also have the services business model, which is, you know, essentially a subscription or a pay-as-you-go, you know, fee-for-service business model. And, you know, that's generating 10-plus billion dollars in revenue every quarter for them.

• 1:15:58Ben Gilbert?

  As Sonos tries to convince investors, we are a software company, not just a hardware company. Does that matter if they're not monetizing the software and services?

• 1:16:07David Rosenthal?

  I think so. I think it matters a lot.

• 1:16:10Ben Gilbert?

  Yeah, I mean, it seems like even if you do all that software and services, you should still be valued like a hardware company unless you're generating cash flows from those things.

• 1:16:19David Rosenthal?

  Right. That's my point is like you're fair, like your product is great, like your services are great, but like your business model is not aligned with your product and services.

• 1:16:28Ben Gilbert?

  Great point.

• 1:16:29David Rosenthal?

  And then the other quick one I had, I don't know how fair this is, if this is more me projecting than anything else, but because I do think speakers are interesting, but like also headphones and personal devices are also real interesting. See AirPods and Apple's acquisition of Beats. Sonos doesn't do anything in that.

• 1:16:46Ben Gilbert?

  What makes sense now that they've locked me in as a customer to offer me where I'm like, here are hundreds of more dollars.

• 1:16:52David Rosenthal?

  Well, imagine AirPods that, you know, you could use Amazon's assistant or Google's assistant or Siri or, you know, like that's compelling.

• 1:17:00Ben Gilbert?

  Yeah. It's so funny how I talk to my phone for some things and my speakers for others. And it does feel like that should be unified. Particularly the notification point that I mentioned earlier, like I can't ask my phone for a flash briefing and I can't ask my speakers for adding something to my to do list and it's super frustrating.

• 1:17:18David Rosenthal?

  All right. Those are my points.

• 1:17:21Ben Gilbert?

  All right.

• 1:17:23David Rosenthal?

  What would have happened otherwise?

• 1:17:24Ben Gilbert?

  I think we really covered this. I mean, I think they basically needed to IPO. You could have like a little McFarlane Elon style, take public or take private or something or, you know, buy outright. If you start to look around at who acquirers could have been, it would have been Amazon in 2013 or 14 deciding to instead of hiring their own hardware engineers to buy Sonos instead, and then base it on that. And I think once they made the decision to start building that out, the Lady A ecosystem themselves, they, they weren't going to buy, buy Sonos. Google, probably the same thing.

• 1:18:00David Rosenthal?

  Amazon would have had to have made that decision even earlier. They started work on the Echo in 2010, 2009, 2010. So I don't, I don't think that ever really would have been on the table.

• 1:18:11Ben Gilbert?

  Yeah. The only other one you could sort of see is a Android phone maker.

• 1:18:14David Rosenthal?

  I think the most interesting one, though, is what if Apple had acquired Sonos instead of Beats?

• 1:18:19Ben Gilbert?

  Oh, I see. I was gonna make the comment, instead of building their own for the HomePod, which they had all that expertise from the iPod Wi-Fi or iPod Hi-Fi. That's interesting. Instead of Beats.

• 1:18:31David Rosenthal?

  I don't think they would have, though, because the real reason they bought Beats was Mog, was the streaming service. They bought it for the hardware and the headphones as well. But Sonos not having their own streaming service kind of made that a nonstarter, I think, for Apple.

• 1:18:47Ben Gilbert?

  And the Beats connections into the music industry and contracts they had signed in order to really make Apple Music have a fighting chance against Spotify.

• 1:18:55David Rosenthal?

  Rick Rubin is great. I have tons of, you know, respect for him as an artist, but he didn't have quite the same industry. He wasn't involved in the business side in the same way that the Beats guys were.

• 1:19:08Ben Gilbert?

  This is a quick sidebar. It's a revisit from a previous episode where we talked about sort of how Apple Music and Spotify were doing. Spotify, like, really seems to be ramping. We don't need to adjust any, you know, calls we made on previous episodes, but like Spotify seems to be sort of pulling away. Well, I don't have great numbers in front of me, but I think Spotify now has like 70 million paying subscribers and Apple Music is somewhere around 40.

• 1:19:35David Rosenthal?

  Wow. Interesting. I remember I at least being more skeptical on Spotify and more bullish on Apple Music, but I don't know if it sounded like I'm being very critical of Sonos. I am on some fronts, but I think they also are doing something really interesting and I do see the value of, you know, open platforms and Spotify is much more that on the music streaming side than Apple Music is.

• 1:19:58Ben Gilbert?

  Well, we'll have to keep watching that battle and see how it plays out.

• 1:20:00David Rosenthal?

  Yeah. It's fun. Like, we didn't intend this, this way, but like, we kind of have this mini-series going of music, you know, from Sound Jam and iTunes to Beats to Spotify to Sonos.

• 1:20:13Ben Gilbert?

  And we can give ourselves credit for sort of these like accidental cool mini series, or we could probably look at household spend and just determine that we were going to end up in mini series based on transportation, food, you know, entertainment.

• 1:20:27David Rosenthal?

  Yup, yup, smartphones.

• 1:20:30Ben Gilbert?

  Yeah, yeah, yeah. Waves, tech themes?

• 1:20:34David Rosenthal?

  Perfect segue into tech themes. And of course, my first one is is technology waves, which is probably what you were going to go with too.

• 1:20:43Ben Gilbert?

  Yep. And I'll just sort of name them and then we can talk about them. There was one they rode and fell off, and that was streaming services changing the way that audio is consumed. And then there's a second one they're trying to ride, which is voice assistants disrupting home audio.

• 1:20:56David Rosenthal?

  Yeah. Well, I think what's interesting, there was one even before streaming, which was just wireless networking in general and wifi in homes. Yeah. I mean, I think the big takeaway for me in like waves throughout this episode is just how important it is to time them correctly. Like Sonos has built a great company. They've got great products, lower priced IPO than they wanted, but still like this is a multi, you know, almost $2 billion company. It's great. This company could be so much more if they had timed the streaming wave and the smart voice assistant enabled speaker waves better, they could be a 20 billion, 40 billion, 50 billion dollar company.

• 1:21:32Ben Gilbert?

  Let's examine that. How would you have timed streaming services better? And what would you have changed? Because my view of it is they timed streaming services perfectly, but ended up just without an offering in the smartphone and headphone space and really only were in the home where that's not where most of the listening was. So you would either had to go down market or diversify on product?

• 1:21:53David Rosenthal?

  I would argue that they were too early on the streaming wave and that their DNA from the initial kind of wireless networking wave of wanting to be like super high end prevented them for like the correct strategic decision would have been in call it 2012, 2013 to go all in on how do we get as many apartment living millennial folks as possible who are Spotify subscribers and their core base? How do we get them to buy a Sonos product and get into the Sonos ecosystem and kept relentlessly driving down market on cost? Or even just starting there as a company versus like doing this weird like, oh, we're going to go back up market now.

• 1:22:33Ben Gilbert?

  Yeah, there are no discounting premium product. Yeah. So you're you think the way you could have rode that wave better would be to sort of appeal to the fatter part of the segment?

• 1:22:42David Rosenthal?

  Well, like you said, there are 70 million Spotify subscribers now, right? And there are 7 million homes with Sonos. Like, that's one 10th penetration many years later. Like, that should be like 80% penetration.

• 1:22:55Ben Gilbert?

  And then how would they have done voice assistants better? I mean, they would have had to start building their own, I think, in like 2013. Because imagine if they had a $100 product and they had their own voice assistant. I mean, then these things would be everywhere. But I think the R and D costs required for that, it needs to come from a FAANG company. And I don't know that you could really do that as a private company. So absent the resources to do that, could they be riding the voice assistant wave any better?

• 1:23:23David Rosenthal?

  Yeah, that's this one's harder because it's it's more out of their control. I don't I don't think they could have built it themselves. I think they could have been faster to market on integrating Lady A and Google and Siri if they can. But but that's that's outside of their control in a lot of ways.

• 1:23:40Ben Gilbert?

  There's another pattern I've noticed, which is kind of interesting. So breakthrough hardware company produces expensive device, then component costs come down and others are able to do it, leaving them sort of only with a small segment who cares about either brand or quality, or has some sort of ecosystem lock in for some reason. And one I'm definitely thinking of is Jawbone, because we used to see $300 Jawbones who invented the portable USB speaker category, and now they're $8 dangling from the checkout at CVS. Not that we're seeing exactly that in speakers, but after sort of poking around a little bit, the components have become a lot cheaper and there has become a lot more know how on how to build good audio systems. And so I think, you know, we're able to see people like Amazon run loss leader

• 1:24:23Ben Gilbert?

  businesses on hardware or break even or small margin businesses on the speaker hardware. And, you know, it may not be the greatest place to be to be the one who invented the category and brought the cost down for everyone and then have someone sort of out compete you strategically. And so, of course, then the only hope of combating this is really with network effects, like what sort of Fitbit was trying Do in the competitions and really building a strong brand and habit in consumers' lives. And my, you know, my mom has a Fitbit, so I want a Fitbit. And the other way that you could sort of compete is with channel and supplier contracts, like what Roku is doing, where Roku has relationships with Netflix and Hulu. And, and then they also have relationships with all the TVs that bundle them in. So they're sort of making a few bucks on every TV that's sold and sort of diversifying

• 1:25:06Ben Gilbert?

  the, the way that their platform is used without them having to sell all the devices themselves. We're seeing Sonos sort of try and do all these things. When you think about the channel relationships, they're definitely doing that with all the FAANG companies, or at least Amazon and Google. The supplier contracts, you know, Roku did that with TCL and all these TV companies. Sonos just announced they're doing that collaboration with IKEA. It's unclear if that's the right sort of brand alignment for them to be bundling a premium product into an IKEA piece of furniture, so.

• 1:25:37David Rosenthal?

  Well, millennials.

• 1:25:40Ben Gilbert?

  Bottom line, I guess when I take a deep breath here, how do they avoid going the, the, the path of the Jawbone?

• 1:25:46David Rosenthal?

  Yeah, yeah. Oh, man. I'd originally wanted to include a lot more Jawbone in the history and facts as like a parallel path. I think we should just do a whole episode on Jawbone someday. Man, that is a wild ride of a company. Fun fact, Jawbone and Airbnb shared an office building for several years. Talk about two divergent paths, but anyway, yeah.

• 1:26:09Ben Gilbert?

  And, and amazing people at Jawbone. I mean, like true missionaries, visionary is brilliant. The world is better for Jawbone having existed.

• 1:26:16David Rosenthal?

  Yep, yep. Also a wild ride. Well, minor tech theme footnote to this story, but I just think is an interesting thing that I've been thinking about this whole season three with Tesla and Xiaomi and now Sonos. This idea of being the iPhone of something, and what I mean by that is over the air updates of hardware devices and improving them, either hardware or, or any experience, improving a core operating system or hardware seamlessly and quickly. It's just such a powerful thing and like every company should do that. Like the, the fact that Sonos is upgrading, adding features, adding, you know, adding services to devices that are 10 plus years old.

• 1:26:58David Rosenthal?

  What a powerful like technology lever versus Chevrolet or GM or, you know, Ford that's like, oh, you know, my car that I bought in 2005, still the same car I bought in 2005.

• 1:27:10David Rosenthal?

  You know, you need to align your business model so that you make money continually from your customers as you're providing the value.

• 1:27:17Ben Gilbert?

  Which Tesla doesn't.

• 1:27:19David Rosenthal?

  Sort of right now, but I think they are maybe getting there in the future with charging and supercharger networks. Jury's still out a little bit there.

• 1:27:29Ben Gilbert?

  When we inevitably do one or several more Tesla episodes, that is an interesting lens to use and sort of keep revisiting of how are they continuing to make money off of their existing customers. And the criteria that we laid out earlier in this episode is sort of, is the refresh cycle fast enough? Are there services revenue? And is there enough high value products that you can continue to sell them over time to bridge the gap until the next refresh cycle?

• 1:27:55David Rosenthal?

  Tesla could go either way right now, but I can see a path with the energy networks.

• 1:28:01Ben Gilbert?

  I have one more. In the Sonos states that experts believe that half of all web searches will happen through voice within five years.

• 1:28:10David Rosenthal?

  I read that as well.

• 1:28:12Ben Gilbert?

  That is nuts. Like, when you think about the implications of that, and sort of my favorite one that I've thought about and don't have a great answer for is when you search for something, you get results. When you ask for something from an assistant, you get an answer. And results leave one to five spots for blue links that are paid. And answers leave zero spots. And it will be fascinating to see Google's business model change if this proves to be true. It's obvious why they're in the voice assistant market. If that's where a search is going, I just haven't come up from a product perspective

• 1:28:52Ben Gilbert?

  with the answer of how you sell advertising or monetize voice-based sort of high-intent search.

• 1:28:59David Rosenthal?

  It's a bold claim. We'll see if it becomes true or not. But if it does, also interesting, and I think explains a whole lot about what's going on in this space. Who is the company that stands to gain the most from that future? It's Amazon. Because I think Amazon is no, I believe they are no longer Google's biggest customer, but they're like one of their top, like, Amazon pays so much money to Google for AdWords for products.

• 1:29:24Ben Gilbert?

  Amazon has shifted the mindshare such that more than 50% of product searches start on Amazon now instead of on Google.

• 1:29:30David Rosenthal?

  Exactly. So anything Amazon can do to move consumer searching out of a world where they You know, are paying any amount of paid search to Google is good for them.

• 1:29:44Ben Gilbert?

  Yeah, Amazon actually has the aligned business model with voice search and Google does not, because Google does not make money on the transaction, whereas Amazon does.

• 1:29:52David Rosenthal?

  Yep, indeed.

• 1:29:53Ben Gilbert?

  Buy Amazon, buy real estate in Seattle.

• 1:29:58David Rosenthal?

  Well, one of us is-

• 1:30:00Ben Gilbert?

  Wait, sorry, I shouldn't yell buy Amazon. We should, I think like we actually should disclaim, this is not a stock picking show. We don't recommend that you buy or sell stocks based on our actions. I'm sure there's a more official way we could say this, but.

• 1:30:11David Rosenthal?

  And that was clearly a joke too, you know, buy Amazon if you want, if you decide, do the work and decide you want to buy Amazon or, or Seattle real estate or whatever.

• 1:30:21David Rosenthal?

  Or HQ2 real estate, wherever. Why has that not been announced yet?

• 1:30:25Ben Gilbert?

  Toronto. I don't know. I, Toronto or DC, but I'm still going Toronto.

• 1:30:30David Rosenthal?

  Yeah.

• 1:30:31Ben Gilbert?

  I thought it was supposed to come out last Wednesday. I thought there was some like narrow down announcement that didn't seem to happen.

• 1:30:37David Rosenthal?

  I don't know. What are those guys doing over there at Amazon, guys and girls?

• 1:30:40Ben Gilbert?

  Yeah.

• 1:30:41David Rosenthal?

  Yeah. All right, grading? Should we bring this home?

• 1:30:45Ben Gilbert?

  Yeah, so listeners who may not have caught the last couple of episodes, in season three, we have decided that when something happened very recently, we will not just arbitrarily grade it. We will paint the picture of what an A plus looks like, how they could get there, and then sort of paint any other cases as well. You know, with historical acquisitions, we have the, the data to be able to show that. And, and here it's really super speculative. The way that we tend to grade these things is what will they do with the money that they raised? And will, and, and was it a good idea to IPO to raise that money? It was a good idea to IPO because they needed the liquidity and they weren't going to sell to anyone for the evaluation comparable to what they could IPO for. So yes, they should have IPO'd. What will they do with the 88 million that they raised?

• 1:31:29Ben Gilbert?

  I think largely continue to fund operations. It's not like this tranche of cash gives us a new, they needed money to, to fund operations still, because they're such a sort of cash flow narrow business. I can see two ways where it becomes hugely successful. One is if they figure out how to- Either go down market or release things outside the home like headphones and they're able to be the way that lots more people get access to multiple voice assistants. If they're able to sort of secure the contracts and relationships so that I can realize my dream of being able to talk to the same device to set a reminder and to hear a flash briefing.

• 1:32:10Ben Gilbert?

  The other way that they could become successful is if they do figure out a real way to get services revenue off of me. And I don't know though what those are yet, but it's not unreasonable.

• 1:32:21David Rosenthal?

  I think this could become a, I don't know, you name it, $5 billion market cap company just on riding the natural course of things and wave there on, which is like millennials who subscribe to Spotify are getting older and buying homes and doing what you did, you know? And so, sales will naturally increase because of that. But that's not an A+. That's like a B. So, I think I agree on the A+. You know, on the C, I think maybe it's that, but the price points just remain so high that people make the decision that I made of like, I'm moving to San Francisco and to a bigger place and want to outfit it with

• 1:33:03David Rosenthal?

  smart speakers. And Prime Day came along and I was like, hmm, well, I could spend a couple thousand dollars and do this with Sonos, or I could spend a couple hundred dollars and do this with Amazon. And I went with the latter.

• 1:33:15Ben Gilbert?

  Quite honestly, if it's just business as usual and there's no sort of strategic or material product change, it's probably in the C or D land. Again, our grading criteria is a little funky right now because it's not, we're sort of at this point now grading the company rather than grading the actual event of the IPO. But sort of my prediction is that this becomes a nice company that grows into a, it stays sort of between the one and a half to three, three and a half billion dollar valuation and at some point deserves it.

• 1:33:47David Rosenthal?

  There we have it.

• 1:33:49Ben Gilbert?

  There we have it. Carvouts?

• 1:33:52David Rosenthal?

  Carvouts. Let's see, I'll go first. So the one I referenced on the Tesla episode that I wanted to do then, but I pulled back because we were already so far over time. Now, now's a good time to do it. Brotopia by Emily Chang. I read it. You all should read it, too. Everyone should read it. I thought mistakenly, I was like, well, I've read all the headlines. Like, I'm super steeped in tech. I know, you know, everything it's good. Like, I, I felt like one of those books where like, yeah, I should read it, but, you know, I already know what is written in there. And I read it and I was like, no, it's worth reading the whole thing. There's just so much more detail and stories and things that, you know, I didn't know. And, um, you know, it's not lost on us here at Acquired either, that we're now in, you

• 1:34:32David Rosenthal?

  know, episode three of season three, and we've covered three really great, interesting companies here, which, um, you know, we're proud of our work that we've done on them. But there are, you know, no women that we've talked about at those companies, founders or, or otherwise. And, uh, that is definitely not lost on us. So everybody view it as your homework and opportunity. Read Brotopia.

• 1:34:57Ben Gilbert?

  Well, I now feel silly recommending a podcast with a man.

• 1:35:02David Rosenthal?

  Well, that's okay, too, but.

• 1:35:04Ben Gilbert?

  I am in the exact same camp that you are in, thinking I've read all the headlines. I've read a bunch of excerpts from the book. I'm sure I know. So homework it is. My carve out is another podcast episode called Invest Like the Best. And this particular episode has the guest Andy Rockliff. And so Andy is a founding partner of Benchmark and the CEO of Wealthfront. There's a lot of amazing things on that episode, and I'll give one anecdote. But the main takeaway on Andy is when that guy talks, it's like these pithy statements of correctness. And it's just like an amazing, action-packed 40 minutes or whatever it is of great point, great point, great point, and true intellectual honesty and value alignment.

• 1:35:47Ben Gilbert?

  So he sort of admits what he's not great at, or maybe like what Benchmark decided not to do and what that enabled them to do by not doing something. And I think a lot of people try and pay lip service. To being great at lots of things and it dilutes their message. And Andy is just so crystal clear on we are not that, we are this. We put energy behind being good at this. And one interesting thing that he pointed out was a lesson that he learned from, I think it was judo. It was the martial art that all strengths are also weaknesses. And when you look at someone else's strength, how is that also a weakness for them that you can sort of exploit? And so when they were the scrappy upstart, starting benchmark, they looked at the big guys, Kleiner Perkins, and noticed that Kleiner had a big team.

• 1:36:33Ben Gilbert?

  And when you sort of went to Kleiner, you sort of got the individual partner because there were so many people there that you sort of just had access to that one partner. And that the benchmark was really about like, you get all of us. It's five of us and you get all of us. And the other point on top of that, when they were analyzing Kleiner was when you take investment from them, they aggressively try and create deals between a lot of their portfolio companies. And of course, this is from 1995. That's great, but you may not necessarily want that. And so benchmarks take was, sure, we'll introduce you to people if you want, but like, we're not, we're not forced anything. It's your company. And so by just looking at the things that make your enemies strong, it can, you can find ways in which you can differentiate and be strong against them. And so I just thought that was really cool.

• 1:37:16Ben Gilbert?

  And there's 10 other awesome tidbits like that in the episode, so go listen to it.

• 1:37:19David Rosenthal?

  Yeah, so good. Andy was one of my professors in business school at Stanford and he's the real deal. And it's such a good point. It's like, clearly he is a disciple of Sun Tzu and the art of war. Know yourself, know your enemy, know the situation. That point also has stuck with me in starting Wave and how we've positioned ourselves. I'm sure you guys at PSL and tech companies and startups are the same deal. I mean, it's, it's written all over this episode. Like you can't start something new and position yourself, you know, in the same way as the existing ecosystem. You have to be a pos, this is why bundling and unbundling is a Tik Tok cycle.

• 1:38:00David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:38:06Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:38:17David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next.

• 1:38:37Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system, so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:38:50David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:39:01Ben Gilbert?

  All right. Well, if you haven't subscribed and you want to hear more, you can subscribe right now from wherever you're listening to this, from your favorite podcast client, or if you're on the web, acquired.fm to sign up for our email list or join the Slack. If you feel so inclined, we would love a review on Apple Podcasts or any love on social media. So thank you so much for listening, and we'll catch you next time.

• 1:39:23David Rosenthal?

  We'll catch you next time.