Sonos – Sounds of sameness pt. III.
Sonos has finally enabled Alexa voice control and Spotify support in its speaker systems thereby ensuring that it will now be competing purely on the quality of its hardware. The Sonos One is Sonos’ first voice-activated speaker which has received rave reviews for its sound quality, but very little else. This is because this device uses Amazon’s Alexa to control its functions and is adding support for streaming services like Spotify and Tidal with increasing regularity. While this is exactly what is required to sell speakers in this day and age, it is confirmation that Sonos has completely lost its mojo.
Sonos was very early into digital music streaming around the house and developed a suite of software that made multiroom music possible. While this was a novelty, Sonos achieved differentiation and was able to charge a premium price for its high-quality audio products with this functionality. Unfortunately, Sonos has squandered the lead that it had and instead of using its lead to maintain its differentiation, it focused on trying to lock users into its products. It tried to do this by only allowing users to access popular services such as Spotify, Amazon and so on via its own app. The idea was to create a compelling user experience such that users would choose a Sonos even if something of equivalent quality was available at the same price point. Unfortunately, this is where it has all come unstuck as Sonos’ ecosystem delivers a frustrating, buggy and substandard user experience that users would not use if they had a choice.
By enabling both Spotify Connect and Amazon Echo, Sonos has removed the requirement for users to use its software which is a sign that it is giving up on trying to create user preference around an ecosystem. Because Amazon Echo and Spotify Connect are keen to work with any speaker on the market, Sonos’ differentiation now becomes: audio quality and design. Multiroom functionality is now table stakes in the home speaker game.
Hence, Sonos’ only chance is to either invest in cool new hardware features and stay ahead of its competition to maintain its price premium or go for volume and gain scale advantages by significantly outselling its rivals. Both of these will be extremely difficult to achieve as much bigger and stronger rivals are all investing in producing great audio quality in a small package and the market is rapidly fragmenting given the low barriers to entry.
Given Sonos’ current position, both of these options would have required a bold strategic move from Sonos that would probably have had the most chance of success if it had appointed an outsider as CEO rather than its COO. Sonos now has nothing to differentiate it from Apple HomePod, Google Home Max and so on meaning that its only weapon will become price. This is big problem because its larger and more powerful rivals are more than capable of subsidising these products in order to push their ecosystems deeper into the home. The net result of this is likely to be a weakening of Sonos’ financial position to the point where one of the larger players is able to buy it at a discounted valuation. We see Samsung, Apple, Sony, Tencent and Amazon as potential acquirers.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.