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EXCLUSIVE: We Lift The Lid On What’s Really Inside The Sonos One & What It Means For The Sonos IPO

Ben Einstein is a General Partner at Bolt, a US pre-seed and seed VC firm that invests in both hardware and software, his Company has taken a long hard look at the Sonos One, which is one of the core products that Sonos are banking on to generate revenue, his conclusion after an extensive review is to say the least of concern for anyone looking to invest in a Company, that wants to raise hundreds of millions of dollars from an IPO based on an ageing product range and facing brutal competition.

In a really insightful article Ben claims that he often finds more truth about a company’s future buried in a company’s products and after literally tearing apart Sonos #1 product he claims that he doesn’t have high hopes for Sonos’ trajectory.

He said that despite all the analyst reports and market speculation and journalists pouring over the Sonos S-1 filing the future capability of the Company is buried in the plastic and the electronics that makeup the Sonos product.

“Hidden in plain sight is the roadmap for how the battle for consumers’ homes is likely to play out” he said.

For eight years, a war has been raging between a number of unlikely players. This bloodless technology battle is turning out to be one of the fiercest and most expensive we’ve seen in decades. The prize is one of the most sought-after commodities in the world: access to tens of millions of homes. It all starts with a 100 year old invention: speakers.

He claims that the reason that this battle matters, is that it reflects a huge change in consumer behaviour.

He said in an article on the Bolt web site, that there are two distinct categories of players in the voice-controlled battle for the home. In the blue corner, big tech companies that want to gather more data about consumers to further their core business.

In the red corner, there’s more traditional speaker manufactures that need to add more intelligence to keep up with consumer expectations. To really understand the players, we have to peek inside products from each.

He chose the flagship products of the leading companies in each of these two camps: Amazon Echo Plus and Sonos One, today we take a look at the Sonos One.

He claimed that even though both of these products are different in pretty much every decision that was made surrounding the hardware, they use the same backend Alexa service (where most of the IP is) from Amazon.

These two products are clearly targeted for the same consumers and represent “mid-level” smart speaker features.

Teardown: Sonos One

Sonos’ One speaker is the flagship smart Alexa-enabled speaker. Sonos is hoping it will boost the trajectory of the 15-year-old speaker company. With a retail price of $299 t’s $70 more expensive than the Echo Plus which is selling at JB Hi Fi for $229. Some might think the price differential is due to more expensive components or better sound quality — but I have another take: I believe it’s a sign of a struggling speaker company in an impossible war.

He gathered his intelligence by removing the bottom cover of the Sonos One to see the first signs of a speaker company: part numbers and coding.

He said “There are different part numbers for black and white parts in the tool, shot date of September 2017, Revision D of this part, and a “PC” which means this polymer is 100% polycarbonate (a somewhat rare and more expensive choice). This level of detail shows a company that runs an extensive supply chain”.

Digging a bit deeper, he noticed traditional design and manufacturing processes for pretty much everything. As an example, the speaker grill is a flat sheet of steel that’s stamped, rolled into a rounded square, welded, seams ground smooth, and then powder coated black. While the part does look nice, there’s no innovation going on with this component”.

After removing all the speaker components, the complexity of the main body came into view.

“This is actually two separate parts that are glued together and the seam ground smooth. This is a design we used to call a ‘block and chisel’ where you start with one big shape and ‘cut away’ plastic to make components fit. It would be impossible to mould this part as a single piece”.

“It’s possible this is a common manufacturing process to increase sound quality while still remaining cost-competitive with higher-end speaker cabinets. The polymer used is ABS + 10% glass fibre, which is quite unusual for traditional consumer electronic products but is a likely addition to improve sound quality. Glass fibres cost more, are harder to design tooling for, and create poor surface finishes (but provide great mechanical properties in exchange).

When he turned his attention to the main circuit board, he found more evidence of a speaker company tacking on technology. The power supply (electronically dirty, analogue circuitry) is on the same board as the communications, MCU, and audio output (digital, clean circuitry).

“In most products I’ve worked on, these are often separated into to two separate boards. While it’s always dangerous to guess, this is likely common in all Sonos speaker hardware to minimize the number of circuit boards that must be manufactured and installed into the cabinet” he said.

He also noticed all the communications are on a separate PCI Express module (which is made by Sonos but designed around Atheros’ AR9580-AR1A chipset). Putting communications on a separate module is a commonly used technique with large companies to standardize radios across a broad number of products and simplifying the FCC certification process. Another supply chain trick and symptom of a company with a broad array of similar products.

Taking a careful look at the heaviest part in the product he said that the rear panel is die cast zinc and serves as the primary heat sink for the product. This means lots of heat is being generated by the microprocessors and flash.

Looking upwards to the top of the speaker, he found the microphone array, audio processing circuitry, and all related buttons and LEDs for the UI.

He claimed that the board looks to be designed by a very different team/person (possibly even outsourced) from the power and communications board.

There are 6x MEMs microphones equally spaced joined by 2x TI PCM1864 audio 4-channel front-end ADCs. The digitized audio information is then beamed down a ribbon cable to the power and processor board on its way to Amazon’s Alexa backend.

After comparing the Sonos One with the Amazon Echo Plus (His review of this speaker will appear later this week) Ben Einstein made the following comments.

“Despite these two products serving nearly an identical purpose, they couldn’t be more different from each other in terms of design intent. After carefully dissecting them both, it’s clear Sonos only buys into the smart speaker category because they have to, in order to compete with others. Amazon has spent significantly more on their bill of materials (BOM) cost for a lower sticker price speaker vs the Sonos One”.

He said, “Amazon has three wildly unfair advantages, which doesn’t bode well for Sonos’ IPO”.

“Part of this is due to Amazon being both the OEM and the retailer (no margins on each sale) but a big portion is Amazon’s clear long-term thinking to dominate this nascent market. It is always tricky to estimate BOM cost without diligently researching each custom part and purchased component, but my suspicion is that despite the 25% lower price tag, the Echo Plus is about 15–20% more expensive than the more premium Sonos One. Amazon has three wildly unfair advantages:

Amazon’s Unfair Advantage #1: Retailer and OEM

Amazon sells nearly all of its Echo products through their own retail channel, this means they don’t pay a margin to other retailers. I can’t think of a single consumer electronics company that sells tens of millions of units nearly exclusively, directly to consumers like that.
In practical terms, it means 35–50% of the product’s price that the retailer typically takes can be directed to make a better product. Sonos, on the other hand, has to pay this cost to retailers (including Amazon!) This is the primary driver for Amazon’s product being both more expensive to manufacture and cheaper to buy. There’s simply no way to beat that strategy in a mass-market product category like speakers where price is one of the major deciding factors for consumers.

He added “Even though Sonos’ speaker has nearly identical Alexa functionality, 100% of the business leverage rests in Amazon’s control. The real IP and value is not in the metal and plastic that consumers are buying. It is in the software, data, and systems that Amazon is continually building.”.
We’ve already started to see this strategy play out with nearly every product at CES 2018 bragging about “Alexa inside.” This is how platform leverage is built and the individual nodes on the platform (like Sonos) are always dwarfed by the owner of the platform itself (Amazon).

He Concluded “Sonos’ speakers represent the full Sonos business and brand. As such, every dollar they make must come from selling physical products”.

“As I’ve written about extensively, this is a tough business and very few companies reach large scale ($1Bn+ of revenue) over multiple product cycles. Amazon, on the other hand, can easily lose billions of dollars on “side bets” like the speaker product line because their revenue spread out across many other business units (AWS, retail, and Prime). This business model diversification makes it tough for companies like Sonos to compete because it’s not a zero-sum game for all”.

He claims that he does not have” high hopes” for Sonos’ trajectory.

If the upstart was really set on embracing the next generation of consumer speakers, they would be rethinking how to build their audio products systematically from the ground up to own as much of the platform as possible. But the products they’re shipping don’t tell that story: they show a traditional speaker manufacturer incrementally adding technology in an attempt to keep up with a fast-moving race. This is never a winning strategy in the long term.

For Ben Einstein’s full analysis click here.

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