How Sonos Built the Perfect Wireless Speaker

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From: Bloomberg

The Sonos Studio is easy to miss, tucked between vintage furniture stores and art galleries on a sun-bleached stretch of La Brea Boulevard in Los Angeles. Sonos is a company that makes exactly nine products—five wireless speakers for playing music at home and four accessories—but here at the studio, its only permanent retail space, it’s not possible to purchase any of them. Instead, one might encounter a listening party, a music-inspired art installation, a class on sound production, or a concert. Off to one side is a wall-mounted skateboard “lending library,” and across from that is a living room decorated in late-era hipster, with cow skulls, taxidermied squirrels, and a chandelier shaped like an octopus. The room is laid out to show how a consumer might install a Sonos audio system at home. On repeat visits there’s but a single customer, who seems most interested in the free Wi-Fi. An employee estimates that 10 people come in on the average weekday.

John MacFarlane, Sonos’s co-founder and chief executive, shrugs when asked about the wisdom of a showroom where none of his products are for sale. “Maybe it’s a bad idea,” he says, smiling.

MacFarlane is a tall man prone to relaxed postures. He’s comfortable doing the seemingly weird thing and waiting for the rest of the world to catch up. It’s what has allowed Sonos, a business he helped start in 2002, to outsell some of the biggest technology companies on the planet in the single category—home audio—in which it chooses to compete. Sonos, however, is growing less niche by the year, as more consumers find they want what it does.

Sonos’s speakers may be the perfect conduits for streaming music services. It sells three core models, Play:1, Play:3, and Play:5, which are best understood as loud, louder, and loudest. There’s also Playbar, a long, thin speaker that goes under a TV, and a subwoofer. They range in price from $199 to $699. Sonos also sells a $499 device that will hook up old-fashioned speakers to Sonos’s system, as well as hardware for improving wireless signals.

The sleek, minimalist products all talk to one another, and most users control the system with a smartphone app. With the app, users can play music from virtually any source—Spotify, Internet radio stations, a local computer—and make it come out of all the speakers at the same time, or play different songs on different speakers. Those who cling to the ancient ways of the audiophile can make a stereo pair out of two units by changing a setting, but most customers get their music out of just one Sonos speaker per room. And the biggest devotees have them all over the house.

Until recently, home audio systems capable of such varied setups were bespoke indulgences for early adopters and the carefree rich. But Sonos’s products are becoming almost commonplace. The company turned profitable in 2012 and says it will surpass $1 billion in annual sales in early 2015. Before the invention of the iPod and iPhone—even before most people had Wi-Fi at home—Sonos predicted the era of ubiquitous, streaming music. It spent the next 12 years meticulously refining its speakers’ design, such that they’re now more like smart furniture than consumer electronics. It took that long for the idea of playing music from the cloud to take off. Once it did, so did Sonos.

When MacFarlane and three co-founders—Craig Shelburne, Tom Cullen, and Trung Mai—started Sonos in 2002, they had no background in audio technology or hardware. They’d been selling messaging applications to giant telecoms at Software.com, a Santa Barbara, Calif., company MacFarlane had founded in 1993. In 2000 the startup merged with Phone.com in a $6.8 billion deal near the peak of the dot-com bubble. The foursome left about a year later, rented an office in downtown Santa Barbara, and tried to figure out what to do next.

They understood Internet infrastructure and believed that two developments were going to fundamentally change the typical home. One was Wi-Fi, which was on the cusp of becoming widely affordable. The second was Napster, which had just exposed a generation to the idea of a virtually limitless music library.

“Literally we took a clean sheet of paper and said, ‘Well, what if we made a stereo system for the modern age?’ ” MacFarlane says, leaning back in his chair in the small, Spanish-style courtyard in front of headquarters. “I think we still have that paper around. I swear, it looks like a bunch of Sonos units you’d buy today. It just takes a while to build this stuff.”

They listed the three features they wanted for the hi-fi of the future: You shouldn’t have to get up from the sofa to control the music; you should be able to pick any song you want to play; and you shouldn’t have to mess with wires. That was it. That was the whole plan. It still is.

Many Silicon Valley startups subscribe to Facebook’s (FB) mantra that one should “Move fast and break things.” At Sonos, flush with capital from the Software.com sale and operating in sleepy Santa Barbara, rushing was anathema. To come up with a name for the company, the founders hired David Placek, the branding guru who coined the names for the PowerBook, the Zune, and the BlackBerry. They rejected so many of his suggestions that he almost quit. Eventually Placek hit on Sonos. A palindrome and an ambigram (a word that’s still legible when rotated), it has no meaning in any language, and it’s easy to pronounce. “It’s an empty vessel you can put a lot of work into,” MacFarlane says.

Most decisions got this treatment. The design team fought with engineers over the placement of a mute button, while the acoustics team battled with wireless experts over where the antenna should go. “We just sat down and argued about everything, from the very beginning,” says MacFarlane. It took more than two years to create a working product: a $1,199 bundle consisting of two speakers, two amplifiers, and a controller.

MacFarlane brought a prototype to the 2004 International Consumer Electronics Show, the annual gadget-unveiling orgy in Las Vegas. A product manager from Yamaha went up to the Sonos booth. He’d heard that something like a thousand different audio sources could plug into the system. Where did they fit all the plugs? MacFarlane tried to explain that the system was fed by data from the Internet, not traditional analog audio connectors. The guy walked away shaking his head. Few people were quite as clueless, but the exchange encouraged MacFarlane and his partners that they had a product no one else had, and that gave them a shot at taking on the giants of home audio.

Later in 2004, Sonos showed off its remote control at a Wall Street Journal conference. The device featured a scroll wheel, not too different from the interface of an early iPod. At the conference, Steve Jobs came up to MacFarlane in a rage, poked his finger at his chest, and said he’d sue Sonos out of existence. The incident made the front page of the Journal. No suit was ever filed. Sonos was on the map.

The bundle hit the market in 2005. Sonos sold systems to about 7,000 households that year, MacFarlane says, mostly via high-end audio stores, whose main line of business was wiring complex speaker systems through rich people’s homes. The Sonos system was radically simple. Each speaker had only three buttons, and, of course, there weren’t any wires to trip over. Like Apple (AAPL), Sonos built every important element in its system as well as the code that knits it together, so the whole thing seemed to just work. Users became obsessives. Of those initial households, MacFarlane says, virtually every one still uses a Sonos—in many cases, parts of the original bundle. The company knows this because all its products connect to the Internet, allowing them to be tracked remotely.

Rapturous product reviews came quickly. “Pure heaven,” David Pogue of the New York Times wrote in 2006; “the Lexus of the category,” said the Wall Street Journal’s Walter Mossberg. The price, though, remained too high for most—Sonos’s next controller featured a touchscreen and cost $350. Help came from a familiar place. A few months after the new remote came out, Apple unveiled the iPhone, and soon began accepting apps from third parties. Sonos shifted resources away from its own touchscreen development and hired software engineers to create an app for iOS. Customers and reviewers were astonished that it seemed to work better than the proprietary remote. With the price of entry to the Sonos ecosystem now lower, overall sales rose, MacFarlane says.

From the outside, Sonos appeared to move with all the urgency of a mollusk, releasing just four products from 2009 to the October 2013 introduction of its version of an entry-level speaker, the $199 Play:1. Big infusions of capital—$110 million in total, including from Kohlberg Kravis Roberts (KKR)—allowed the company to take its time and burnish its reputation as a perfectionist. Patrick Spence joined the company two years ago from then-Research In Motion as the head of product development. He was shocked to witness the delayed release of the Playbar, which hooks up to TVs and video players to deliver surround sound. The device was supposed to come out before the 2012 holiday shopping season, but the design team wasn’t happy with the cloth that covered the front grill. It didn’t look elegant enough and sometimes pilled after packaging. Sonos held the Playbar until February—an unthinkable decision at most companies. “A question I kept hearing was: Is this beautiful enough to deserve a place in someone’s home for 10 years?” Spence recalls. The Playbar is currently the best-selling product in its class, according to NPD Group.

As Sonos was polishing its products, MP3 sales were leveling off and streaming music services were starting to catch on. Pandora (P) went public in June 2011, followed a month later by Spotify’s introduction in the U.S. Today, Sonos estimates that some 150 million people worldwide are what it calls “modern music lovers”—anyone who listens to music via the Internet and wants better-quality sound. It doesn’t matter that virtually no streaming music company has figured out a way to make money, just so long as consumers get hooked on the format. The more people begin to treat music like a utility, the more they’ll desire an object that projects it—the way you need a TV if you’re paying for cable. “Basically,” MacFarlane says, “it’s as simple as, if you already pay to stream music, you already get what Sonos does. We don’t have to work to educate you.”

Sonos makes a careful study of how its products fit into the home. Two years ago, the company hired Mark Trammell, a designer who’d worked at Digg, Twitter (TWTR), and on President Obama’s 2012 reelection effort. Both the campaign and Sonos involve what Trammell calls “a transfer of passion.” With speakers, this often plays out along gender lines. Typically, a guy brings a Sonos home because he’s into gadgets. How does his wife, girlfriend, or daughter become a Sonos fan? Trammell likes to interview customers in their homes, sometimes in the moment when a Sonos speaker first arrives and a family is taking it out of the box and deciding where it should go.

“They’re looking for a Sonos-size hole to fill,” he says. The small Play:1 is good for bathrooms and kitchens; the Play:5 tends to go in living rooms and dens. The accessories allow for attaching other kinds of sound equipment, such as weatherproof outdoor speakers, to the network. The average Sonos household has 2.1 units.

A key moment tends to be when family members discover how to add to and remix playlists together. Mark Whitten, Sonos’s chief product officer, compares the experience to that of the Xbox. “The reason gaming consoles became ascendant wasn’t because of the games,” he says. “It’s because two kids were sitting on a couch, playing together.” Whitten was hired six months ago from Microsoft (MSFT), where he introduced and oversaw much of the Xbox, including Xbox Live. He says he was attracted to Sonos, a company one-140th the size of his former employer, because it was going after something very simple, and “doing something that’s very simple is very, very hard.”

Take the basic Sonos proposition: playing the same music out of two speakers in two adjacent rooms. One box is downloading the song from an Internet music service and sending that information to the second box. There’s an acoustic challenge—the sound must be in perfect sync or the effect is ruined. And there’s a software challenge: If the user wants to start playing a different song on the second speaker, that speaker must immediately switch from being in harmony with its partner to pulling in its own data. Whitten describes a good user experience as a series of “ands”—you do this, and then that, and then another thing, all the while never noticing a lag or sensing the technology behind the experience. The tech, if done right, disappears. “How many things do I have to explain to you before you can go play music? If it’s more than one thing, that’s too many.”

In pursuit of such simplicity, Sonos’s R&D department has grown to 325 employees, split between Santa Barbara and Cambridge, Mass. Worldwide, Sonos now has about 1,100 workers, triple the number in 2012. The company’s acoustics lab is in a Santa Barbara neighborhood called the Funk Zone. Inside, there are a drum set, amps, and local beers on tap. On Thursday or Friday nights some of the engineers get together for jam sessions. Foo Fighters, Weezer, and the Rolling Stones blast overhead on Play:5 speakers. The place is beyond cluttered—the aesthetic opposite of the austere, reverent image that Sonos projects.

Down a long hallway referred to as the bowling alley sits a stack of discarded grills, the metal outer shell of the speakers. The preferred process of punching holes into each grill is—no surprise—an ongoing debate. On the Play:1, the company tried acid, lasers, even an old-fashioned punch machine. Each approach changed the look, feel, sound quality, and wireless range. Eventually Sonos developed its own drill machine to do the job.

In Los Angeles, the company is happy to provide its Sonos Studio, for free, to almost any artist of a certain stature or cool factor who wishes to use it. Moby and Alanis Morissette have performed there, and the band The xx created an interactive installation with 50 robotically controlled speakers. The studio is a clubhouse, but it’s also a honey trap—a space to lure artists, and even, eventually, customers.

The company did briefly yield to the obvious last year, allowing some sales of its products at the La Brea showroom during the 2013 holiday season. Greg Perlot, who oversees marketing and branding, says the company hasn’t decided whether to repeat the experiment this Christmas. “We just don’t yet have that experience sorted out,” he says.