Sonos Radio: We’re Gonna Need a Bigger Moat

In a world with Spotify, Apple Music, Pandora, Tidal, Deezer, Amazon Music, iHeartRadio, and the Neil Young Archives, it’s a little unclear why consumers need another choice for their music streaming and radio needs. 

Yet, that’s exactly what Sonos decided to launch this week. This play is a little bit about the music, and a lot about planting a seed for a service business. Let’s take a look below the waterline and figure out why.

Sonos Radio is a free music streaming service available exclusively on the Sonos app, that only works on Sonos speakers. There are three main offerings once you open it up:

• Sonos Presents
  This is the home of Sonos’s original programming. It has a flagship station called Sonos Sound System, which is curated by the Sonos team and will include snippets of stories from artists where they discuss their music. There’s also a station curated by Thom Yorke of Radiohead called “In the Absence Thereof…” and will launch other artist stations. Sonos Presents is ad-free.  
• Local Radio
  Sonos partnered with TuneIn.com and iHeartRadio to bring thousands of local and national radio stations to listeners. These stations are also ad-free.
• Sonos Stations
  Sonos launched a collection of over 30 themed listening stations, such as Cocktail Hour, Indie Gold, and New Lords of Metal. These are similar to Sonos Presents, but positioned as having more varied playlists. This is the only offering that is ad-supported. 

If you recall our last post on the company asking, “Does Sonos have a moat?” you might remember that one of the biggest concerns we had with Sonos’ strategy was that they had a hardware business model:

...in a hardware business model, the customer only pays once but extracts value over several years. For Sonos, a customer might buy a speaker for $399 and use it for 10 years without paying Sonos again.

The coronavirus pandemic perfectly highlights the problem Sonos has with its customer base. They have seen device usage spike to “New Year’s Eve-level of engagement most days” since the start of the quarantine. But Sonos isn’t making a dime in additional revenue. All those people already paid for their speaker.

A radio service addresses this problem — for the company. Sonos Radio is ad-driven, so as more people listen, Sonos makes more money on the ads it sells. 

But, does Sonos Radio address a problem that Sonos customers have? In other words, will enough Sonos customers use Sonos Radio to make an impact on Sonos’s bottom line? Or, will the inclusion of Sonos Radio convince people to become Sonos customers?  

Eh, probably not. But it’s still a strategy that makes sense.

Even if Sonos Radio does become popular, advertising models only work with truly massive scale. 

Sonos has a base of 10 million homes and 29 million active devices. Just for fun, let’s do some math to see if the additional ad revenue would make a dent in the company’s bottom line. 

If we assume each of the 10 million homes is listening to their Sonos for 5 hours per week (and 52 weeks per year), that means there are 2.6 billion hours listened per year on Sonos speakers. 

Then, if we assume that Sonos serves five ads per hour, that’s 13 billion ad impressions per year. At a $30 CPM, which is at the high end for streaming audio, we get $390 million in ad revenue potential. We picked the high-end CPM because most Sonos customers are affluent homeowners. Sonos might have less headache if they used an off-the-shelf ad provider offering lower CPMs, but they’d also be leaving money on the table.

Either way, that $390 million figure is only accurate if they monetized every second of those 2.6 billion hours. And they won’t be able to do that.

They won’t do that because most of the time listening to a Sonos speaker will be listening to existing streaming and radio services. Those streaming and radio services (like Spotify) monetize the listener during those hours, but Sonos won’t be able to.

Then, even if customers listen to Sonos Radio over existing services, only one of the three Sonos services is ad supported. They don’t receive any revenue from Sonos Presents or Local Radio, only from Sonos Stations.

In a best case scenario, say 5% of that listening time is spent on that ad-supported product, Sonos Stations. Five percent of $390 million results in just under $20 million per year. To put that in perspective, Sonos made over $1.2 billion in 2019 on their core business. 

The exact numbers don’t matter as much as the broader point: Sonos isn’t going to move their revenue needle with this new service.

So why launch it? What is Sonos doing?

The real opportunity — and why this is worth discussing — is the potential of recurring revenue through streaming. CEO Patrick Spence mentioned Sonos Radio is just the beginning for Sonos services. To me, this is much more interesting than a stand-alone advertising business. 

Sonos Radio might not be a big deal now, and there’s a good chance it never becomes a big deal. But if users like it, it could become the kernel of a premium service subscription that leverages Sonos’s strengths in the market to avoid becoming commodity hardware.

Of course, as of now there is little reason to choose Sonos Radio over the myriad of alternatives, let alone pay for it. But I guess it’s a first step?

If the advertising revenue simply helps Sonos Radio break even for now, it buys the company time to create a subscription layer that could make it a stronger business in the long run. If Sonos Radio can help keep customers loyal to Sonos speakers, and upgrading to new Sonos hardware rather than considering alternative systems, it’s an investment worth making.

In other words, if Sonos can keep finding ways to make their core product more distinctive and valuable, and extract more long term value from their customers, they can keep themselves from being swallowed up by the competition — the hardware competition — like so much shark bait.

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