Innovative Tech Giant vs. Speaker Company

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.

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, which 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.

Amazon’s Unfair Advantage #2: Platform Ownership

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).

Amazon’s Unfair Advantage #3: Diversification

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 is 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.


Short or Long on Sonos?

As you may have gathered, I don’t 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.