How to Build a Consumer Platform: Lessons from Sonos

One has to look really hard to find a Silicon Valley startup (unless you consider Apple a startup) that has found success in the hotly contested consumer electronics market place. Many have failed. Some have tasted early critical success and been acquired by bigger players: Slingbox, for example. However, one company might just change that: Sonos, a Santa Barbara, Calif.-based maker of networked digital music devices.

The History

After hitting it big in the corporate networking world, the five founders of left the successor to their company in 2001 and decided to take their earnings and start a networking business all over again — this time in the home. With the sense that networking would continue to spread, the founders of what would eventually become Sonos first decided to build networking gear that would connect the instrumentation of an airplane. But Tom Cullen, VP of sales and marketing and a co-founder of Sonos, said that when he looked at that idea, he didn’t want to have the Federal Aviation Administration standing between him and his customer, which freed the founders up to create a networked, home-music system.

Using their own money and an undisclosed amount raised from angels, Cullen, Sonos CEO John McFarlane, and three others created Sonos in 2003, believing the phenomenon of IP communications in the workplace would soon invade the home. Building a system that made moving music digitally across a home network in a simple and easy-to-use way became the goal. “We wanted it to be like grabbing a CD off of a shelf and popping it into a player. It had to be that easy,” Cullen said. Fast-forward to today, and the company, which doesn’t report sales, has sold millions of its products and has seen sales grow by more than 105 percent in 2010 from the previous year, thanks in part to the release of its S5 product. The S5 resembles a boombox, connects to your wireless network and delivers whatever songs are stored on your iTunes or a home media server.

The Sonos S5 is making Sonos a household name.

For those who have a Sonos (I do), the experience is unbelievably simple (albeit expensive). You plug in the product; it gets online; and two minutes later, you can listen to music stored on your media server or from an online music service such as Pandora or Spotify. The new-found success has brought in $25 million in new funding from Index Ventures.

This rise to the top hasn’t been a straight line. There are more twists and turns in their story that there are on the Blue Ridge Mountain Parkway.  Along the way, the Sonos crew has learned some valuable lessons that any consumer-focused startup should consider in order to create a good user experience and profits. And for those wondering, Cullen wouldn’t give a time frame for the release of an Android (s goog) controller, only saying, “We can see a handful of other potential platforms, and we want to see which one has the biggest concentration of music lovers.”

Lesson#1: Focus and Refine

Tom Cullen of Sonos

“We wanted to be the Bose of the digital world,” Cullen said. But in order to do that, the Sonos crew had to figure out how to make a product that was easy to use and could deliver a sound quality that audiophiles and those listening to MP3s would appreciate (as an aside for digital music junkies, Cullen says he stores his audio files as 320 kbps MP3 files). Improvement is ongoing, with the latest advancements being the way it built its S5 boombox-style device. Sonos, not longer content to shuttle bits around the home network through a proprietary wireless system, designed a new speaker for the S5 that digitally controls the output from the different parts of the speaker.

An advantage of this is that the S5 sounds the way most consumers prefer their speakers to sound (at least according to the gurus at Lucas Arts who vetted the sound quality for Sonos) and that the speaker profile can be changed via a DSP programmer tweaking the settings. Expect those advances to be seen in future Sonos products. Cullen also notes that the home audio market is the focus today, but people listen to music in other places, such as in their cars or via headphones — an area Sonos will one day explore. As it does, it’s staying focused on providing the best sound for digital music and continuing to refine the way it builds its products in the service of that goal.

Lesson#2: Consider Usability Before You Build

It took the guys at Sonos a few months to build their first prototype, and at the end, they were left with a product only a geek could love. Realizing this, they sought help from a usability expert, who told them they didn’t need a usability expert until much later in their process. What they needed was an industrial designer who could get in early and help them build the hardware and software with an eye toward the consumer. The team eventually hired Meiko Mieko Kusano, a designer for Phillips, who told them, “Usability is in the bones of the product, not the skin.” Cullen still credits that mentality with Sonos’ success.

“Most consumer electronics companies build out hardware and then add software to update it and change their designs every 18 months. We turned that on its head, building hardware that will last and software that we can update whenever we need to in order to improve the experience.” Cullen credits that shift to Kusano, and offers up Sonos’ Zone Player products as an example. “You should be able to stream music over that for the next 15 years.”

Lesson#3: Don’t Be Afraid to Cannibalize Yourself

That long-term vision for the hardware is part of the success of the Sonos platform, but the other is the philosophy the company has about working with partners and even introducing new products to expand its base. When it launched, a Sonos system could run a user about $99 for a wireless router, another $350 to $500 or so for something that picks up that signal and connects to speakers in one room (each room would need another of these), and a special controller for about $350 to drive the system. But in 2008, Sonos released a free app for the iPod that mimicked the functionality of the controller and thus brought down the cost of the system. Sales surged. The loss in controller revenue was more than offset by sales of the new system, Cullen said.

It now has a free app for the iPad, and as mentioned earlier, Cullen says support for other platforms will come. But last year, Sonos introduced a much more disruptive product: its S5 boombox. For $400, the S5 has speakers and allows someone to create a Sonos network with the addition of a Zone Bridge for $99. The launch of that product has changed the profile for Sonos, moving it out of the specialty market and into the mainstream. At the time of this writing, items No. 3 and No. 6 on Best Buy’s (s bby) Top 10 bestselling wireless and streaming audio products were S5s. However, Sonos’ S5 cracked the top 100 of Amazon’s (s amzn) Bestsellers in Home Audio & Theater Products list at No. 73, behind rivals Logitech and Bose. But Cullen says the fear of cannibalizing sales of its more expensive gear hasn’t been realized; instead people buy an S5, then tend to add more onto their networks.

Lesson #4: A True Platform Doesn’t Pick Winners
As a platform, Sonos plans to release a breadth of hardware and software to ensure a better digital music experience, but it also extends that to partnerships it signs with music providers. Sonos currently supports Spotify in the U.K. and Scandinavia, and that partnership alone has enabled it to boost sales of its system in those countries by a non trivial amount. In the U.S., a partnership with Pandora has had a smaller but still noticeable affect on sales as well. Cullen said Spotify and other some partners have offered to pay Sonos for providing access to their content to Sonos users, but Sonos doesn’t play that game. “We don’t take revenue from people,” Cullen said. “We don’t want any incentives to guide our behavior rather than the user choosing what they want to listen to. We don’t want to be picking winners and losers.”

So far, Sonos’ strategy is working. The company has now raised $65 million,and while Cullen wouldn’t discuss IPO plans, he says the company has been approached by buyers. However, the $15 billion home audio market beckons, and Sonos believes it has learned how to play the game well and can take the disruption provided by digital music and home networks to give the industry giants a run for their money.

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