Sonos: John MacFarlane

30:01It was expensive. Yeah, it was. And Walt at the time had written reviews on - There's Walt Mossberg. Yeah, Walt Mossberg had written reviews on similar units. So the goal was to get him really hooked. So he would write, if you recall, he had like the Wednesday column that was on the far right. Massively influential people. Yeah. And so the goal was to hook him. So when it came out, he would write, he would review it. Because he could make or break products at the time. Yeah, he could. So we fortunately exceeded his expectations and he wrote a great review and everything went well from that. At that conference, you had a confrontation with Steve Jobs.

30:43Yes, that's correct. What happened? Well, I was standing actually with a bunch of the staff of the Wall Street Journal and Phil Schiller walked by. Phil Schiller, remind me who Phil Schiller is. Phil Schiller was their VP of marketing. For the journal or for Apple? For Apple. Okay. And he walked by, and I had known him from a previous context. And he said, you stay right there. And he went and got Steve Jobs and walked him over. And, of course, that was like bait for all the Wall Street Journal. But he walked right up to me and pounded on my chest and said they were going to sue us out of existence for having a scroll ring on our remote.

31:23He said that in front of all those reporters? Yes, he did. And was it covered? Was it published? Yeah, yeah. Made the front page of the next day. That just, he was going to sue you because you had a remote. At the time, Sonos had a remote, an external remote. And it had a scroll wheel on it. And he said that's copying their iPod or whatever, right? Yeah, that's exactly right. We had done it in parallel, unknown that they were doing what they were doing. So really had no overlap with them at all. So he was aggressive. Oh, very. Yeah, it was an interesting experience. And in fact, I pushed back on him because we had been a little worried about that.

32:03So we had done our homework on filing some patents and understanding where their work was. And I told him, well, you have no grounds to stand on. There's nothing you can sue us over. And later I learned he checked and had heard the same thing. And the relationship I had with him after that was all positive. and he wasn't aggressive with me at all ever after that. So it just turned out to be the right way to handle Steve in that moment. Because you would, of course, have other encounters with him as a partner. So they never sued you? They never sued us, no. All right. So you get off to a great start.

32:43You've got this product. You get a good review from Walt Mossberg. And presumably, that's it. you're going to start to ship these products shortly after. Well, that's a nice summary. What really happened was we were running really hard to release the product. So we announced it in, I think that would have been June 2004. We were really trying to make the holiday season end of 2004, but we just didn't have the quality we felt we needed to have. So we had to postpone. The quality of what? The look of the machine? No, mostly around the wireless. So we just hadn't achieved quite the bar we needed.

33:30And we had some of the problems with latency and range that we hadn't worked all the way through. So we had to skip that holiday season. And of course, you feel like you have to make that holiday season. In retrospect, it wouldn't have made any difference. And we would have killed the company had we released the quality of product it was at at that time. Because people would have said they would try to once, that would have been it. Yep, exactly. And you had to have a great positive first experience if you're going to build the brand on word of mouth. So we didn't ship until 2005. And when you say ship, where were they being sold?

34:10Well, like at that Wall Street Journal conference, we took pre-orders there and had a lot because you could put your hands on the unit. You could see. Could you buy it directly from Sonos at the time? You could buy it directly from us. And by the end of the year, we were in Best Buys. We were in, let's see, what was the chain that was on the East Coast? Tweeter, if you remember them. All right. So you have all this great response, this great reviews, excitement in the industry. You start shipping them in January of 2005. It's$1 ,300 to buy one. So were they flying off the shelves? I think we finished that year well above what we should have, well below what we had hoped for.

34:56So not an overwhelming response, to say the least. Well, I mean, zero to, I think we probably did 10 to 20 million that year. I mean, we had unrealistic, I mean, a bunch of people coming from software and in a hardware business, you can sell only as many as you make. And only if they're in the right stores and the right places where people want to buy them. And so the whole logistics learning of how to get the units in this, I mean, a given Best Buy store might do really well, but then run out, and then another store might have too many. And so learning how to manage Best Buy and all of that is a whole art in and of itself.

35:39And who were these? I mean, the first people to buy them, just the early adopters, these are people who basically had digitized most of their music. I mean, uniformly, they were music lovers, and they wanted music around their home. So most of them had already digitized some amount of music for their iPod or whatever. And keep in mind, this is 2005 now, so the iPod had been out for two years. 2006, I think, was when we first integrated Rhapsody. So that's when you could literally play anything ever made on their service. By the way, the Rhapsody, which doesn't exist anymore, it was eventually merged with Napster.

36:21But it kind of faded away. It was a pioneer in like music. It was before Pandora, before Spotify, before iTunes. So Rhapsody was, if you could integrate that with Sonos, it was perfect. Oh, it was, that was the mind blower. I mean, I remember when we got that integration working and we did a kind of press tour and we had a little hot spot, wireless hot spot. and so you could you you know I went into Walt Mossberg's office and said what do you want to listen to anything ever made and of course when you say that to somebody they're going to challenge you with some very esoteric something and it would just blow people's minds and I mean we had reviewers who would okay what's the trick here where's the you know where where's the hard drive well, there isn't one.

37:15It's in the cloud. So that was a big paradigm shift for sure. And again, and this is pre-iPhone, but still now you had, if your computer was connected to the Sonos system, uses a Rhapsody on it, and then you were good to go. And you still used an external remote control, right? Right. When we very first demonstrated Rhapsody, you needed a computer in the middle, but pretty quickly the Sonos could reach out to the Rhapsody services and do it all directly without a computer involved at all. And you could also, I mean, iTunes had been out by that point, I think. Yes. Could you use iTunes with the Sonos system?

37:57Well, that's where it got a little complicated because iTunes had that digital rights management. So if you bought an iTunes track, you couldn't play that. But if you used iTunes to play your ripped music, you could. So that was friction for sure. And we had back and forth with Apple about using the DRM, but then they took it off. So then it didn't matter. So initially, if you bought music from iTunes, you could not hear it through a Sonos speaker. Correct. That's crazy. Yep. Wow. So they created a walled garden. They did. Okay. So, all right. So, you've got the iPad iPhone comes out in 2007, but what's about to happen is a global financial crisis.

38:40Yeah. Which is – begins in 2008. I shouldn't chuckle, but that is going to – I mean, that obviously, you know, was even worse than the dot-com bubble at burst. Bust, I should say. And from what I read, it really had a massively negative impact on sales for Sonos. well we went from like a hundred percent year-on-year growth or yeah um to i think 2008 we grew 10 or wow maybe you know we grew but not that much um so we definitely had to temper things and select what we were working on and it was scary i mean it really started the end of 2007 if you recall, that's when the global financial crisis started rippling through.

39:33So the information we had to see what was happening was the first players being set up. And when you set up a Sonos, it would radio in and say, hey, I got set up. Is there any new software for me? And then we'd prompt you, hey, there's a later version of software. Do you want to download it? Oh, right. When someone would set up at their home, you could see how many people are setting it up. Yeah. And they went to zero, near zero. It dropped like off a cliff. And so we replanned. We had a wonderful guy running the commercial side of the company at the time, and he just sat down and really worked his way through it.

40:16That was also the year that would have been 2008. So we released the iPhone controller, which helped because that made the purchase cost lower. On the App Store. Yeah. So now you could buy Sonos units without the controller and use your iPhone, and that helped. That cut your costs, presumably, because you had to produce the remote. And I guess really the way out of that hole, or one way out of that hole, was to basically make a cheaper product or a less expensive product, which was the Play 5, right? It was like a third the price of what a Sonos – because the Sonos system was really expensive in 2009.

40:54It was like$1 ,200. Well, that's not a system. That's a combination. That's a bundle. But I'm not criticizing. I'm just saying, understandably, it was expensive. Yeah. And a Play 5, which came out in 2009, really opened up the growth. And you're right. It was easier because before that, you had to buy a unit. You had to buy speakers. You had to connect the speakers to the unit. And the Play 5 was all in one. So you bought it. You plugged it in and it just worked. And so you're right. It was less expensive. It was easier to use. It just made more sense all the way around. And that had a huge impact, right?

41:35It did. We grew a bunch that year. OK. I mean, around this time, I mean, you're kind of peerless, right? I mean, you did not have any significant competitors making quality home wireless speakers, did you? Well, I would say no. There were competitors, but they were all traditional audio. So Philips had a product that competed against us. Yamaha had a product. Sony had a product. There were a variety of, there were a couple of startups that competed, but none of them worked well. So I wouldn't say we were alone, but, you know, if you were a reviewer who was competently, you were going to rank us first.

42:19What was the – I mean, as you started to really dominate this category, tell me a little bit about the strategic thinking because when a brand starts to dominate a category, it can actually be a really dangerous time because that's when you start to get comfortable. And that's when you start to say, okay, we're bulletproof. But of course, that almost never happens. Companies very rarely dominate for a long time. What do you remember about the internal conversations about how you were going to innovate? I mean, you could make better quality sounding speakers or make it even easier to set up. But those seem incremental to me.

43:05What were the big swings for the fences you guys were talking about at that time in 2010, 11? Well, at that time, first off, we didn't feel like we were dominating because it's a global market. And every country everywhere on the planet had its own complexities, including the music companies licensed at that time by country. So while Spotify was available in Sweden, it wasn't available anywhere else. And Rhapsody was available in the U.S., but it wasn't available outside of the U.S. And the success of Sonos really depended, in your view, on the proliferation of these streaming services. The best experience by a long shot you would have is if you had Sonos with those streaming services.

43:55You know, otherwise you had the complexity of having a ripped library. So I don't think we ever viewed it as dominating the marketplace. We just saw so much to do. So did you think of yourselves as – I mean, I know the mission statement was like music – what was it, music? Fill your home with music. Fill your home with music, which is great. It's very simple, clear. Fill your home with music. That's what we do. Did you think of your company, Sonos, as like a JBL or a Dolby or like when they were at their peak, you know, like did you think of those as the gold standard that you were trying to achieve?

44:35No. You've got to keep in mind, I mean, I remember at the CES show in 2005 when we released, a guy came over, I think it was from Yamaha, and asked the people that were working the booth, you know, how many inputs do you have? And the person answered, well, an infinite number because we have an internet connection. And he said, well, how do you have an infinite number? You don't have enough connectors on the back. So the traditional audio market that you're mentioning, we didn't really view them at all in the same mindset as us. While they did fill the home with music, they just, you know, it was usually the B or C team.

45:19TVs were much more popular, home theater receivers. So they were just kind of on autopilot. And what we were worried about is that Apple, Amazon, and Google would ultimately get into this space, and they understood software clearly. They had a global footprint. They could do an amazing job. So we knew down the road we would be competing with them. We didn't know when. We didn't know how. So we were more playing scared through that period of, at least I can speak for myself, when does Apple enter? If they did a great product, they could put a lot of hurt on us. When we come back in just a moment, what happens to Sonos after Alexa and Siri enter the home speaker market?

46:09And why, after leaving the company for 15 years, John decides to step away for good? Stay with us. I'm Guy Raz, and you're listening to How I Built This.

46:35Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2015, and after 10 years, Sonos has become a force in home audio. But another force is coming, smart speakers. Amazon launches the Echo, and Sonos is suddenly competing with a bot named Alexa. Right. You know, I was actually probably too blasé about it. I had paid attention to the voice recognition market forever, and it consistently under-delivered and underperformed. So I looked at it more as a gimmick than I did as a real thing. I would say they made the cardinal mistake of trying to go after everything and under-delivered on everything.

47:22And since it's a first impression thing, you see it in their numbers. People try it, but they don't keep coming back and doing it or grow their use. So I think the promise of voice response for music in the home is still ahead of us, not really behind us. Even today? Yeah, I would say that. All right. But just going back to that time, right? I mean, this is a new technology. Clearly, Amazon had cracked something. Yep. No question about that. And then you'd have Siri that would come out. Yep. Right, come out around that time. They'd cracked something, and it was different. It was better. and oftentimes in an industry when a you know competing product comes out that just all of a sudden you know it's like it's like the blackberry like the blackberry when they first saw the iphone they were like yeah they didn't respond but but then people were like we got to make a smartphone and then they'd scrambled and eventually they did which and we know the end of that story yeah they and make a great one.

48:26Did part of you feel like we better make a smart speaker right now because we're going to be put out a bit or no? Yeah, for sure. I mean, when I finally woke up to what the Echo was. How long did that take you to wake up? A few months. Okay. And then I, you know, really pulled hard on the whole company to realign us around smart speakers and voice assistants. But that means you would have to develop your own voice recognition system. Well, at that time, I thought that was a probably bad idea because Amazon, Google, and Apple with Siri were clearly running that down hard. So the positioning we took was to be compatible with all of those.

49:16integrate with them just like the music services such that you'd use the voice assistant for selecting which music you wanted, but we would be the person filling your home with music. But it sounds like you were relying on a brand that Sonos to consumers meant crystal clear quality. It does. It's a quality brand. And no one, I think everyone thinks of Apple, Amazon, on Google as quality brands, but nobody necessarily thinks of them as great speaker companies. So in your mind, did you think that's really what our value proposition is going to be? Even if these companies try to crush us, we'll be okay because people will think of us as the quality way to listen to music.

50:01Yeah. I mean, a brand gives you certain permissions, but you have to then follow up and deliver on that. And I think Sonos stayed true to its roots and continues to do a great music experience. And as it does that, I think that works. I think Apple of all those brands has the brand permission to do a great home music experience, but they've got so many other things to do. They haven't really done that. Yeah. This would be a tiny P &L for them. It's not worth their time. Yeah. All right. But by early 2016, Amazon's Echo started to eat into sales of Sonos. This is a fact. This has been written about.

50:43It's been chronicled. You guys had to announce layoffs. I mean, the Echo, whether you liked it or not, it did have an impact on your business. Yeah. Unquestionable. And that, I mean, so either they were doing something right or maybe the price point was right or something. I mean, how did you respond to that? We really focused the company around embracing voice assistants. That was expensive, probably, to start to work on that. Yeah, for sure. It always is when you start something new. But you just have to ask yourself, is this a better way to, you know, fill your home with music? And we felt it was, so we put the work in.

51:24Right. You did because you eventually were able to integrate voice assistants into your speakers. I think first around 2017 with a system that integrated with Amazon's Alexa and then not long after that, you could do it with the Google and the Apple devices too. So when all that happened, I imagine it stopped some of the bleeding. hard to say um maybe uh because if you wanted a sonos and you wanted a voice assistant you could you could have that whereas before um in you know 2015 you had to choose one or the other yeah and it was after i left so i was uninvolved in it and i don't know any of the inside but i think they just felt it you know as i've told you in my view the voice assistants still you know their time is coming.

52:20I think they were just too early. Like now you see the startup companies trying to integrate voice assistants with the AI stuff. And do I believe in that? Yes. You know, is that 10 years away or is it two? That's the question, right? So that year, I imagine, was a tough year. I think you thought about stepping down already from what I gather, in part because your wife was actually battling breast cancer and your parents were getting older. You would want it to step down earlier, right? But that year was a challenging year, 2016, and it kind of delayed your plans a little bit. yeah more i'd say with my wife's breast cancer and my kids are teens and it i i sprinted the marathon if you'll put it that way i mean i was always really good at keeping a little bit of reserve and never trying to sprint a section uh i sprinted and i just burned myself up um and so i just found myself not the person i wanted to be at work i would you know i'd be angrier.

53:37I'd have a shorter attention span. I wasn't enjoying it as much. And on top of that, I wanted to successfully lead the change to embracing voice assistance. Because as you can imagine, there was quite a bit of debate over whether we should go that way or not. And so you don't really want to leave that effort half finished. And I didn't really realize when I was burned out that I was burned out, it took a little time to have that perspective. When you were feeling like you were burned out, right, and you're leading the company, so you've got to show up one face because you've got a thousand or more employees at this point, right?

54:19By 2017, 1 ,400 employees at least? Probably in that range, yeah. And you're doing over a billion dollars in sales. You brought the company over a billion dollars in sales, but here you are internally feeling stressed out and burned out. Yeah. One thing you realize is you know very well when you're leading people, you bring them through your ups and downs. Yeah. So you really have to be mindful of that so that when you're having a down or you're having an up, you don't bring them all the way with you. and as a leader you want to be that you want to choose optimism and I found myself after 25 years of startup companies I was looking more for the negative the downsides than I was the upsides yeah and that's I just didn't want to be that person I'd run into people like that I didn't want to be that person and that's not the person you want leading you you you want you want the person that's seeing the nine out of ten upsides not the nine out of ten downsides if you will You were becoming the person that you encountered in 2002 who said to you, oh, this can never be done.

55:29Exactly. And who wants that in the company, right? But that's the cycle, right? That's the perfect cycle of the human experience, right? And that's fine. But that was my turn. I was done. Yeah. But even that, right, recognizing that is one thing. And then deciding to step down is another thing because this is 14 years of your life. If you'd started this company, now you didn't need the money. You were financially set even before this started. So it wasn't about the money, but it was about the purpose. It was about going in. It was about your colleagues. It was about people looking to you for affirmation.

56:07And giving that up is very hard. You know, my ego was not based around that. I really, I wanted the company to be successful 10 times more than I wanted to be the leader of the company. I had kind of decided and I shared with board members maybe six months before we did the official transition in January. So Patrick was kind of running the company already. So when I stepped out and he stepped into the CEO role, I didn't want to be in a position where I was second guessing what Patrick was doing. Yeah. I mean, when I left, I didn't stay on the board because who wants to have the founder of the board, uh, sitting on the board at the company, uh, that you're running.

56:55Happens every day, but I hear you. I know, but I wanted to give the company its best shot at being successful. And if they needed my help, they'd call me and I'd be happy to help. And if they didn't, they wouldn't. And, you know. That would be fine. That's, that's, yeah, that's fine. Time to step out. So you literally went from being the CEO one day to the next day just going home and waking up the next morning and you didn't have an agenda or a calendar pre-populated for you. No, no, it was wonderful. I mean, God, I love reading. I've always been a reader. but for 25 years you would pick up the book by the side of your bed and you'd start reading in five pages and you'd fall asleep and then you'd pick it up the next day and you'd have to reread three of the five pages and that just was no fun.

57:48I distinctly remember after leaving Sonos in January and being able to read a book from start to finish in the middle of the book thinking, geez, I'm such a loser. I should be doing something more productive. So I definitely had to deal with those feelings of disconnect too. But it was fantastic to be able to read a book. Yeah. I mean, I remember my wife and I, Patty, would take a walk and I would get phone calls during the walk, which would drive her crazy. And after I was out of there, I went with her for a walk and she had signed up for a bunch of boards and her phone was ringing off the hook and my phone didn't ring that whole walk.

58:34Yeah. And how's Patty's health, by the way? Good. She got all the way through it and hasn't had any complications. That's great. Yeah. Thank you. Yeah. Yeah. I mean, probably since your departure, and as I say, I mean, you got it to over a billion dollars in sales and a huge staff I mean created this incredible brand and to me the the story and I think I think probably everybody there would acknowledge it you know you your time there helped set them up for success because really Sonos could have been like TiVo Sonos could have been like you know a product that everybody used for a short period of time like the Blackberry and then it got crushed and it didn't.

59:21Yeah. Well, first off, I only got it to just shy of a billion. Patrick really carried it through a billion and through two billion. So, you know, if I got the foundation set up correctly, then good. That's what I should have done. But they carried it past that. But the fact that it's making products that still compete and more than compete with, the Google speaker and the Amazon speaker and the Apple speaker. Some people have all those things. I mean, I've got different ones. It's pretty remarkable because Sonos is a tiny company compared to those giant companies. True. But you're not really competing against the whole company.

1:00:03You're competing against the section that's making a competitive product. TiVo was a great company, but never decided, was it a product? Was it a service? Which is it? Is of both. And as the idea becomes mainstream, you've really got to do that and dive deeply. And the companies that survive do that well, and the companies that don't, don't. And I think Patrick has done a wonderful job of staying on that. Yeah. Do you think that it's, I mean, you mentioned that it's, you think it's healthy for founders to make a break, right? And I think there's something to that. I mean, although there are founders who've been on the show who disagree, who would say, no, you don't want to stay and mentor or stay around or be a resource and whatever, whatever it is, whatever that perspective might be.

1:00:48But you must still, Santa Barbara is a small town. You must run into people all the time from the old days or who still work there or not, or maybe you don't. Well, it's funny, actually. A lot of people I run into that work there, I don't know. so you know seeing a sitting next to somebody talking about sonos or seeing a sonos jersey and not knowing the people you know happens i mean it's like staying in your child's life there is a period of time where you need to be prescriptive about things um you know don't cross the busy road and there's times when that kind of prescriptiveness is just going to hinder their development.

1:01:31And I think for me and Sonos, it was just far better to keep my fingers out of it. And of course, if the company fails after I leave, that's not great on me, right? Yeah. When you think about the journey you took and all of the ups and downs and where you got to today, how much do you attribute it to the work and grind you put in? And how much do you think had to do with timing and luck? Oh boy. Timing and luck is so critically important because as you pointed out, there are lots of companies that had their timing wrong. So I would say timing is maybe it's 80 % and hard work is 20. You got to put the hard work in because the luck comes your way when, I mean, I'm sure it's the same for you guy.

1:02:21If you don't put the work in, the opportunities aren't going to come and you're not going to grow. But boy, if your timing isn't right, those two things are not going to get you across the finish line. That's John McFarlane, former CEO and one of the founders of Sonos. By the way, the very first song played through a Sonos speaker was chosen by John himself on a day when some of the first units were being worked on. And according to company lore, that song was the Beastie Boys' No Sleep Till Brooklyn. That's all true. It just fit. These were the first units that were fully assembled. We had a room that had the quality assurance team in it, and they were really trying to beat it up.

1:03:07And I thought that was the appropriate song because they had a lot of work ahead of them. So I played it full volume for them in that room. Nice. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And as always, it's free. This episode was produced by Catherine Seifer with music composed by Ramtina Arablui. It was edited by Neva Grant with research help from Sam Paulson. Our production staff also includes JC Howard, Casey Herman, Carrie Thompson, Alex Chung, John Isabella, Chris Messini, Carla Estevez, and Malia Agudelo.

1:03:43Our engineers were Robert Rodriguez and Josh Newell. I'm Guy Raz, and you've been listening to How I Built This.

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