Sonos CEO John MacFarlane on Voice Recognition, Layoffs and Streaming
The "smart speaker" chief on teaming up with Apple Music and why being called an idiot can change one's outlook.
Perhaps the biggest challenge when creating a From the Desk Of feature on Sonos CEO John MacFarlane is the fact that he doesn't really have one. His "office" is anywhere in the company's 12 global offices he sets up his laptop.
"I would go to our Amsterdam office for two weeks, work out of the kitchen and run into everybody," explains the 50-year-old married father of two. "I would do the same in Boston and realized I got to know everybody in those locations so much better than in Santa Barbara, where I'd sit in my office. So last year I just got rid of it."
MacFarlane's unorthodox approach to work space -- which in Santa Barbara includes free pilsner on tap, mustard greens from the office's tower garden and an officewide, staff-curated soundtrack -- reflects a freewheeling approach to business that he has honed through the decades. In 1989, the Denver native matriculated at the University of California, Santa Barbara for graduate studies in engineering and by 1992 had launched an Internet email system called Software.com, long before most people had heard of the Internet and before he knew "the difference between a P&L and a balance sheet."
He figured it out soon enough: Within a decade, Software.com merged with Phone.com in a deal valued at $6.4 billion. Since its 2002 launch, Sonos -- which specializes in "smart speakers," controlled from an iPad or iPhone, that can stream music in multiple locations in a house or office -- has grown from MacFarlane and his three fellow co-founders to 1,400 staffers today, with a dozen offices spread across the United States, Europe and China while raising some $323 million in 8 rounds of funding according to CrunchBase. The company had its best year to date in 2015, hitting nearly $1 billion in sales, according to MacFarlane, and unveiling its Trueplay technology (which allows users to "tune" speakers to a room's dimensions) and Play:5, a compact yet sonically sophisticated speaker jammed with midwoofers and tweeters. In February, the company announced a partnership with Apple Music (which was criticized for launching without Sonos) and later in the year will open its first retail space, in New York.
As this story was going to press, MacFarlane announced in an official blog post that as a result of a changing and more competitive speaker market in which Sonos is battling cheaper offerings, home entertainment systems options and especially Amazon's voice recognition product line, the company would set itself in a new direction focusing on paid music-streaming services and voice-activation technology -- and have to lay off staff.
Billboard: Is it true that your approach to Sonos changed after a friend called you an idiot?
John MacFarlane: Yes. I'm the morning person in my family, so I wake up my kids, make their breakfast and lunch and bring them to school. We would have these huge battles. I was complaining about it to this friend, and he said, "You're an idiot. You run Sonos and you don't know what to do? Put the Play:3 in each of their bedrooms, ask what they want to hear when they wake up, put a playlist together and make sure it goes off 15 minutes before you go in there." That guy changed my life. Music is a cool subject to talk about with your kids when they're going to bed -- "Hey, have you heard this?" -- and then they wake up to it. Now, I come in in the morning and they're jewels.
Did that experience inform the "Music Makes It Home" campaign?
We've all had our own epiphanies!
Apart from the day-to-day running of the company, what is your biggest task right now?
I have 20 people on our management team going on a two-day off-site [meeting] in Los Angeles to refocus our company strategy onto paid music subscribers. During the first 10 years of Sonos, [most users were] people who had ripped or "There's almost no tech company that understands the creative process."purchased digital music collections and then added a subscription service if they wanted one. With the launch of Apple Music last year, and on Sonos [on Feb. 10], the whole industry is leaning into streaming music, so we're retargeting the company at streaming-music users.
What is most challenging about this change?
If you looked at the Sonos market a year ago and added up all the people who had [downloaded] digital music collections, it would be around 300 million for our market. If you add up Spotify's 28 million people and Apple Music's 11 million, you now have a target of 39 million -- that's roughly a tenfold drop. It's a big change to lead everybody through, and it's all just starting.
Is getting more people to convert to streaming one of your goals?
A lot of that is being done by streaming services. Our mission is to fill your home with music. That ["Music Makes It Home"] campaign with Apple was fun because it's true: People quantitatively listen to a lot more music when they can play virtually anything ever made, rather than their own collections.
What prompted your decision to suddenly introduce voice recognition?
I was at the Allen & Co. conference in Tucson last week and everybody there is a Sonos owner and they were asking, "What do you guys think about voice, will that ever be a part of Sonos?" And it became blindingly clear to me that it was important that we step into that conversation. Coming back, the Uber driver asked me about it. He literally overheard the discussion with Joy [Howard], who is our CMO, and Pete [Pedersen], the leader for PR. He got off the phone and said, "Man, you're totally right, I was gonna ask you, How do I integrate my [Amazon] Echo with my Sonos?" And he had a Play:1 in one room and an Echo in the kitchen and Play 1 in his bedroom. I came back and said we just need to step into this because we're tone deaf if we don't.
Is this a preventative measure or was the market slowing down?
It's been slowing down a little bit, mostly out of the Echo being in the market in the U.S. If you look at the U.S. -- Bluetooth speakers, Sonos, AirPlay -- everything that is non-Echo shrank slightly year-over-year in calendar Q4 last year. We grew, but that whole category shrank. The Echo probably shipped as much as that category if you included it.
Why did you have layoffs, are you operating at a deficit?
No, we run profitable, but we would run at a loss if we doubled down where we were doubling down and didn't let people go. Yes, at the beginning of the fiscal year we weren't planing to go hard after voice or doubling down on paid music services, so those are changes, but we decided we needed a bunch more people in those areas so it's a zero sum game. We did have to pick some places where we let staff go and that sucks, frankly. The only time we've ever done that before was in 2008 when the world got tougher. We did grow last year, we are growing now, literally we're just aiming a little differently. We will exit the year with more people than we had by a pretty big number.
Will you acquire a voice recognition company like SoundHound or maybe license the technology?
I won't say never, [but] that's not what we're making room for now.
You rarely see Rick Rubin cosign an audio product, yet he's featured prominently in Sonos' latest ad campaign. How did you connect with him?
We saw him talking about Sonos in a magazine. He said it had changed his relationship with music and that he finally [understood] streaming services because of Sonos. He gave us our North Star, which is to -- as closely as possible -- deliver the artist's intent in whatever room you are in, which is what led us to Trueplay.
What role does Giles Martin [son of late Beatles producer George] play at Sonos?
He leads our sound experience team. He's an accomplished producer and recording engineer and worked on Play:5 a lot, so when we released it [in November], it was in the homes of [advisory board members] Rick Rubin, Hans Zimmer and Q-Tip, and we made sure it sounded like they wanted it to. It's triple-oriented, so you can put it vertical or horizontal, or you can use two and pair them. I would say a pair of Play:5s can't be beat for less than $40,000, and they're $500 each.
What's the criteria for selecting the artists Sonos uses in its campaigns?
We won't work with an artist if it's just a commercial transaction and he or she is not passionate about Sonos.
Who are your music-business mentors?
[Universal Music Group chairman/CEO] Lucian Grainge. I met him when he was at Universal in the U.K. We have lunch every couple of months. There's almost no tech company that understands the creative process, and Lucian is an A&R guy who values the artist's side. He taught me that, and hopefully I've taught him a bit about the tech side. They are very different cultures and don't overlap very well, which is why the music business and the tech business have been so estranged.
Isn't that changing?
It's at a turning point -- the light is appearing at the end of the tunnel. Streaming revenue is growing faster than physical. It has been fun watching Lucian pilot this because the whole industry underwent a lot of compression before it turned the corner, and digital streaming has grown. Digital downloads never had an effect like this. I'll bet the best days are ahead of us and the business will be larger than even in the peak days of the CD.