Sonos: John MacFarlane

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SPEAKER_01: You were becoming the person that you encountered in 2002 who said to you, oh, this can never be done. SPEAKER_02: Exactly.Exactly.And who wants that in the company? SPEAKER_01: Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how John McFarlane and his partners figured out how to fill a house with music without wires and launched Sonos, a brand that does over a billion dollars a year in business. Why do some consumer products survive even when the odds seem stacked against them?This is a question I always wondered about Sonos.Sonos, of course, makes wireless speakers.In fact, really good wireless speakers.They usually rate really high on review sites. But I always figured it was just a matter of time before Google or Amazon or Apple or Samsung or any other tech giant would just come along and eat Sonos for lunch.After all, each one of those companies makes wireless speakers, and in many cases, much cheaper ones. But Sonos has not only survived, it's thrived. The company was founded in 2002, back when most people listened to music on CDs.At that time, music streaming was barely a thing.There was Rhapsody, but very few people used it.And if you wanted surround sound in your house, you had to wire it up and drill into your walls to connect those wires. But John McFarlane and his partners Craig Shelburne, Tom Cullen, and Trung Mai all imagined a world of seamless, high-quality, wireless listening.And to achieve that, they literally had to invent the technology to make it possible.But it would take several years before Sonos would catch on. And then once it did, everyone else copied the idea.But instead of competing on price, Sonos doubled down on sound quality.And that strategy worked. Today, the company sells more than a billion and a half dollars worth of speakers a year.And it's one of the most successful brands to come out of the small coastal city of Santa Barbara in California. John McFarlane grew up in Denver and studied electrical engineering in college.In the early 1990s, he was in a Ph.D.program at UC Santa Barbara, and he would soon start his first business, a software company.But at the time, he was experimenting with the early Internet and seeing how it could be used to communicate with other countries, in his case, Russia. SPEAKER_02: If you remember, that's right when the breakup of the Soviet Union was happening.And Russia had some really specialized scientific centers, these secret cities.And to exchange information with them, there was no real easy way to mail them anything or anything like that.You used this thing called the Internet. Now, it didn't always work reliably, so you had to kind of understand how it worked.And I became the expert in the lab on doing that.So I was the go-to person for getting anything data-related in and out of Russia at the time.And that just kind of hooked me, so I dove more and more in.And that was the genesis of the first company I started, because another grad student and I were sitting around talking about how big this thing, the internet, would be. We thought we should go off and start a company. SPEAKER_01: So this is why you're a grad student.You met another student.What was the student's name?Mike Dorico.All right.So you and Mike said, let's start a company.And what would that company do? SPEAKER_02: Yeah, the idea was to sell software over the net.So if you go back to that time, this was 1992.If you bought some software, it came on a stack of 20 floppy disks.And maybe they were the small ones in the little plastic, the three and a half inch.Right.A little later, it would be a CD-ROM.But it was a multi-hour endeavor to get in. SPEAKER_01: Put it in a computer and let it upload.Yep. SPEAKER_02: Yeah. And so the idea was have a little piece of software that would fit on one floppy disk, put it in, connect the computer to the Internet, and then purchase what you wanted off the Internet, put your credit card in, and you'd walk away and it would install all of it. SPEAKER_01: And what was the name of your company? SPEAKER_02: Software.com. SPEAKER_01: Software.com.You could register that domain online. SPEAKER_02: Oh, yeah, that's a funny story.There was a big debate over whether the Internet was available for commercial use or for only academic use.And you could tell it was going to go to commercial use.It was just too valuable.So there was one organization that did the domain name registrations. and I sent a note in and I just happened to know there was a man and a woman that worked there that decided and I sent it to dear sir or madam and it landed on the woman's desk and she just immediately approved it and put a little note at the bottom.I appreciate that you addressed it to who you did.That was it.I kept that email for a long time.Yeah, it was pretty funny. Be respectful. SPEAKER_01: So you got software.com.And so did you have the I mean, obviously, you're an engineer, and you'd been self taught coder.But did you have the technical skills to build the infrastructure that would enable software to be sold online? SPEAKER_02: Yeah, funny enough, if you wanted to get on the internet in 92 and 93, you had to build a lot of the software yourself.So yes, we did have the skills to build it, or we learned them. SPEAKER_01: Yeah. SPEAKER_02: But while it made a lot of sense, the folks that kind of were the gatekeepers at the big software companies at that time, Microsoft, Borland, Lotus, weren't interested in selling their software over the internet.They were more worried about hurting their sales through the conventional channels.Right.And that turned out to be a bigger problem. SPEAKER_01: you couldn't essentially, you realized relatively quickly that that was not going to be a viable business plan? SPEAKER_02: Yeah.I mean, you had to do a lot of evangelizing on what the internet was because people didn't really know what it was at that moment. SPEAKER_01: All right.And I guess you guys kind of realized you have to pivot away from this initial idea of selling software online.And I guess what you decided to pivot to was email.And I mean, this is the early 1990s.And, you know, more and more companies at the time were starting to adopt email, right?And so I guess you guys developed like, like the software for email server to sell to companies? SPEAKER_02: Yeah.So one of the things we realized was the first thing a company wants to do is add email.So we had put a lot of time into a good email system at software.com and we thought, hey, we can commercialize this and really own that market and made a commercial email service that was really easy to use. That actually went well because we could sell it over the Internet.Of course, we believed in selling software over the Internet.And we had companies all over the planet buying it. SPEAKER_01: And this is before Microsoft Outlook or Gmail or any of that stuff. SPEAKER_02: That's correct. Believe it or not, we were about the only thing out there.So as the internet kind of shifted to telecom and cable companies, that's where we really focused on.And if you were a telecom company anywhere on the planet or a cable company launching an internet service, you were probably using our stuff or we were knocking on your door to use it. SPEAKER_01: All right.So you've got this company, right?Software.com, based out of Santa Barbara.And, you know, you're growing to the point where you, I guess, you decide to quit your PhD program.And then your company, I guess, merges with another company.And then about a year or two after that, you leave.And this is like around 2002.And you, I mean, you're like in your mid-30s.And at this point, you probably made a ton of money from this business, right? I mean, because the internet created all this wealth. SPEAKER_02: Yeah, more money than I'd ever met.You know, making money was never the goal, but that said, I had been luckier than I should have been.So for sure, that's true. SPEAKER_01: I mean, at this point, you could... kind of sit back and surf or get into surfing or whatever you might want to do in Santa Barbara, open a restaurant or something.I mean, you could have done anything you wanted to.Sure.But I wasn't done, so.Did you have a family at that point? SPEAKER_02: Yes.My first son was born in 2000 and my second son was born in 2002.And that was part of the factor.I remember we were remodeling a guest house on our property and my son thought the contractor was his father, not me.It was a good warning about being a part of their life, which I heeded.Yeah. SPEAKER_01: So, all right, so you've got a young family.And what did you – I mean, did you immediately think, all right, I'm going to do something else now.Now I've got to find my next project? SPEAKER_02: Yeah, I was nowhere near done.I mean, software.com was just an incredible opportunity because I got to visit almost every country in the world.Wow.And the internet was kind of just getting going.So it had – really penetrated most businesses at that point.But as far as affecting you and your home, even internet broadband had only just started.So unless you lived in the Bay Area or certain places, you probably only experienced the internet through a dial-up modem, if you remember those.And so... That was kind of the genesis behind Sonos. The four that officially started Sonos, we'd all work together at software.com. SPEAKER_01: I want to go back to that process because I know it didn't happen overnight.I mean, from what I understand, you and these three other guys from software.com, Craig Shelburne, Tom Cullen, and Trung Mai, you came together with some other folks and you decided that you were going to create something.Yeah. And this was essentially, this was the dawn of the high-speed internet era.This was the beginning of a time where people would start to get to move from dial-up to DSL and other ways to access fast internet.When the four of you got together, tell me, what do you remember about the process of ideation, about coming up with ideas?You had some assumptions that you made.So let's start with the assumptions that you made about that time. SPEAKER_02: The basics were, hey, the internet is going to come into your home.What's it going to change?So we ranked a bunch of stuff from alarm systems to smart home to music to video.Entertainment always popped way up there.And music, Napster had come out in 1999 and immediately been sued out of existence, but The idea that you could have your music in the cloud or have access to all the music ever made was a no-brainer.In many ways, it was similar to what we had thought about at Software.com because the original idea of selling software over the internet, why couldn't music be sold that way or distributed that way?Keep in mind, it was the day of a 100-disc CD changer or a tape deck. So we started diving into more about how you would enjoy music through your house if you could completely take a clean sheet of paper and design it.So you kind of went through, you started from what's the ideal experience you want to deliver and then you work through what that meant. SPEAKER_01: You mentioned a couple other things like smart homes or alarm systems, all of which would happen.You're having this conversation in 2002, right?And alarm systems could have been a great thing too, right?Because eventually that would go wireless and that would be more simplified.I mean, SimpliSafe is a good example of this and Ring and other companies do it because at that time, Most alarm systems were hardwired, but music was the one you guys landed on because I guess at that time, 2002, if you wanted a really amazing home system and you had the cash, you could put speakers all over your house.It would just have to be wired through the walls.You'd have to drill holes and everything. you know, probably most people would have it done by an outside contractor.It'd be very expensive to do. You still see some of those homes with like speakers embedded in the ceilings from that time.But you wanted to figure out a way to do this and you knew already in 2002 that you wanted to do this wirelessly. SPEAKER_02: Yeah, Wi-Fi was just starting.If you didn't deliver an experience wirelessly, you shrunk the market tremendously.And I think all of us, the common theme was we all loved music.We all wanted it in different places in the house, not just one room.You wanted to wake up to it.You wanted to listen to it when you were in your kitchen.You wanted to have it in your living room, ideally out in your patio. And we bought some of the systems that you could build into the house and they weren't reliable.They were hard to use.They were expensive. They often failed quickly. SPEAKER_01: These are the wired systems. Yeah.Yeah.And I'm wondering, like, when you guys started to have this conversation, right, 2002, because this is really when Sonos was founded, would that have sounded like kind of a pipe dream to most people?Like, right now, if you said to me, you know, hey, guy, let's come up with something really cool.I would say, well, let's do wireless electricity.Like, let's figure out how to power my blender without having to plug it in.Was it – it might not have been that kind of outlandish, but was it a little outlandish? to be having that conversation in 2002? SPEAKER_02: Yeah, for sure.I mean, I was told by no end of people in the industry or outside of it that that was crazy and it would never work.But we were pretty persistent.And keep in mind, I had been through this with the internet before, so I had some level of confidence that once you dived into something and you saw the trends going your way, you... saw something someone else didn't.And so we felt pretty confident it would go that way.In fact, we thought it would move faster than it did.It usually took longer.For example, you look now at the cloud services.They were out the same time we really got started, and it was a wonderful thing. but people could not get their heads around getting their music out of the cloud.It took a lot of incremental change, like the iPod and the iPhone, to get people to start having that expectation. SPEAKER_01: Yeah, and to that point, when you were first designing Sonos, where were you thinking that the music would come from?I mean, the iPod... was in its infancy, right?Most people were still playing music off CDs at that point.So yeah, where would the music come from?Would the user insert a CD into the system somehow? SPEAKER_02: It would come from the initial music source and the people we sold to had ripped their music collections.So they had taken them and put them on their computer And they might listen to them on their computer, but they had them available and then we would find them and play them.It took time until the services like Rhapsody or Pandora, you know, could really express all that was available.And that was really when it opened up for Sonos.But initially it was your ripped music collection. SPEAKER_01: you know, you could look at this as an example of starting something before the market is ready, right?Like, you know, there's so many stories of great ideas like the Apple Newton, right?And this seems to me like it could have been one of those stories because there was no, I mean, people weren't used to listening to music like this way.And, you know, probably well into the 2000s, People were still playing music off their CD player.So did you ever hear from just people, maybe friends or people in the industry who were just saying, no one's going to do this.Like people are happy with their systems.They've got their speakers.They've got their CD players like they like it.No one's going to getting people to change that behavior is going to be impossible. SPEAKER_02: Well, the decade of marketing challenge for Sonos was if you tried it, you loved it.But trying to explain it to somebody, as you're accurately pointing out, Guy, was really hard to do.Once they started seeing it, they were like, wow.I mean, I remember we had a great partnership with a Wi-Fi chip company, Atheros.And I remember showing it to their management team. And they were blown away.I mean, I remember the CEO saying, wow, I think I'm watching history made here.And he was a huge music lover.So he was right in the heart of the audience.It was always the case if you tried it and or saw it, you loved it. But trying to explain it to somebody until they'd done that was was a challenge. SPEAKER_01: When we come back in just a moment, Sonos gets a rave review from a top tech journalist and a pounding from another titan of tech, Steve Jobs.Stay with us.I'm Guy Raz, and you're listening to How I Built This. 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SPEAKER_00: Hey guy, my name is Christina and I live in Austin, Texas.I love every episode of your show, but if I had to pick a favorite, it would be your interview with James Dyson.Ever since listening to the episode, my favorite thing to say to people is, you know, Dyson didn't actually invent the vacuum.He just made it better. Thank you for all that you do.Keep up the good work. SPEAKER_01: If you want to share your favorite episode of How I Built This, record a short voice memo on your phone telling us your name, where you're from, what your favorite episode is, and why.A lot like the voice memo you just heard.And email it to us at hibt at id.wondery.com.And we'll share your favorites right here in the ad breaks and future episodes.And thanks so much.We love you guys.You're the best.And now, back to the show. Welcome back to How I Built This.I'm Guy Raz. So it's around 2003, 2004, and John McFarlane and his partners are trying to bring Sonos wireless speakers to life.But to do that, they need reliable Wi-Fi.So they reach out to a company called Atheros for help. SPEAKER_02: The way Wi-Fi was originally specced, you had these units.People generally think about them as their router in their house, and you had to be a distance from that for it to work. SPEAKER_01: And the farther you were, the slower it was.It still is. SPEAKER_02: Right.Yeah.So we had to develop this technology called a mesh network, and that's why we needed that close partnership with Atheros to do that. SPEAKER_01: And a mesh network is basically like a repeater, sort of.Each unit is repeating signals. SPEAKER_02: Yeah, basically as long as any one unit can see another unit, it all works.And making the mesh network work and then making it reliable was the heart of the matter in that.And that was a big effort, which had we not been successful, we probably would have stopped doing it. In the early days, Wi-Fi was really unreliable in the home and you couldn't, you had to be reliable or you couldn't, you weren't going to grow. SPEAKER_01: So in order for that to happen, you were essentially creating the wireless system.Like the hub was, you weren't relying on the home Wi-Fi.And if they had it, great.If they didn't have it, it didn't matter because this system created this internal mesh network. SPEAKER_02: Yeah, because the customers didn't have an IT department, so you had to work.So yeah, it created a whole parallel network and worked around any imperfections you had in your network as well as it could. SPEAKER_01: Okay, you guys were, and I'm assuming you guys self-funded this because all of you made some money off of the previous startup.So you self-funded this at the beginning, right? SPEAKER_02: Yeah, we self-funded through the first big manufacturing run.We had an angel, and then we took our first venture capital probably in 2005. SPEAKER_01: Got it.And, John, just from the business side now, you are all working out of an office in Santa Barbara.You're well-capitalized because you didn't have to raise money initially.I mean, you were the CEO there. Tell me, why did you – were you best suited?Maybe you can't answer this question.Sometimes I ask questions that are not the right question for the person.But why do you think you were best suited to be the CEO of the company?I know you were CEO of the previous company, the founder of it. SPEAKER_02: No, I think I was just the dumb enough, dumbest person in the room to take the job.Uh, hopefully I was inspirational enough and I held the bar high enough on certain areas that really mattered for the company.But, you know, you talk about being well capitalized, um, you're never well capitalized as a hardware company. SPEAKER_01: So the costs are just so high, right? SPEAKER_02: You're constantly worried about how much inventory you've built and how quickly you're getting paid and if you have enough cash on hand for the next Christmas season.So there's a lot to do there. SPEAKER_01: Right, because you were building software and hardware, essentially.Right.You were both those things.And you had to, presumably, you had to find a place to manufacture software. the speakers, and I'm assuming you started in Asia, that's where you went initially? SPEAKER_02: Yeah, I mean, that's where it's a true team effort.Like Trung Mai, one of the co-founders, really focused on getting the manufacturing and supply chain in place.And it turns out he's just incredible at building relationships.You know, one of the other co-founders, Tom, worked on sales and marketing.Another co-founder, Craig, did about everything else.And fortunately, we had... We had a broad enough team, Andy Shuler, who was one of the early people put together the software team.And I would say without each of these people, if we didn't have one of them, we wouldn't have been successful.I mean, Sonos was a wonderful thing because everybody believed in the mission, fill your home with music.What a wonderful thing. Who doesn't want their home filled with music?And if you don't, you probably weren't going to work there. SPEAKER_01: All right.So by the summer, I guess, of 2004, you sort of figured out the work through the bugs and you had a good working prototype.And that year you were going to unveil this thing at the all things digital conference, which was a big deal conference at the time.Walt Mossberg and Kara Swisher, I think, were doing that conference there. And you were going to unveil this product at that conference.Take me there.What did you do?Were you doing the presentation?Were you being interviewed? SPEAKER_02: No.What we did was there was a room that all the interviews were done in, and there was kind of a foyer that you went out, and it's where you got food and drinks and stuff like that.And we put those around the foyer so you could play with them. Our price point was too high at that point.How much was it at that point?Well, two players and the remote control was, I think, $1,300 or something. SPEAKER_01: So when you say two players, it's two speakers. SPEAKER_02: Well, at the time, what we sold were two units that you connected to speakers.I see.Okay.So they didn't have the speakers built in.Got it. SPEAKER_01: Okay.So it was a lot.It was expensive. SPEAKER_02: Yeah, it was.And Walt at the time had written reviews on- This is Walt Mossberg. 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. SPEAKER_01: Massively influential people. SPEAKER_02: Yeah.And so the goal was to hook him.So when it came out, he would write, he would review it. SPEAKER_01: Because he could make or break products at the time. SPEAKER_02: Yeah, he could.So we fortunately exceeded his expectations and he wrote a great review and everything went well from that.Yeah. SPEAKER_01: At that conference, you had a confrontation with Steve Jobs. Yes, that's correct.What happened? SPEAKER_02: Well, he, I was standing actually with a bunch of the staff of the Wall Street Journal and Phil Schiller walked by. SPEAKER_01: Phil Schiller, remind me who Phil Schiller is? SPEAKER_02: Phil Schiller was their VP of marketing.For the, for the journal or for the 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. SPEAKER_01: He said that in front of all those reporters?Yes, he did.And was it covered?Was it was it published? Yeah, yeah, made the front page the next day.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? SPEAKER_02: 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. SPEAKER_01: So he was aggressive, right? SPEAKER_02: 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.So 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. SPEAKER_01: Because you would, of course, have other encounters with him as a partner.So they never sued you?They never sued us, no.Yeah. All right.So you get off to a great start.You'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. SPEAKER_02: 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.Yeah.We were really trying to make the holiday season in end of 2004.But we just didn't have the quality we felt we needed to have.So we had to postpone. SPEAKER_01: The quality of what?Like the look of the machine? SPEAKER_02: No, mostly around the wireless.So we just hadn't achieved quite the bar we needed.And 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. SPEAKER_01: Because people would have said they would try to once that would have been it. SPEAKER_02: 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? Well, 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. SPEAKER_01: Could you buy it directly from Sonos at the time? SPEAKER_02: 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. SPEAKER_01: 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? SPEAKER_02: I think we finished that year well above what we should have, well below what we had hoped for. SPEAKER_01: So not an overwhelming response, to say the least. SPEAKER_02: 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. SPEAKER_01: And who were these?I mean, the first people to buy them is the early adopters.These are people who were basically had digitized most of their music. SPEAKER_02: 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.Yeah.2006, I think, was when we first integrated Rhapsody.So that's when you could literally play anything ever made on their service. SPEAKER_01: By the way, the Rhapsody, which doesn't exist anymore, it was eventually merged with Napster and... But it kind of faded away.It was a pioneer in music.It was before Pandora, before Spotify, before iTunes.So Rhapsody was, if you could integrate that with Sonos, it was perfect. SPEAKER_02: Oh, 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 hotspot, wireless hotspot, And so you could, 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's the hard drive?There isn't one.It's in the cloud. So that was a big paradigm shift for sure. SPEAKER_01: And again, and this is pre iPhone.So but still, now, you had if your computer was connected to the Sono system uses a Rhapsody on it, and then you were good to go.And you and this you still use an external remote control, right? SPEAKER_02: 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. SPEAKER_01: And you could also, I mean, iTunes had been out by that point, I think.Yes.Could you use iTunes with the Sonos system? SPEAKER_02: Well, 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. SPEAKER_01: So initially, if you bought music from iTunes, you could not hear it through a Sonos speaker.Correct.That's crazy.Exactly. Yeah.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.Yeah.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 first – bust, I should say.And – And from what I read, it really had a massively negative impact on sales for Sonos. SPEAKER_02: Well, we went from like 100% year-on-year growth to I think 2008 we grew 10% or maybe we grew, but not that much.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. So 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, you know, there's a later version of software.Do you want to download it? SPEAKER_01: Oh, right.When someone would set up at their home, you could see how many people are setting it up. SPEAKER_02: Yeah.And they went to zero, near zero.It dropped like off a cliff.Yeah.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. That was also the year that would have been 2008.So we released the iPhone controller, which helped because that made the purchase cost lower. SPEAKER_01: On the App Store. SPEAKER_02: Yeah.So now you could buy Sonos units without the controller and use your iPhone, and that helped. SPEAKER_01: 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?That was like a third the price of what – because the Soto system was really expensive in 2009.It was like $1,200.Yeah. SPEAKER_02: Well, that's not a system.That's a combination.That's a bundle. SPEAKER_01: I'm not criticizing.I'm just saying, understandably, it was expensive. SPEAKER_02: Yeah.And 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. SPEAKER_01: And that had a huge impact, right?It did.We grew a bunch that year.Okay.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? SPEAKER_02: 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 weren't, you were going to rank us first. SPEAKER_01: What was the, I mean, as you started to really dominate this category, tell me about 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, you know, 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.What were the big swings for the fences you guys were talking about at that time in 2010, 11? SPEAKER_02: 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. SPEAKER_01: And the success of Sonos really depended, in your view, on the proliferation of these streaming services. SPEAKER_02: The best experience by a long shot you would have is if you had Sonos with those streaming services.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. SPEAKER_01: 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, of Sonos, as like a JBL or a Dolby or like when they were at their peak? Did you think of those as the gold standard that you were trying to achieve? SPEAKER_02: No.You've got to keep in mind, 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.TVs 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 and worried. through that period of, you know, when does, 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. SPEAKER_01: When we come back in just a moment, what happens to Sonos after Alexa and Siri enter the home speaker market?And why, after leading 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. Thank you so much for having me. Squarespace makes it really easy to get started with best-in-class website templates for all types of businesses that can be customized to fit your specific needs.Squarespace also provides the tools you need to run your business smoothly, including inventory management, a simple checkout process, and secure payments. And with Squarespace email campaigns, you can build a community of email subscribers and customers.Start with an email template and customize it by applying your own brand ingredients like colors and logo.And once you send, built-in analytics measure your email's impact. 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One, because your business is one of a kind.So you get a customized solution for all of your KPIs in one efficient system with one source of truth.Manage risk, get reliable forecasts, and improve margins.Everything you need to grow all in one place.Right now, download NetSuite's popular KPI checklist designed to give you consistently excellent performance.Absolutely free. at netsuite.com slash built. That's netsuite.com slash built to get your own KPI checklist.netsuite.com slash built. Hey, 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. SPEAKER_02: 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 under-performed.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.And 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. SPEAKER_01: 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, right?Come out around that time. They'd crack something and it was different.It was better.And oftentimes in an industry, when a 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, but then people were like, we got to make a smartphone.And then they'd scrambled and eventually they did, which we know the end of that story. SPEAKER_02: Yeah, they didn't make a great one. SPEAKER_01: Did a part of you feel like we better make a smart speaker right now because we're going to be put out or no? SPEAKER_02: Yeah, for sure.I mean, when I finally woke up to what the echo was. SPEAKER_01: How long did that take you to wake up? SPEAKER_02: 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. SPEAKER_01: How were you, but that means you would have to develop your own voice recognition system. SPEAKER_02: 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. integrate with them just like the music service is 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. SPEAKER_01: But it sounds like you were relying on the 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, and Google as quality brands, but nobody necessarily thinks of them as great speaker companies.So were you, 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 will be okay because people will think of us as the quality way to listen to music. SPEAKER_02: Yeah, 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. SPEAKER_01: 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.It'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. 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? SPEAKER_02: We really focused the company around embracing voice assistants. SPEAKER_01: That was expensive, probably, to start to work on that. SPEAKER_02: Yeah, for sure.It always is when you start something new.But you just have to ask yourself, is this a better way to fill your home with music?And we felt it was, so we put the work in. SPEAKER_01: Right, 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, I mean, so when all that happened, I imagine it stopped some of the bleeding. SPEAKER_02: 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.I 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? SPEAKER_01: 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. SPEAKER_02: 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.I'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 assistants. 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. SPEAKER_01: When you were feeling like you were burned out, right, and you're leaving the company, so you've got to show up one face because you've got a thousand or more employees at this point, right?By 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 to over a billion dollars in sales.But here you are internally feeling stressed out and burned out. SPEAKER_02: Yeah. One thing you realize is you know very well when you're leading people, you bring them through your ups and downs.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 choose optimism. And I found myself, after 25 years of startup companies, I was looking more for the downsides than I was the upsides. SPEAKER_01: Yeah. SPEAKER_02: And 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 want the person that's seeing the 9 out of 10 upsides, not the 9 out of 10 downsides, if you will. SPEAKER_01: You were becoming the person that you encountered in 2002 who said to you, oh, this can never be done. SPEAKER_02: Exactly.And who wants that in the company, right? SPEAKER_01: But that's the cycle, right?That's the perfect cycle of the human experience, right? SPEAKER_02: And that's fine.But that was my turn.I was done. SPEAKER_01: Yeah.But even that, right, recognizing that. is one thing.And then deciding to step down is another thing because it's 14 years of your life.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.And giving that up is very hard. SPEAKER_02: 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 I didn't want to be in a position where I was second-guessing what Patrick was doing.I mean, when I left, I didn't stay on the board because who wants to have the founder of the board sitting on the board at the company that you're running? SPEAKER_01: Happens every day, but I hear you. SPEAKER_02: 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... SPEAKER_01: That would be fine. SPEAKER_02: Yeah, that's fine.Time to step out. SPEAKER_01: 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. SPEAKER_02: No, no, it was wonderful.I mean, guy, 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 and 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.I mean, I 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. SPEAKER_01: Yeah. SPEAKER_02: 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. SPEAKER_01: Yeah.And how's Patty's health, by the way? SPEAKER_02: Good.She got all the way through it and hasn't had any complications.That's great.Yeah.Thank you. SPEAKER_01: 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.Yeah. But to me, the story – and I think probably everybody there would acknowledge it.Your time there helped set them up for success because really Sonos could have been like TiVo.Sonos could have been like a product that everybody used for a short period of time like the BlackBerry and then it got crushed and it didn't. SPEAKER_02: Yeah.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. SPEAKER_01: But the fact that it's making products that still compete and more than compete with you know, the Google speaker and the Amazon speaker and the Apple speaker.Some people have all those things.I mean, I've got, you know, different ones.It's pretty remarkable because Sonos is a tiny company compared to those giant companies. SPEAKER_02: True.But you're not really competing against the whole company.You'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 it 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. SPEAKER_01: 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 want to stay in mentor, stay around and be a resource and whatever, whatever it is, whatever their perspective might be.But 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.I don't know. SPEAKER_02: Well, it's funny, actually.A lot of people I run into that work there, I don't know.So, you know, 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.Yeah, that's true.There is a period of time where you need to be prescriptive about things.You know, don't cross the busy road anymore. And there's times when that kind of prescriptiveness is just going to hinder their development.And 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? SPEAKER_01: 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? SPEAKER_02: Oh, boy.Timing and luck is so critically important because, as you pointed out, there are lots of companies that have 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.I mean, I'm sure it's the same for you, Guy.If 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. SPEAKER_01: 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. SPEAKER_02: 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.And I thought that was the appropriate song because they had a lot of work ahead of them.So I played it at full volume for them in that room.Nice. SPEAKER_01: It was edited by Neva Grant with research help from Sam Paulson. Our production staff also includes J.C.Howard, Casey Herman, Carrie Thompson, Alex Chung, John Isabella, Chris Messini, Carla Estevez, and Malia Agudelo.Our engineers were Robert Rodriguez and Josh Newell.I'm Guy Raz, and you've been listening to How I Built This. If you like how I built this, you can listen early and ad-free right now by joining Wondery Plus in the Wondery app or on Apple Podcasts.Prime members can listen ad-free on Amazon Music.Before you go, tell us about yourself by filling out a short survey at wondery.com survey. Hey everyone, it's Guy Raz here, and I have a new show that I think you're going to love.From Wondery and hosted by Laura Beal, the critically acclaimed podcast Dr. Death is back with a new season called Dr. Death, Bad Magic. It's a story of miraculous cures, magic, and murder.When a charismatic doctor announces revolutionary treatments for cancer and HIV, it seems like the world has been given a miracle cure. Medical experts rush to praise Dr. Surhat Gumruku as a genius.But when a team of private researchers looks into Surhat's background, they begin to suspect the brilliant doctor is hiding a shocking secret.And when a man is found dead in the snow with his wrists shackled and bullet casings speckling the snowbank, Surhat would no longer be known for world-changing treatments.He'd be known as a fraud and a key suspect in a grisly murder. Follow Dr. Death, Bad Magic on the Wondery app or wherever you get your podcasts.You can binge all episodes of Dr. Death, Bad Magic ad-free right now by joining Wondery Plus in the Wondery app or on Apple Podcasts.