As Sonos invests in spin doctors to spruik their pending IPO a US VC fund has literally torn apart a Sonos one and the highly popular Amazon Echo Pro networked speaker a device that has really exposed the difference between the two speaker offerings.
Analyst firm Canalys expects the smart speaker market to approach an installed base of 100 million devices by the end of this year, making it almost 2.5 times bigger than at the end of 2017.
Amazon Echo devices will account for over 50 percent of the installed base in 2018, while Google’s Home series will account for 30 percent leaving analysts pondering where there is space for Sonos in what is becoming a crowded network sound market.
Ben Einstein is a General Partner at Bolt, a US pre-seed and seed VC firm who specialise in tearing apart devices he recently compared the Sonos One (See story here) Vs the Amazon Echo Pro that is stripping share away from the likes of Sonos.
Einstein claims that Amazon was the first company to popularize the smart speaker concept. The Seattle giant’s first foray into speakers has been shockingly successful (selling tens of millions of units to date). While the revenue generated by Echo is a tiny fraction of Amazon’s top line, every detail about the implementation of the product signals a company spearheading a new product category and a business model that doesn’t depend on profitably selling consumer electronics hardware.
He said, “This is clearly an extremely unusual way to design a speaker”.
“From the very first part I looked at, it became clear Amazon did not design Echo like a traditional speaker. The entire product is assembled like a tubular plastic sandwich with all components connected vertically around a central axis (us engineers call this a stack-up). It’s an extremely unusual way to design a speaker”.
After peeling off the first plastic part in the stack-up, he found the audio and Bluetooth board. The bottom of this board handles the digital circuitry for generating and manipulating the audio signal, while the top is the amplifier, power input connector, audio out connector, and EFR32MG12 Bluetooth chipset (EFR32MG12P232F1024GM48 — say that three times fast).
The EFR32MG12 has a configurable sub-GHz radio programmed for the Zigbee home network protocol, which is one of several future low-power, IoT home networking standards. This is yet another clue that Amazon is thinking about Echo as a gateway to the home rather than a speaker with some new tricks.Peeling off the next layer in the stack-up, he found the tweeter which plays the high-frequency spectrum.
“Both the tweeter and midrange drivers are downward firing, which again is quite rare for consumer electronics speakers but a near necessity for the cylindrical design.”.
This part is extremely complex for such a simple functional part. There are a surprising number of ribs, undercuts, and bizarre geometry not often found in consumer electronics parts.
The external surface has no draft (meaning the wall has no angle). Draft is a required feature of nearly every injection moulded part, so this part is actually two parts (the inner/upper part is injection moulded and the outer surface is extruded or machined). Again, a very unusual decision that is both beautiful and expensive.
This conical reflector + outer surface part is easily 3–5x more expensive than I would have guessed from the outset.
Pulling off the sleek speaker grille, he found what he described as a “shocking secret” an extruded plastic tube with a secondary rotational drilling operation.
“In my many years of tearing apart consumer electronics products, I’ve never seen a high-volume plastic part with this kind of process. After some quick math on the production timelines, my guess is there’s a multi-headed drill and a rotational axis to create all those holes. CNC drilling each hole individually would take an extremely long time. If anyone has more insight into how a part like this is made, I’d love to see it! Bottom line: this is another surprisingly expensive part”.
As he peeled away layers of the stack it started to become “painfully clear that Amazon is spending far more to produce this speaker” than he initially estimated.
This primary structural part (where the main circuit board is mounted and that holds the mid-range driver) was exposed as being wildly complex.
“Looking at the draft angle (blue arrow and dotted lines) we know this part is pulled out of the injection mild tool vertically, which is both expensive and fraught with design constraints. Why Amazon decided to mould the part this way is beyond me. It also strikes me as unusual to place the heavier driver (the midrange) above the tweeter. Usually speakers are designed with the heaviest magnets as close to the bottom of the product as possible for stability” he said.
The main PCB sits at the centre of the product and is loaded with Mediatek parts (moving away from TI in the first generation Echo product line).
As he peeled away the last layer of the stack (and the top of the product) we found the volume control, two pushbuttons, and microphone array/user-interface PCB.
“The volume control is an incredibly creative assembly built around a continuous rotation potentiometer, an elegant round light pipe and custom gearing in the volume ring. It is nothing particularly expensive or complex, but it’s a very neat design” he said.
Pulling the user-interface assembly completely apart, he exposed the many parts it takes to build a custom volume control. Again, Amazon is willing to spend real money to build something interesting and differentiated.
On the microphone PCB, he found seven microphones (one more than the Sonos, the extra being in the centre of the board likely for directionality) and 12 LEDs that display the volume and directionality of Alexa’s voice.
“I’ve always loved the light display on the Echo line of products but I’m curious why the LEDs aren’t equally spaced (maybe to show directionality around the mics?”
Conclusion Amazon Vs Sonos
Despite these two products serving nearly an identical purpose, they couldn’t be more different from each other in terms of design intent.
After carefully dissecting them both, it’s clear Sonos only buys into the smart speaker category because they have to, in order to compete with others. Amazon has spent significantly more on their bill of materials (BOM) cost for a lower sticker price speaker vs the Sonos One.
Amazon has three wildly unfair advantages, which doesn’t bode well for Sonos’ IPO.
Part of this is due to Amazon being both the OEM and the retailer (no margins on each sale) but a big portion is Amazon’s clear long-term thinking to dominate this nascent market. It is always tricky to estimate BOM cost without diligently researching each custom part and purchased component, but my suspicion is that despite the 25% lower price tag, the Echo Plus is about 15–20% more expensive than the more premium Sonos One.
Amazon has three wildly unfair advantages:
Amazon’s Unfair Advantage #1: Retailer and OEM
Amazon sells nearly all of its Echo products through their own retail channel, this means they don’t pay a margin to other retailers. I can’t think of a single consumer electronics company that sells tens of millions of units nearly exclusively, directly to consumers like that. In practical terms, it means 35–50% of the product’s price that the retailer typically takes can be directed to make a better product.
Sonos, on the other hand, has to pay this cost to retailers (including Amazon!) This is the primary driver for Amazon’s product being both more expensive to manufacture and cheaper to buy. There’s simply no way to beat that strategy in a mass-market product category like speakers where price is one of the major deciding factors for consumers.
Amazon’s Unfair Advantage #2: Platform Ownership
Even though Sonos’ speaker has nearly identical Alexa functionality, 100% of the business leverage rests in Amazon’s control. The real IP and value is not in the metal and plastic that consumers are buying. It is in the software, data, and systems that Amazon is continually building. We’ve already started to see this strategy play out with nearly every product at CES 2018 bragging about “Alexa inside.” This is how platform leverage is built and the individual nodes on the platform (like Sonos) are always dwarfed by the owner of the platform itself (Amazon).
Amazon’s Unfair Advantage #3: Diversification
Sonos’ speakers represent the full Sonos business and brand. As such, every dollar they make must come from selling physical products. As I’ve written about extensively, this is a tough business and very few companies reach large scale ($1Bn+ of revenue) over multiple product cycles. Amazon, on the other hand, can easily lose billions of dollars on “side bets” like the speaker product line because their revenue spread out across many other business units (AWS, retail, and Prime). This business model diversification makes it tough for companies like Sonos to compete because it’s not a zero-sum game for all.
Short or Long on Sonos?
As you may have gathered, I don’t have high hopes for Sonos’ trajectory. If the upstart was really set on embracing the next generation of consumer speakers, they would be rethinking how to build their audio products systematically from the ground up to own as much of the platform as possible. But the products they’re shipping don’t tell that story: they show a traditional speaker manufacturer incrementally adding technology in an attempt to keep up with a fast-moving race. This is never a winning strategy in the long term.