About Me 0047: Making Fast Money

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

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

Lesson#2: Consider Usability Before You Build

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

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

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

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

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

Lesson #4: A True Platform Doesn’t Pick Winners

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

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

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It doesn't seem possible that there'd be money to be made from lending e-books. But at least one woman figured out how to do it, and more little lending conglomerates seem to be on the way.

When on Dec. 30, Kindle decided to allow its customers to lend copies of purchased e-books (but only for 14 days, and only to one person), a 40-year-old Canadian woman named Catherine MacDonald had an idea that literally popped up in her dreams. She started the Kindle Lending Club. It started out as a Facebook site, where she'd match up people who wanted to lend a book to people who wanted to borrow. It quickly grew out of hand, so she looked for angel seed money.

Finding someone who was willing to invest $12,500, she launched a slick Web site and created a place where people can come and look for specific e-books, or offer to lend them. So far, she has lent more than 1,000 e-books among total strangers and it's all worked without a hitch.

But where does the money come in? If the lender finishes the book within the 14-day limit, no fees are assessed and everything is free. But if the borrowers discover that they can't finish within Amazon's 14-day lending window (and things do come up in life--someone gets sick, or a business trip comes up) lendees can offer a link to buy the e-book and lenders share a portion of the resulting revenue through Amazon's Affiliate Program. For anyone familiar with Amazon's affiliate program, it takes a lot to actually make any money, but if the business person is dogged about going about it, he or she can make some bucks out of the program. So the lendee gets an e-book at a good price, and everyone's happy.

However MacDonald in Canada is hardly the first person to come up with the idea of the Kindle Lending Club. She was merely one of the first. Now there are many on the Web and not just for Kindles either. There are nook lending clubs popping up too. Kindles and nooks don't mix, thanks to incompatible software.

Continued on the next page

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Monday, January 24, 2011

Making Fast Money

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