There are worse business models Sonos (NASDAQ:SONO) could choose to follow than the one set out in Roku's (NASDAQ:ROKU) playbook. So it is fitting the high-end speaker maker is moving away from being solely a hardware manufacturer and toward becoming a content creator.
Just as the streaming player maker created its own platform to allow viewers to watch video, as well as choosing to use it to subscribe to other video channels, Sonos is launching its own free-to-listen streaming service that can supplement services from Amazon Music, Apple Music, Pandora, and Spotify.
Sonos Radio is a new, ad-supported platform where audiophiles can listen to more than 60,000 stations from the technology stock's partner list. But they'll also be able to tune into stations and channels created by Sonos curators.
Making hardware more profitable
According to Sonos, about half of all listening that occurs on Sonos speakers comes from radio. By creating its own streaming service, the speaker maker is developing an opportunity to diversify its revenue streams by building out a new experience for listeners.
That's not dissimilar to what Roku achieved, which found that hardware is not an especially profitable business with very thin margins. Now it earns money from advertising that it sells on the Roku Channel, or when viewers subscribe to streaming services through its devices.
Roku has perfected the technology-oriented, razor-and-blades business model by giving away its hardware virtually at cost and making up profits on the back end. The platform segment now accounts for 66% of its total revenue of $1.1 billion and generates 97% of its gross margins.
Sonos could have the same potential. And while it is decidedly not giving away its speakers and sound equipment at cost, it believes it can improve greatly on the 42% gross margins it currently realizes.
Sonos first dipped its toe in the water last month when it began bundling its speakers with music content that small- and medium-sized businesses like cafes, bars, offices, salons, and gyms can purchase to stream into their venues.
Sonos has extended this concept by developing partnerships with outside companies like Ikea, the Swedish-origin furniture and home furnishings company. Ikea is now offering lamps and shelves integrating Sonos speaker technology.
There is risk in the attempt, though. GoPro, for example, thought it would be easy to make the leap from hardware maker to content creator, but stumbled hard in the execution.
It also took Snap several attempts and numerous steps backwards before it was able to get it right, and as TiVo has made clear, being a hardware-only company, no matter how innovative at the outset, is fraught with risk. It has stopped making DVRs altogether.
There's also the risk that Sonos will receive pushback if its starts competing more directly against Amazon or Google. It already has sued Google for patent infringement that could lead to pushback on Sonos speakers compatibility with Google Assistant.
But Sonos seems much more likely to emulate Roku's success as both manufacture hardware that facilitates the provision of content, unlike others who try to shoehorn content creation into existing businesses.
The path to higher profits
Roku's streaming boxes, dongles, and smart TVs are already providing content, and Roku is simply adding to the environment but also taking a cut from those who want to make sure Roku users see their services.
With so many people using Sonos speakers to listen to music and radio content, making its own audio content available to its speaker customers makes sense, particularly because its existing partnerships aren't generating all that much money for the company.
In the first quarter, total revenue rose 13% to $562 million, but partner products -- primarily revenue generated from Ikea sales -- contributed just $33.9 million. The Swedish company is creating a lot of Sonos speaker customers, but it's not generating much money for Sonos.
Selling speakers and giving access to music where it can generate revenue from advertising could ramp up how much it makes, at very little additional cost.
Top of the charts
Roku showed the way forward for hardware makers, and Sonos could be one of those that's best able to emulate its success.
Sonos Radio is a value-added benefit customers can realize as soon as they purchase a speaker. It has long been speculated the company has ambitions bigger than your living room, perhaps even in-car audio, and having a music package to go with it could make it an instant hit.