When a company files to go public, they do so by submitting a document called an S1 to the SEC. An S1 is like a prospectus, and sometimes it’s loaded with really interesting industry information. Sonos, which recently went public, is a great example of such an S1. Below are some facts and trends about streaming music we pulled from Sonos’ S1.
Paid music subscribers has room to grow. “Futuresource estimates that the number of global paid subscribers to streaming music services grew from 29 million in 2013 to approximately 176 million in 2017, and projects this number to grow to 293 million by 2021. Even with its rapid growth, the number of paid streaming music subscribers represents a fraction of the 858 million households worldwide with broadband internet today.”
Music is back. “According to Nielsen, the average number of hours spent listening to music per week in the United States has increased 37% in two years to over 32 hours in 2017. These dynamics have revitalized the music industry, which had suffered declines for over a decade. The recorded music industry had revenue growth of 16.5% in 2017, while streaming music revenue increased 43% over the same period, according to the Recording Industry Association of America.”
This is a big shift for the music industry, which Spotify confirms. According to Spotify’s S1, “Global recorded music industry revenues declined by 40% from $23.8 billion in 1999 to $14.3 billion in 2014 following the launch of the first internet-based music download service. As Spotify’s access model gained traction (they did $4bln EUR in 2017), that trend reversed itself in 2015 when global recorded music revenues grew more than 3% from the prior year. Growth accelerated in 2016, when global recorded music revenues reached $15.7 billion, an increase of 6% from 2015. This was the highest annual growth rate in 20 years, according to management estimates and industry reports. Streaming is the engine which has primarily restored the global recorded music industry to growth. Streaming revenues increased by 60% in 2016, reaching $4.6 billion, while physical sales and digital download revenues continued to decline at 8% and 21% respectively.”
Growth from streaming will continue. Going back to Spotify, “In the 61 countries and territories where we are present, there were an estimated 1.2 billion payment-enabled smartphone users in 2017. According to research from Ovum, the number of payment-enabled smartphone users in the countries where we are present is forecast to grow by 28% to approximately 1.6 billion by 2021.” There are 3.6bln internet users globally.
Podcasts are not being left behind. “According to Activate, the number of podcast hours consumed annually in the United States will grow from 6 billion in 2016 to 15 billion in 2021, representing a 20% compound annual growth rate.”
Alexa and Sonos are used for streaming primarily. “75% of consumers are using their voice-enabled speakers to stream music despite the fact that such products have not been primarily designed for music consumption. Over 70% of our customers subscribe to a paid streaming music service.”
Voice will be the new way we search. “By 2022, 50% of all web searches will be voice searches and 55% of U.S. households will have at least one voice-enabled speaker.”
Big hardware requires a lot of R&D and patents. “As of March 31, 2018, we had been granted more than 630 patents and had over 570 patent applications pending. Our patents expire between 2024 and 2036. As of March 31, 2018, we had 549 employees in research and development. Our research and development expenses were $101 million, $108 million and $124 million for fiscal 2015, 2016 and 2017, respectively.”
Gross margins deteriorate as new products are released. “We have maintained a relatively consistent annual gross margin of approximately 45% over the previous three fiscal years. As we increase the pace of our product introductions, we expect our gross margin to decline in the near to intermediate term as new products gain a larger share of our overall product mix. For example, the launch of our Sonos One product in October 2017 and promotional activity caused our gross margin to decline to 42.3% for the six months ended March 31, 2018. We have historically seen that the gross margin for our newly released products is lowest at launch and has tended to increase over time as we realize cost efficiencies.”
Physical stores are still where customers are, not e-commerce. “We sell our products primarily through over 10,000 third-party physical retail stores, including custom installers of home audio systems. We also sell through select e-commerce retailers and our website sonos.com. Our products are distributed in over 50 countries, with 55% of our revenue in fiscal 2017 generated outside the United States.”
Repeat purchases matter in hardware. “As of March 31, 2018, our customers had registered over 19 million products in approximately 6.9 million households worldwide. Acquiring new households is an important driver of our revenue, both in terms of initial purchases as well as creating the foundation for follow-on purchases. As our customers add Sonos to their homes and listen to more music, they typically increase the number of our products in their homes. In fiscal 2017, follow-on purchases represented approximately 38% of new product registrations.”
Sonos is a streaming music hardware business with $992mm of revenue and adjusted EBITDA of $3.9mm (margin is only 5.6%). Debt and equity raised as of March 2018 was $352mm. They’re a massive business so the trends they are experiencing and seeing matter for the rest of the hardware and music streaming industry.
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