Behind the $500 Million Fiasco at Sonos
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What makes for a successful app update? It improves your experience as a user, and seamlessly. In fact, the best updates are the ones you barely notice at all.

You either put it on automatic or you hit a button and it's done and finished. The ones you notice are the ones where the experience changes. And that was definitely the case with this. That's Dan Gallagher. He's a herd-on-the-street columnist for The Wall Street Journal, and he's talking about an app update at Sonos that led to a $500 million debacle.

The maker of premium audio equipment rolled out a redesigned app last year that was supposed to improve the user experience and accelerate the company's pace of innovation. And like other Sonos products, the idea sounded great. Sonos put out a press release about this app update because it was a major overhaul. It wasn't some small, quiet update. This was considered an entire relaunch of this app. And so when that went wrong, it was actually even worse.

Earlier this year, Patrick Spence was ousted as the CEO of Sonos. The company has said that this calamity costs at least $100 million in revenue. And if you measure the financial hit by market cap, the real cost of all this is closer to $500 million. That's roughly how much Sonos' value plummeted from the day it released the new app last May to the day the new interim CEO started in January.

From The Wall Street Journal, this is the Science of Success, a look at how today's successes could lead to tomorrow's innovations. I'm Ben Cohen. I write a column for the journal about how people, ideas, and teams work and when they thrive. Sometimes, success stands out all the more because of its opposite, failure. Today, I talk with Dan Gallagher about the disastrous software update at Sonos and what's next for the premier audio brand.

Before we get into it, we reached out to Sonos for comment following their first quarter earnings report. Interim CEO Tom Conrad said, quote, In recent months, we have made meaningful progress in our software, but we still have work to do. Our goal is nothing less than delivering software as refined and exceptional as the audio experiences we deliver. Dan, so in addition to being a tech writer, you are a Sonos user. You own Sonos products, which makes you the perfect person to ask, why do people like Sonos so much?

One, you have to care somewhat about music quality because there's lots of cheaper options out there for speakers. But Sonos, honestly, their main point of differentiation is laying music over your device's phone or computer and not lose that sound quality. If you really care about that kind of quality, that's where Sonos is worth it.

And I would also imagine its other appeal is the convenience of like being able to move from room to room in your house and be able to listen to the same thing you're listening to or listen to something completely different in another room while something else is playing in another room. Is that right? Certainly. I mean, I'm old enough now to remember when you put a record on.

in one room of the house. And then if you went somewhere else, that didn't go with you. With Sonos and the convenience of it to have it follow you across your house at one time sounded very futuristic. Also some foreshadowing there for the problems that Sonos users have faced over the past year, but we'll get to that. I'm curious, before the past year, I mean, Sonos is a pretty successful company. It did about a billion and a half dollars in sales last year.

What slice of the audio market are they targeting? Their best-selling speakers start at a few hundred dollars. I assume they're after a premium consumer? Definitely a premium consumer. Their market share would be small relative to companies like Amazon and Google and Apple. Apple actually doesn't really play in those low price ranges. They've been smaller but niche player in that because, again, of all the people playing music, not everybody wants to spend that kind of money for premium sound.

So you mentioned some of Sonos competition, Apple, Google, Amazon. Those are companies worth trillions of dollars. What's the market cap of Sonos? Well, Sonos today is about one and a half billion dollars in market cap. So it's not even a rounding error if you're comparing it to Amazon or Google.

Dan, you said $1.5 billion? Billion with a B? Right. So right now, Sonos' market cap is around $1.6 billion. But still, those are trillion-dollar companies. This is a billion-dollar company. And it used to be worth a little bit more before last year.

Last year, Sonos rolled out what it called its most extensive app redesign ever. It turns out it was also their most expensive app redesign too. Why? Well, this app redesign was really ambitious. They needed to really overhaul this. And part of it was because they were launching their first headphone product, which was actually the first Sonos product really designed to be operating out of the house, out of the home network.

And so they had to re-architect their entire, like essentially the foundation. And the problem is they've been shipping speakers now since 2009 is when they were shipping their first ones. So they have a large fleet of old devices and speakers are not something people upgrade every other year, the way we do phones. And so there's a lot of speakers out there that are old, running on old code, and they wanted to bring the entire architecture up. And that turned out to be

far more difficult than they envisioned. And it did not go smoothly. This happened in May. By the time Sonos reported its results in September, its quarterly results, it had to change its forecasts and its financials were really disappointing. I've actually never seen an instance in my 20 plus years of tech reporting where an app update has essentially off-tracked a company's financial forecast like that. And how long have you been covering tech, Dan?

Since the mid-90s. That's a long time. Long time, yes. We've seen app updates go bad and usually companies fix it. But for a company small and niche focused at Sonos, having something go out that affected a significant number of its users to the point that

A couple of things the company did is they stopped launching new products for a while because they felt they had to put essentially all hands focused on this and get things fixed. And the bad publicity and bad buzz was hurting their sales. People were starting to talk about, well, should I buy another Sonos or should I buy my first Sonos? Because there's this problem. Coming up, what exactly went wrong with this app redesign and how the company might recover? Stay with us.

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Dan, what exactly went wrong here with this app update? What happened is, as they put this app update out, a lot of Sonos users found that it didn't work well with their systems they had. And the stories I've seen have run the gamut from they found one of their speakers in their house didn't work well to all the speakers didn't work at all. Those were obviously the worst case scenarios where you've invested this kind of money in this kind of product and all of a sudden it doesn't work.

The magic of Sonos has always been it's essentially a home network service. You're running through your home Wi-Fi. So it needs this app to have those things work together in the way that they're supposed to. And essentially, the new app didn't do that. And it actually made the experience worse for a lot of their users.

Right. The promise of Sonos, as I understand it, is that it has this Apple-like, it just works magic. And this was something where, in this case, the app just stopped working. Is that right? For a lot of people, yes, that was the case. It didn't work or it didn't work properly. It's a pretty complicated undertaking when you're talking about updating that kind of fleet of devices, some of which are really old and people are working on it, interfacing through different

types of devices, computers, phones, et cetera. And this is a small company. And frankly, part of what added to the problem was this is not a company that's typically been known for their software. They're known for making great speakers. And in this day and age, you really have to have your software chops.

Sonos has said that technical debt had accumulated over the course of a decade or two. Can you quickly define what that term technical debt means? It just refers when you have older devices that are running on really old code. Software engineers and developers update code

and work with new tools as new tools come out. When you have something like iPhones, where they have a kind of a defined lifespan, it's a very different thing than speakers that might be 10, 15 years old by this point. They're going to be running on some old code that isn't used anymore, but the company still has to figure out a way to make that work within its ecosystem. Okay.

Is that a common problem for tech companies when they're trying to release these new apps that will work on all sorts of systems? Yeah, it's a common enough problem that there's a term for it. So they're certainly not the first to face that. The reason that we're seeing that it's had such a profound impact on them is they are relative to essentially a lot of other tech companies. They're fairly small, a fairly focused business. And so when

essentially the one app that controls all the products you sell goes bad, it's a really big deal. You wrote in November that there's never a great time to infuriate your most loyal customers. And for Sonos, the timing couldn't have been worse. Is that because of the headphone release?

Absolutely. All of Sonos' products have been essentially designed to use in your home. The headphones were really the first thing that Sonos did that was really portable audio, kind of the entrance into that premium portable audio space. Headphones is a very large market. We see that with Beats. Apple is in it now, these premium headphones. So this is something that I know Sonos has been wanting to get into for a while. This was their big entry point to it. And this app update really, frankly, messed that up.

After I wrote about Sonos, I heard from so many frustrated users that I lost count. There was a moment when I

I could feel sympathy with Sonos customer service, and I'm sure you've heard from lots and lots of them too. How would you describe their relationship with Sonos these days and their loyalty to the brand? Well, if you go from the ones that I've heard from, they tell me I'm done with Sonos kind of in that vein. In reality, if you've spent a lot of money investing in the system, you're

probably compelled to be patient and figure out how to get it working again. Some people might have enough money that they can afford to say, "Oh, forget it. I'm going to go to something else." Sonos is unique in the sense, it's not that they have the market to themselves, but they have within audio, premium audio, there's some brands that are really super expensive, really for what you might call audiophile. And that's not quite the market Sonos plays in. Sonos has over the years built up a pretty devoted customer base.

I don't think they're going to lose all of them despite all the anger that you and I have heard on it. But if you look at their sales, a lot of their sales are to existing customers. If you're somebody who's been burned by this, you're going to be much more hesitant to buy that new thing, at least until you're convinced the company has really put this behind it.

Speaking of putting it behind it, what does this all mean for Sonos moving forward? How does the company make any of this sound better? Well, they still have a lot to slog through, quite frankly. Replacing the CEO was part of that journey, part of them showing that, hey, we're taking this really seriously and we're really changing the company to address this and make the company work better. I think it's going to take time for people to believe that and understand it. That's

This kind of damage doesn't fix itself overnight. They just have to kind of put their heads down, make sure the app and the software are fixed and make sure future products go very, very smoothly and put out good stuff. Over time, customers will be inclined to come back in some numbers. I don't think this is the end of the company, though it definitely has been a major black mark and it's going to take quite a while to fix if they count.

That was Heard on the Street columnist Dan Gallagher. Dan, thanks so much for your time. Thanks for having me. And that's the science of success. This episode was produced by Charlotte Gartenberg with supervising producer Catherine Milsop. Michael LaValle and Jessica Fenton wrote our theme music. I'm Ben Cohen. Be sure to check out my column on WSJ.com. And if you like the show, tell your friends and leave us a five-star review on your favorite platform. Thanks for listening.