John MacFarlane

Sonos builds beyond its bass

June 25, 2012: 2:57 PM ET

The audio equipment manufacturer has out-lasted buzzier rivals and now, with a major new round of investment, is plotting to grow faster.

sonosFORTUNE -- "If we'd really understood it, we'd have never have started," says Tom Cullen, co-founder of audio equipment maker Sonos. The "it" in this case is the ruthless nature of the consumer electronics industry. Cullen isn't being hyperbolic. In the decade since Sonos was founded, the company has faced heated challenges from Apple (AAPL) and a raft of buzzy startups as well as a global recession that sapped demand for non-essentials like wireless speakers.

But Sonos survived and thrived. It made a name for itself selling simple, elegant devices that allow consumers to beam media about the house without requiring a doctorate. Getting the company's speakers, which are sold in Target (TGT) and other stores, to wirelessly communicate takes just a few minutes, and users can easily mix and match products to send music from services like iTunes, Pandora, and Spotify from room to room. Brand consultant Dean Crutchfield argues Sonos' launch was "perfectly timed," arriving just as consumers were looking to make the most of the WiFi revolution. That's paid off over the years as consumers increasingly identify the company as being synonymous with ease of use.

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That's been good for Sonos. Even as home audio sales -- including CD players and speakers -- declined 4% last year, the streaming segment remained a bright spot. According to the NPD Group, a market research company, the demand for streaming audio speakers is accelerating in North America, generating $146 million in sales last year, a 123% increase from 2010. Sonos is one of the companies at the forefront. Global sales for the company in 2011 passed $200 million, with sales on track to climb more than 60 % this year.

Last week, the company announced it raised $135 million in a growth equity round of funding with investors like Kohlberg Kravis Roberts (KKR), Redpoint Ventures, and Elevation Partners, the private equity firm co-founded by U2 lead singer Bono. "The continuing transition from physical to digital media is driving fundamental changes in listening habits and Sonos has been on the cutting edge of developing a unique product with a loyal following," David Kerko, Member & Technology Leader of KKR, told Fortune. As All Things D previously reported, $45 million of that is primary capital and will likely be used to fuel expansion abroad in fast-growing markets like China.

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It wasn't always that way. Sales were lackluster during the first three years for Sonos, despite glowing reviews. "We were just sitting there going, 'everybody loved this,'" recalls Cullen, who now serves as vice president of product and market development. "Why aren't we going to $500 million [in sales] in a day?" Then, the recession hit the company hard. "The world stopped. After all, nobody needs a Sonos," says Cullen. At the time, the company was working on a larger wireless speaker, but didn't have the capital to follow through. Some staffers, including Cullen, borrowed money from friends and resorted to paying employees out-of-pocket.

Business turned around with the introduction of an iPhone app in fall 2008 that transformed the popular smartphone into a controller for Sonos gear. The app alone pushed sales up that year by 15%. The larger speaker, dubbed the Play 5, eventually came out and is now the company's best-selling product. Ben Arnold, Director of Industry Analysis at the NPD Group, says Sonos has distinguished itself by pairing a sound fidelity often compared with Bose, another industry leader, but also in its savvy marketing, geared towards music lovers with ads featuring artists like Questlove and deadmau5.

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Sonos seems to have the home speaker category covered with a variety of products, and it just released a $699 subwoofer positively received by critics. But the company's exact next step remains a mystery. One thing's for sure, it has plenty of capital to make it happen.

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