Digital music's ultimate player

John MacFarlane wants to fill every room in your house with tunes. Does that make Sonos a game changer -- or takeover bait?

By John Heilemann, Business 2.0 Magazine columnist

(Business 2.0 Magazine) -- The first thing you notice about John MacFarlane is that he's got Steve Jobs on the brain.

Less than two minutes into our meeting at the Santa Barbara headquarters of his home music system startup, Sonos, MacFarlane is holding forth about the Silicon Valley icon -- and over the next two hours, the topic recurs repeatedly.

With the iPod and iTunes, MacFarlane says, Jobs and Apple "took on big problems. They grew the market.... We wake up every day and thank Apple." But when I ask who he considers his competition, MacFarlane answers, "Apple, Apple, Apple."

That the founder of a fledgling firm at the intersection of media and consumer electronics should be obsessed with the industry's 800-gigaton gorilla comes as no huge shock. And neither does the fact that MacFarlane, a startup recidivist, believes that his own company is more in tune with the future of digital music than Apple (Charts, Fortune 500) is.

What's surprising is that, believe it or not, MacFarlane may be right -- though it might not be enough to save Sonos from being squashed anyway.

At 40, MacFarlane has the tousled, boyish looks of Tom Hanks circa Big. He took his first company, Software.com, public at the height of the bubble, then merged it with Phone.com in 2000 in a $6.8 billion deal. Possessing a reported net worth of $136 million didn't slake his entrepreneurial thirst.

Two years later, with the Wi-Fi revolution aborning, MacFarlane founded Sonos to build a new kind of wireless audio system: one that beams music throughout users' homes at a fraction of the cost (and hassle) of a typical multiroom stereo network.

The first iteration of the Sonos system hit the market in 2005. It was sleek, off-white, and user-friendly, with a killer remote control. But it wasn't until last September that Sonos took its great leap forward: allowing users direct, computer-free access to the Web music service Rhapsody, which for $10 a month gives them a library of close to 4 million songs.

Sonos and Rhapsody are each other's killer app. MacFarlane tells me that Sonos customers use Rhapsody "more than 10 times as much as the average Rhapsody user." And, according to Rhapsody insiders, the service's churn rate among Sonos users is tiny compared with the overall figures.

Among those addicted to new music and new technology, the Sonos-Rhapsody combination wins raves so gushing they're almost too embarrassing to print. ("About as perfect a music experience as I've ever had," writes one such junkie -- OK, the editor of this magazine.) And the bottom-line results have been encouraging. Though MacFarlane says Sonos, which has received more than $30 million in financing, isn't close to profitable, last year the company sold more than 100,000 units and its revenue doubled over its 2005 level.

The more successful Sonos is, of course, the more it becomes a target -- which brings us back to Apple. Though MacFarlane does mention other audio companies such as Bose, Denon, and Yamaha as potential rivals, the threat posed by Jobs is what preoccupies him. One possibility is that Apple will build a directly competitive home music system.

More likely, MacFarlane says, is that the Cupertino colossus will turn what Sonos does into a feature of another of its products -- Apple TV, in particular.

MacFarlane tries to reassure himself with the argument that Jobs has bigger fish to fry. "They are looking to replace Sony, and that's a big ambition," he says. "They have a full-pitched battle going with Microsoft in computing. They are taking on the entire mobile-phone industry -- and when you pick a fight with Nokia, you're really in for a battle. So are they going to squish us out of existence? I don't think it would be worth the talent to put on the problem, because our market isn't big enough for them."

MacFarlane knows that Apple, having conquered the portable media market, has its sights set on the home. Yet here he believes that Jobs's company is handicapped by the iTunes pay-per-download model. As broadband connectivity becomes ubiquitous, MacFarlane sees an inexorable shift to the music dial-tone model -- which is more conducive to a raft of innovations, such as social networking and recommendation engines, that are currently unfolding.

Sure, iTunes could add those features, he says. "But then you've got to go and buy the songs -- and what if you don't like them? I think that's where a subscription service makes a lot more sense."

MacFarlane's analysis is quite compelling. Having spent the past month myself reveling in the wonders of the Sonos-Rhapsody combo, I can firmly attest that the lure of iTunes rapidly diminishes to zero. But if all this is obvious to me and MacFarlane, it surely hasn't been lost on Jobs.

"Of course he knows," MacFarlane says. "Steve will need to change the model for iTunes in order for it to be truly successful, and I believe he'll make that pivot. It's only a matter of time."

The same could be said for Sonos. If left unmolested by Apple for the next few years, it's easy to imagine the company evolving into a thriving medium-size outfit that looks much like, say, Bose.

If Apple trains its sights on Sonos, however, a different outcome is more likely: that the company will be acquired. MacFarlane affirms that he's already had offers, just none tempting enough to take.

One obvious candidate would be RealNetworks, the parent of Rhapsody, whose CEO, Rob Glaser, is a massive Sonos fan and detests Apple to boot. But another candidate, irony of ironies, might be Apple itself. Indeed, given that the Sonos boxes look like "the Mac Mini with a tan," the fit would make sense both strategically and aesthetically.

MacFarlane says he doubts that Jobs would bid for Sonos. "They buy teeny companies," he says -- and Sonos, with more than 100 employees, isn't teeny anymore. But Jobs isn't one to let himself be lapped by those who see the future more clearly than he does. And, at the moment, MacFarlane and Sonos can make a plausible claim that they've done just that.

HOW SONOS TUNED IN TO THE NET

1. When it launched, Sonos allowed users to stream their computers' music libraries to any room in the house equipped with a ZonePlayer.

2. In April 2005, a software update enabled Sonos to play streams from a PC subscribed to RealNetworks's Rhapsody music service.

3. Last September, Sonos took the next step, cutting out the PC so that ZonePlayers connect directly to Rhapsody.

John Heilemann wrote "Pride Before the Fall." His next book is "The Valley." He lives in Brooklyn. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.