Custom Firms Adjusting to Coming Sea Change in Music Preferences

Internet music is changing the landscape of the multi-room audio business, said retailers and manufacturers surveyed by Consumer Electronics Daily. Some custom multi-room audio companies are being squeezed out of the cloud-based services world as content services look for high-volume distribution models, and installers are turning to affordable wireless solutions from Sonos and Logitech to satisfy consumers’ interest in Pandora, Rhapsody and other content services.

It’s unfamiliar territory for custom vendors, whose wired, hardware-based multi-room audio solutions have been the backbone of the custom electronics market. “We provide the most robust multi-room entertainment experience,” said Michael Stein, senior director of research and technology for Russound, describing control systems with programmed scenes that direct uncompressed music from CD players, FM tuners and satellite receivers or cable boxes to specified zones controlled by a central keypad. Such customization used to justify fees starting at several thousand dollars for design, wiring and programming.

Now, Stein said, people can search for any music they want on YouTube and listen all day for free. “The custom channel has always thrived on taking the content du jour -- CD, satellite radio, and so on -- and building on with systems that add value,” he said. But the skills required for wiring and programming to make those systems work are being supplanted, he said. “You don’t need all intermediate steps or the level of training” to bring music to various rooms in the home anymore, he said.

Consumers understand they don’t have to pay for services that used to command luxury prices. Just as they realize they can have a home control app on a $500 iPad rather than spending $5,000 for a touchpanel controller from Crestron, they know they can buy a low-cost, wireless multi-room audio system and get all the content they want, Stein said. The iPad has reset price expectations for home control, and free, legal Internet music content has done the same thing on the content side, he said. “There are still premium customers, but they don’t want to get ripped off,” he said. “They're struggling with the value equation."

Russound would like to offer cloud-based services such as Pandora and Rhapsody through its multi-room audio system but hasn’t been able to get the ear of the services, Stein said. “Part of it is a volume game,” he said. “If I'm running a cloud-based service and have to sign up another 200,000 customers, I'm not going to talk to Russound,” he said. Instead the services are going to Sony, Samsung and others that can deliver more listeners via smartphones, Blu-ray players and connected TVs, he said.

Services are also going to Sonos, which had the foresight to get into the cloud-based music business early on, offering Pandora and Rhapsody a multi-room music option beyond the PC. “What Sonos delivers for the money is extraordinary,” Eric Johnson, vice president of Universal Remote Control told Consumer Electronics Daily. He added that the system is “bad for the custom market because it’s so low-margin.” Dealers who are using Sonos for multi-room audio and adding in-wall speakers “can’t make any money until there’s a better product,” Johnson said, so URC has spent two years developing its own Pandora and Rhapsody interfaces as part of a total home control system. To differentiate and add value, URC plans to offer a video interface so that album art and titles for the music show up on TV. URC plans to add a premium for the feature to boost margins for dealers, Johnson said.

Custom features tax music services’ servers compared with computers that “always ask things in the same way,” Johnson said. Custom engineers that want to allow users to do something different -- rate music by pressing a button, for example -- are “giving a command to the server that it doesn’t expect so the server gets bogged down,” he said. Five years ago, it was possible for companies to work with Rhapsody and Pandora and work out such bugs, he said. Now, companies have to provide their own chip designs and submit them for certification to companies like Pandora because the music services don’t have the tech support staff to handle the issues that come up during development. According to Johnson, Autonomic Controls was the last company to get assistance from Pandora when it came out with a solution two years ago that allowed media server systems from AMX, Crestron and NuVo to integrate Pandora and Internet radio stations controllable through a two-way interface.

"You're not going to get a key from Pandora or Rhapsody unless they've tested it in their lab and it doesn’t screw up the server,” Johnson said. Certification is a “slow, laborious process,” he said. “The end result is you spend $2,000-$5,000 sending a unit in to get certified, and if you've done anything adventurous they say, no, it doesn’t certify.” It’s up to the company to fix it, he said. One chip maker offered to integrate Pandora and Rhapsody at the chip level for URC, Johnson said, but “it would have cost us $800,000 and we would have had only two of the services we wanted.”

Even Savant, the Apple-based home control system, has turned to Logitech for its streaming music solution, said Craig Spinner, marketing director. “Why try to reinvent the wheel?” Spinner said. Logitech has done the “legwork with these companies and paved that path,” he said. Logitech offers “the best music service integration out of the box” and consolidates all the music services into one platform that consumers see through the Savant user interface, he said. He left open the possibility that Savant may offer its own implementation down the road. “For now we're comfortable with Squeezebox,” he said.

Onkyo, Integra, Denon and Yamaha offer music service streaming on certain AV receivers, some of which can serve two- or three-zone music systems. According to Paul Wasek, Onkyo continues to look at available services and “to enter into business relationships that make sense for both companies.” He cited Onkyo’s longstanding relationships with Sirius, XM and vTuner Internet radio and said they made “migrating to the Internet music side easier."

Custom integrators are at varying stages in the streaming music market. Greg Margolis, president of Home Entertainment in Dallas, said the company has gotten one request for streaming music services so far, so it’s not a big focus for the company. David Young, president of the Sound Room in St. Louis, said his company sells one Sonos system per day and “loves it.” Leon Shaw, president of Audio Advice in Raleigh, N.C., has completely embraced the streaming music era. “It’s coming, and customers love it,” he said. The best thing about streaming music services and Internet radio is “it gets them back into music,” he said. “They buy better speakers, and they start playing with their system again. There’s zero downside to it."

Shaw concedes that margins are lower with the Sonos system than the traditional 40 points specialty dealers are used to getting from audio gear, falling between TVs and Blu-ray players and audio components. But “it’s something new and exciting to talk about,” he said. “Most people actually don’t know about it,” which gives salespeople a chance to explain Sonos, Pandora and the concept in general, he said. Regarding customer pushback due to the inferior sound quality of streamed versus uncompressed CD sound, Shaw said, “It could sound better, but for background music it’s fine.” Installation, too, is “tricky,” because customers have to subscribe to the services. “You have to be at the customer’s house and you need their network password to set it up,” he said. So far, he hasn’t gotten support calls when the music goes down along with a home network. “I think people understand when the Internet is down it’s not going to work,” he said. “It’s not like cable. It’s pretty reliable."

Sonos co-founder Tom Cullen said the company’s success in the custom integration market owes to the company’s commitment to “time to music.” Dealers praise the system for its reliability and simplicity. In addition to Pandora and Rhapsody, Sonos links customers to last.fm, Iheartradio, Napster, Sirius XM, Rdio, Audible.com, Classical.com and Wolfgang’s Vault. It plans to pick up the pace due to a programming change the company implemented last fall to enable new music services without Sonos having to send out a user upgrade. “Now it will happen much more consistently where we'll be able to add services without requiring an upgrade to thousands of customers,” Cullen said. Users will be alerted to new services by email. Cullen envisions a future with 1,000 services. The company has added 10 staffers in China who will work on developing services for that market. “We'll have Mandarin and Cantonese opera, and they'll be completely separate services,” he said. Also coming are dedicated talk radio, classical music and opera services, he said.

Cullen credits YouTube, Netflix and Hulu with the “habit change” that taught consumers about streaming media. He said Sonos was wrong on the timing of streaming music services when it launched nearly six years ago, after a three-year development period with a goal of “playing everything everywhere.” He concedes the company was early but that consumers are catching up when told streaming music services “are like YouTube for music.” The sea change for the industry is “People are showing you can enjoy content with an Internet connection that has nothing to do with what’s stored on a local drive,” he said. The company has dedicated staff for service, software development, content integration, quality assurance and a product manager that “develops relationships with services and irons out areas of friction to get services to work,” he said. He said the support investment runs “north of $1 million a year, and it’s recurring."

The benefit to services that work with Sonos is years of experience in the field, Cullen said. “If someone wants to get into streaming now, they don’t know what the real challenges are,” he said. He cited the example of a bump in server traffic on Christmas Day when new Sonos users tap into music services for the first time. “We now build a plan for three months before Christmas with all the leading service providers,” Cullen said. Sonos customers listen to four to five times more music than PC browser users, he said. As a result, services have to have load planning to absorb new users in their directories and so servers can support “a quick burst of users,” he said. Sixty percent of Sonos customers subscribe to at least two subscription-based services, he said.

In a climate where consumers are pushing back on prices of consumer electronics and increasingly expect to get content for free, it’s unclear how far they'll commit financially to support music services. Quoting former Google CEO Eric Schmidt, Stein of Russound said, “The Internet is the most disruptive technology in history because it replaces scarcity with abundance.” So far, said Shaw of Audio Advice, consumers don’t seem to be pushing back on music subscriptions, despite the amount of free Internet content. “They've been paying for Sirius or XM for awhile,” he said. “Pandora is free with commercials, or $35 a year without, so it’s not a big deal for most people.”