You know I’m right—a Story on Snap is acutely different from one on Instagram or a Fleet on Twitter. If you post a story on Facebook, you’re due for a wellness check. And don’t even get me started on LinkedIn’s bid for ephemeral content.
The “story” format is one all of Big Tech has tried in some way or another since Snap pioneered it back in 2013...and it’s the perfect example of Big Tech propensity for ripping off small competitors’ winning features to insulate themselves from future threats.
But how is all of this knocking-off legal? Why don’t our antitrust regulators keep it from happening? And what does it mean for startup innovation if Big Tech just steals an idea as soon as it catches on?
That’s what we’re talking about today with Patrick Spence, CEO of cult-favorite smart speaker company Sonos. He knows a thing or two (especially since he’s actively in a legal battle with Google over its alleged infringement on Sonos’s patents).
Listen now for a look at Big Tech like you’ve never seen it before.
Kinsey Grant, Morning Brew business editor and podcast host [00:00:06] Hi, everybody, and welcome to Business Casual. I'm Kinsey Grant, and I am amped for this episode. So now, let's get into it. [sound of a ding]
Kinsey [00:00:16] Imitation is the sincerest form of flattery, or so we've been told constantly since our childhoods. If somebody is copying you, it's because you're doing something right. When it's a haircut or maybe a sweater or maybe a Twitter bio, you can convince yourself that imitation really is the sincerest form of flattery. But when it's your business' core product, the product at the very center of your future profitability, it's a little harder to believe that a copycat is actually an admirer.
Kinsey [00:00:42] We've seen it happen time and again. Before there were Instagram, Facebook, LinkedIn, YouTube, or WhatsApp Stories, there were Snap Stories. Snap came first, found it hit a nerve with ephemeral content, and watched as every single tech giant ripped it off. It happened most recently with Twitter's very much Stories-inspired Fleets, which dropped just days before we were recording this episode in the year 2020. Snap started doing it in 2013.
Kinsey [00:01:07] Disappearing content like Stories is just one example of many. Big tech, and its biggest players, are egregious, notorious copycats. We know it to be true. But what does it mean for you, the customer? What does it mean for the future of tech innovation? And who's to step in and stop copycats in their tracks? To help answer some of these question today, I am very excited to welcome to Business Casual, Patrick Spence, CEO of Sonos. Patrick, welcome to the show.
Patrick Spence, CEO of Sonos [00:01:34] Thanks, Kinsey. I'm excited to be here.
Kinsey [00:01:36] We are excited to have you. This is a conversation I'm very much excited to have. I think that we all can relate to seeing this copycat happen. I made the reference to Stories, but it happens all over the place. I was trying to come up with some examples. Even shoes. You know, Allbird came up with these great shoes and Amazon [chuckles] ripped them off and put them on their platform. It happens across the board. It's something we've all experienced before.
Kinsey [00:01:58] And I think you're a great resource to ask a lot of these questions to. We wanted to bring you in because Sonos has [laughs] experienced this firsthand with Google, most famously. Also Amazon imitating your products, and trying to use products and innovation and IP that you guys had worked so hard to make, to do their own thing, and be the copycat in this situation. You also worked at BlackBerry, which everybody is familiar with BlackBerry too. So I imagine that you will be able to fill in some of these gaps here as we try to figure out why the copycatting happens and why it matters. So, should we jump right in?
Patrick [00:02:33] Let's do it.
Kinsey [00:02:34] All right. Let's do it. So this copycat problem I'm referencing—we see it happen a lot with FAANG, these big tech stocks. These big tech companies will come in and rip off a product that they found is making traction with consumers. So to start, Patrick, I want to get a better understanding of why does this happen? Is this the norm, and why does it happen, in your view?
Patrick [00:02:56] Yeah. I think it happens because the big tech companies that we see today have learned from the dominant companies of the past, and they've learned and kind of evolved. And so it's a little bit, to me, like they get dominant in a certain area. And then in order to try and make sure that they maintain that dominance, they want to kind of reach out into other areas to make sure they're really protecting their monopoly in one particular area. And that's different than what we've seen in the past.
Patrick [00:03:30] So like you said, I've been in this industry, the high tech industry, for about 20 years. And what used to happen, and we saw this at BlackBerry—Microsoft and Qualcomm actually teamed up to try and do a competitive solution to BlackBerry. But when they created that and when they did that, the difference was they were actually trying to create it to make money and to run a business that would be a good business overall. And we had some fundamentals in terms of what was happening.
Patrick [00:03:56] What we've seen since then is that the big tech companies today will look out and they'll look and they'll say, hey, I need to get into that space to make sure that my search monopoly doesn't get threatened by somebody else, an up-and-comer. But the difference is, not only are they doing what we call efficient infringement, which is really just copying other's intellectual property—and that's why we've sued them—but they're also using things like predatory pricing.
Patrick [00:04:25] So they're putting products out there that are actually losing money to make sure that their existing monopoly in one category, like in Google's case, search, isn't threatened by something like smart speakers or voice or any of these other areas. And that's very different than what we saw from previous periods where there have been big companies. Because big isn't necessarily bad. It's how once you've developed power in a particular category—how are you using your power as you think about other categories and your dominant position?
Kinsey [00:04:57] Right, right. This is a really interesting back and forth to me that, to your example, Google is willing to sell something at a loss or to put a product in market at a loss to maintain its dominance across the board, because it can count on some cushy profits from search, from ads, from what have you. It doesn't need to make money on hardware. It's making plenty on software.
Kinsey [00:05:17] Is the expectation then, from, let's say, hypothetically, Google's perspective, that a company like Sonos or one of these smart speaker companies could come in and try to get into its territory in search, or are they just concerned with the hardware portion?
Patrick [00:05:31] Well, I think they are concerned about search and they're concerned about any threat to their dominance in any area that they are. So, I think they look at any new, up-and-coming category and they don't want any company necessarily to get a leg up on them. And if they do, they very quickly will try and respond. And we've seen countless examples.
Patrick [00:05:52] So one of the ones I'm closest to is eero. So eero had actually invented the whole mesh networking category and did a really good job. Really scrappy startup company that created this great Wi-Fi mesh networking for the home. And along came Google and just copied what they did, underpriced them, quickly moved in because they didn't want eero to get that kind of foothold in the home because it could be potentially a threat.
Patrick [00:06:18] And actually, we've just seen one in the last couple of weeks, where Google Photos—Google, a long time ago, came into photos when there were probably a dozen competitors, up-and-comers coming through there. And they came in with a decent product. But what they said was, it's gonna be free. So it's free. So all consumers come here. This is gonna be free. This is gonna be great. Oh, and look, now all the competition is gone. What's happened? Oh, they're actually making you pay now. And so after all the competition is out, now they're making you pay? That is classic, classic behavior of a monopolist.
Kinsey [00:06:51] Right. So you said earlier, big is not bad. And we hear time and again, the best offense is a good defense. You know, these companies are being strategic. It might not be above [chuckles] the board here, but it is strategy. So why is it bad that this is happening—this efficient infringement—is happening in general?
Patrick [00:07:10] Because consumers are often—there's been kind of a mischaracterization of antitrust over the last few decades, which is, it harming the consumer? And that's so one-dimensional in terms of the view, because not only are we all consumers, we're also entrepreneurs. We're also workers, employees. We have multidimensions in terms of who we are. We're citizens.
Patrick [00:07:33] And so, the Google Photos example is a perfect one because, as a consumer, you look at it and say, hey, there's this great product. You know, there's probably six or seven great products out there. This one's free. You know what? I going to use that. And so under that antitrust doctorate, you would say, oh, that's pretty good. But what it doesn't take into account is that long term, these things come home to roost, and then you're going to pay higher prices.
Patrick [00:07:56] And, as you think about being perhaps an entrepreneur and starting one of those companies, or you think about being a worker at one of those companies, we also need to be thinking about how power is used, or in some cases, abused, in the industry and damages really the whole mechanism of capitalism and everything that we're trying to do. You know, we have half as many public companies as we did 20 years ago. New business starts have been much, much lower than they were 30, 40 years ago.
Patrick [00:08:25] And I think that's because we're seeing a huge consolidation of power in a few companies that are learning and have learned, again, to your point, in terms of strategy and learning these things, how to make sure that their monopoly positions, as their dominant positions, are not threatened.
Kinsey [00:08:39] Yeah, yeah. I think it's impossible to have this conversation about copycats in tech without having the antitrust conversation. They are absolutely intertwined in one another. And I think the difficulty, especially when we think about does it harm the consumer, is that it's so difficult to see into the future for that consumer. And when we think about the products within the big tech sphere, it's so much more than just a place to store your photos. It has tentacles in so much of what we do, whether that's how we run our day-to-day in a calendar or how we communicate with other people and what have you.
Kinsey [00:09:10] I think that is at least partially why this conversation is so often had around big tech. But do we see this happening outside of big tech? Why is this where we constantly talk about infringement and antitrust?
Patrick [00:09:23] I think it's the category where we've seen it happen fastest. But just over the last year or so, David Cicilline and the whole House subcommittee, Judiciary subcommittee, has been working on antitrust. And as this has become a bigger topic, I've certainly learned that it's happening in more and more categories, and it has happened in many categories.
Patrick [00:09:44] We're down to two or three companies, often in many industries now, that have a dominant position. And it's not good overall in terms of innovation and consumers and kind of everything that we stand for as a country. So it's not just happening in big tech. This is this an issue of power and really, consolidation, which ultimately is, I think, leading to some of the inequality we see in society as well.
Kinsey [00:10:13] Yeah, it holds a mirror up.
Patrick [00:10:15] Yeah.
Kinsey [00:10:15] You have to think of it in that way. I have to wonder, though, with big tech, especially, you know, obviously this happens across the board and like you said, in many other industries. But with big tech, we're talking about some of the most profitable companies sitting on the biggest cash piles in America. I wonder why they can't just build it. We often ask, do you want to build it? Do you want to buy it? It's never, do you want to steal it?
Kinsey [00:10:37] But in the case of big tech, it actually is. Facebook spent something like $17 billion on research and development last year. I wonder how come some of these companies can't just try to build competitive products instead of stealing the IP that already exists in the market?
Patrick [00:10:52] Well, I think the thing that they're doing is they're watching what's happening out there and then in some cases—not all cases, in some cases—they're just copying what they're seeing work.
Kinsey [00:11:02] Yeah.
Patrick [00:11:02] And going after it in that way and using, like you said, those balance sheets that have never been this concentrated, this big, from a world perspective. Not just the United States, but on a global basis. And using that. And so, great example that you brought up is the way Facebook, Instagram has just tried to basically copy what Snap has done, as they've looked at what they do there.
Patrick [00:11:22] And we just have to decide, as a society, as citizens, not just consumers, are these the kind of things that we're OK with? That's there? And so, what's really happened is that I think some of the rules, for instance, like in our case around intellectual property, they kind of steamroll those rules and then the sense of fair competition that we've seen in the past, because they are so powerful and they have so much money, and quite frankly, the mechanisms in government have not held them to account.
Patrick [00:11:54] So we haven't seen kind of antitrust cases that we've seen in the past. We have not seen them held to account. And so they can get away with it. And that's what I call this efficient infringement, where they can just spend and spend and spend, and typically not worry about the smaller companies holding them to account. But that's why I feel like in our case, it's been so important for us, because we are big enough and successful enough, to stand up—that we do it for all of those companies that can't.
Kinsey [00:12:22] Yeah.
Patrick [00:12:22] That have been out there and have been driven out of business or forced to sell to somebody else because of this very issue.
Kinsey [00:12:29] Yeah. Forced to sell is interesting here. If Google had come to you a couple of years ago and said, [indistinct] we'll talk about, you know, the legal issues with Google too. But if Google came to you and said, we want to Sonos, would you have sold?
Patrick [00:12:41] You know, we always have to think about that. And what I have to do is make sure that I'm doing the best thing for all of our people, all the stakeholders across the company, our customers, our investors, all of those things. So I always have to look at that and consider that.
Patrick [00:12:59] But I will tell you that I'm a citizen as much as anyone. And I think we really want to see more companies, more smaller entrepreneurial companies, you know, spreading out. I think the pandemic, actually—we're starting to see that a little bit, almost because people are being forced to. So there's a lot of, you know, there's been a lot of tragedy. It's been terrible in terms of going through this.
Patrick [00:13:21] But one silver lining—it looks like from data I've seen is that there may be more companies and more entrepreneurs starting businesses because that's a robust economy. That's better for everybody. More success. And so that's something that we want to see, and that's something that I think we need to really be strong for the future.
Kinsey [00:13:40] Yeah, absolutely. And I think it's important to expand our perception of what a small business is. So often we think of a small business as the mom-and-pop hardware store on Main Street, but it can also be a small tech startup. It could be this scrappy, young kind of company that wants to change the world but just doesn't have a lot of people doing it yet. That still counts very much.
Kinsey [00:13:59] I also love, Patrick, that you're speaking from the CEO perspective, but also from the consumer perspective. So let's think about this consumer perspective a little bit here. We're supposed to benefit from competition. So what do you think is at stake for the consumer when this kind of infringement does happen? What do we stand to lose?
Patrick [00:14:16] Yeah, I think we're losing, again, you know, you have a few different hats that you wear. And I think as a consumer, you benefit in the short term. But that, as we see in the Google Photos situation, you're harmed in the long term as a consumer because you're going to pay higher prices. Or perhaps you worked at one of those photo startups that went out of business. And so you're hurt as an entrepreneur or as an employee.
Patrick [00:14:41] And so those are things that I think we have to be more nuanced about in terms of the way that we think about these things. Because we all want a vibrant economy where there's lots of flowers blooming, right, and lots of companies. And like you said, not everybody, not every small business needs to grow and to become a big tech company or any of these things. But we should be having lots of new ideas, lots of fresh ideas, giving people a lot of opportunity, and we risk that if we're going to allow this kind of behavior from our largest companies.
Kinsey [00:15:12] Yeah, and we participate in the economy in ways far beyond just buying a photo sharing app on the App Store. All right. So, Patrick, I have one big major question for you here that I think we've kind of been dancing around this whole time. Before I ask you that question, we're going to take a short break to hear from our sponsor. —
Kinsey [00:15:30] And now back to the conversation with Patrick Spence. So, Patrick, as I said before this break, there's a big question that I want to ask you. And here it is. How are these big tech companies getting away with the theft of ideas and concepts and major trends? How is this legal?
Patrick [00:15:45] It's not. And I think we've seen the House Subcommittee on Antitrust starting to come up with some real recommendations in terms of what should be done. But we went through a period of three, four decades where it basically—it was a free-for-all.
Patrick [00:16:01] And so the companies understood and evolved and they're smart. And they realized they could get away with it and that all they needed to do is outlast small companies. And they could go and copy them. And by the time a smaller company even tried to take them on, they brought in resources. Or they could swamp them in other areas and that kind of thing.
Patrick [00:16:20] And so, it hasn't been a level playing field and it hasn't been something where I would say the government has stepped in to make sure that the game is being refereed in the right way. And so we have seen this in the past. We have been there. It wasn't that long ago that those rules have been enforced.
Patrick [00:16:40] And certainly we're in a different era where the rules are going to be need to be different, to be nuanced in terms of what happens. But there's still a case of making sure that we're enforcing the moral code of the notion that, hey, we've got these entrepreneurial companies, we've got these great ideas, we've got intellectual property, and it's not OK for a company, just because they're bigger, to come in and just copy what somebody is doing and it [indistinct] them destroy them.
Kinsey [00:17:04] Yeah.
Patrick [00:17:04] That's not what I think we stand for at the end of the day.
Kinsey [00:17:07] Right. And there should be room for morality in business and entrepreneurship, but it's also difficult to enforce. You can't expect people to do the right thing all the time. So, I mean, is it realistic to say we live by this code and I can't really enforce it, but I hope that you will shake my hand and not steal my [indistinct]. [chuckles]
Patrick [00:17:25] No way. No way. No, no, no.
Kinsey [00:17:28] Like we need somebody here [laughter] to enforce the rules.
Patrick [00:17:30] That's where—exactly. And this is where, I think over the last 40 years, there's been some undermining and some loss of confidence in the government.
Kinsey [00:17:38] Right.
Patrick [00:17:38] And the reality is they exist for a reason. One of those reasons is to ensure that we do a fair competition and companies are behaving in the right way because we all live together in a society that we're trying to make better for everyone. And, you know, we've kind of let that disappear, quite frankly.
Patrick [00:17:55] And so I am encouraged because the House committee has been doing a lot of work on this. We've obviously seen the DOJ and FTC coming more into the picture and recognizing that this is a problem. But let's be honest, it's really been an area that just hasn't had the attention it should have received over the last 30, 40 years.
Kinsey [00:18:14] Yeah. We hear all the time, and we see all the time, that there is an antitrust hearing happening on Capitol Hill and bringing all of the big tech CEOs to Capitol Hill. But I feel like nothing ever actually happens [laughs] in the United States. Rarely do we actually see anything come out of these hearings other than some good memes making fun of Mark Zuckerberg. Like nothing's happening. So how optimistic are you that anything actually will happen—that they will be reined in?
Patrick [00:18:39] I think that's fair from some of the early hearings a couple of years ago. But certainly I think it's been a huge change since David Cicilline and that group have taken on the mandate. Jay Paul from Seattle as well. Amy Klobuchar is very interested in this.
Patrick [00:18:58] And the questions that they asked the four big tech CEOs at that hearing, the report that they put out subsequently had tangible measures in terms of what should be done. Really concrete ideas that make a lot of sense, quite frankly, for what we're trying to do. And so that work, I think, is encouraging work.
Patrick [00:19:17] And we'll have to see how it develops. But I've seen a will from a lot of these legislatures to really take this on. Because they see it and they understand it as well. And they want to make sure that, again, for the country, for all citizens, that we have a level playing field and that people are playing by the rules that have built the country.
Kinsey [00:19:34] Right. Right. And it can be encouraging. We have seen this happen, I would say, these hearings to a more rapid degree than we have been used to. And we have more people running for office, more potential legislators running for office on a campaign of reining in the monopolies that are happening in big tech. And that's a good thing.
Kinsey [00:19:54] But, it takes a while for that change to go into effect. This doesn't happen overnight. We have had plenty of evidence of that. So what is the next solution? I have to imagine taking legal action comes to mind. So ...
Patrick [00:20:08] Yup.
Kinsey [00:20:09] Yes? Dot, dot, dot. [laughs]
Patrick [00:20:11] So, [laughs] yes, you can do it. We did. Well, look, actually, I think there's two aspects to that. One is we're a great example of doing a few things simultaneously. One, raising this as an issue, like we've talked about, and saying, hey, this is an issue for society, not just specific to Sonos. So that's kind of one side of it.
Patrick [00:20:34] The second is we've continued to innovate and execute and make sure that we're building a successful business, and we're doing everything we can and serving our customers, and kind of finding ways to navigate around these big tech companies. And we've been successful at that. And we've grown for 15 years straight. And so it is hard work, but it's work that we've done. It's work that other companies have done. Eric and the team at Zoom, Stewart and the team at Slack.
Patrick [00:21:02] So there are examples. For sure, there's not enough, but there are examples of doing it. And so, that's part of it. And then the last part is in specific cases like ours, where you can clearly see that our intellectual property has been violated and infringed upon, we felt the need to take Google to the ITC and really to say, hey, look, this just isn't fair. This isn't right in terms of infringing on our invention.
Patrick [00:21:28] And so last year, actually earlier this year—it's been quite a year. [Kinsey and Patrick laugh] We launched that action after, you know, a couple of years of trying to reach an amicable settlement. We work closely with all the big tech companies on their music services, their voice assistance, app stores, you name it. So we've got a multifaceted relationship with all of them.
Patrick [00:21:50] And we still do with Google. I mean, to their credit, they continue to work with us on Google Assistant, on YouTube music, and some of those areas. But when it comes to the hardware they're building and the related software that does what Sonos does, basically, they've copied what we're doing. And so that we felt the need to stand up and say, this isn't right. You need to stop.
Patrick [00:22:13] And so we're in the midst of that right now with the FTC. And that'll come to a hearing at the end of February, beginning of March. So we're looking forward to having our day in court.
Kinsey [00:22:24] What are your thoughts heading into the hearing?
Patrick [00:22:26] We're very confident.
Kinsey [00:22:27] OK.
Patrick [00:22:27] We've been at this for many years. We've actually been through this—we've been through a couple of court cases at this point. So we know that our intellectual property is strong and it's well-recognized, and we're the inventors here. And so I think it's important for all small American inventors that we stand up and don't let people trample our intellectual property.
Kinsey [00:22:50] Right.
Patrick [00:22:50] And make sure that they're playing by the rules. And again, so we're using another mechanism, which is judicial side to make sure that's being enforced.
Kinsey [00:23:00] What's the outcome that, you know, your dream outcome of this legal proceeding here with Google? Like what exactly is the end game for you in a perfect world?
Patrick [00:23:08] Yeah, I mean, that they stop copying what we do.
Kinsey [00:23:11] Yeah. [laughs] Like other than standing up for smaller inventors, you know.
Patrick [00:23:15] Yeah, exactly. That they're thinking about that before they go and embark on something like this. In the antitrust report, I think one thing that was talked about was not just in our world, but just generally, they could spin out their businesses into standalone units so that they're not cross-subsidizing and leveraging a monopoly in one area to subsidize predatory pricing in another.
Patrick [00:23:36] So one thing they could do, Google in particular, could spin out their hardware business and have it a standalone business. And compete straight up instead of subsidizing it from their search side, for instance. That still doesn't address the infringement of intellectual property.
Patrick [00:23:52] On that front, they gonna need to stop infringing it or pass a licensing fee that's reasonable for that. So there's a couple of different issues at play when we talk about what they're doing. But those are the kind of remedies that you could think about.
Kinsey [00:24:05] Right. How do you think the dynamics that are currently at play within the big tech space would shift if that first example were to happen? If Google were to spin out its hardware business into a separate entity, would our perception of, quote unquote, big tech change, do you think?
Patrick [00:24:22] I think it would. I also think it puts constraints on those, you know, the spun-out companies to have to run a proper P&L and have to run a proper business, and not be able to predatory price to try and prop up one part of their business with another.
Patrick [00:24:38] And so, you know, can you imagine if we rewind whatever it was a number of years ago, back to a period where there were six or seven photo apps and Google Photos happens to be one of them, but you have to pay for it, just like you pay for the other ones. So, in that case, if they created the best app at a reasonable price that was through there and competed and won in that way, fair game in terms of being able to go and do that.
Patrick [00:25:00] But it's not OK in a situation where they make it free to capture all your data, drive those companies out of business, and then start charging you for the service later on. And so, I think the spun-out kind of companies and having to stand alone, create just more real competition and truly, like, the spirit of capitalism and everything that we've always believed in terms of what we're doing.
Kinsey [00:25:24] Right. Right. We do see some of these big tech players recognizing that, I would say. With Facebook trying to encrypt everything that [chuckles] it owns so that it would be a lot harder to unravel it, they're taking steps, recognizing that this might be a possibility. But to that point, it would be very difficult to unravel a lot of these companies as they exist today. Everything is tied to one another. That goes beyond just the Google products. That's I think that's the case in a lot of these companies.
Patrick [00:25:49] Don't drink the Kool-Aid. [Kinsey laughs] That's what they're saying to you, Kinsey. And the reality is, like you said, they have more money than any company's ever had before globally. They have the most engineering talent we've ever seen in one place. They can do this if —
Kinsey [00:26:05] They can figure out. [laughs]
Patrick [00:26:06] Exactly. These are not—it's like stopping misinformation, disinformation. They can do it if they choose to do it. It's an investment to be made. But they're also the most well-resourced companies in the world. And so, I don't think, as a society, we let them off the hook on that, like, they have to do these kind of things and they can achieve a lot.
Patrick [00:26:27] And if the right thing, and the government decides the right thing, is saying they need to spin out different businesses, then they need to do it. And they'll figure out a way to do it because it's in their best interest.
Kinsey [00:26:38] Right. Right. All right. That makes sense. I'll stop with the Kool-Aid drinking. [laughs] So one more interesting part of this relationship within big tech itself, but also the relationship that all of us have with big tech, is that we do rely on it a lot. Sonos relies on Google in some capacities, to your earlier point.
Patrick [00:26:56] How do you take that into consideration when you're preparing to leverage legal action against this company? That, in a lot of ways, these big tech players still underpin a lot of your business, whether that's ads or, you know, how you run a day-to-day within logistics, et cetera. Did that play into the decision to really, literally take them to court?
Patrick [00:27:18] You know, I think they have been, you know, like I said, I give them credit because we're working with their Assistant team. We work with their YouTube music team, the AdWords team, all of those teams as we go through it. And they continue to engage with us because they also understand that if they were to not do that, it would be even worse for them in terms of where they are, because we already feel like they are using an advantage in one area to compete unfairly in another.
Patrick [00:27:45] And to withdraw those services from small, innovative companies would be another misstep on their part, quite frankly. But I'll tell you, like the ultimate thing that's in their best interest is working with us because we have a user base of 11 million homes now and some of the best homes in the world. And the homes that everybody wants to be in. So, it's not out of the goodness of their heart that they're working with us. It's because they want their services on the Sonos platform to get to customers in all the homes that we're in.
Kinsey [00:28:13] Yeah, this is so compelling to me. This kind of tug of war between being strategic and trying to think ahead and trying to take advantage of the next best thing, but also like this almost code of conduct that you have to stick to and that you do want to be in these 11 million fantastic homes that are utilizing tech to the best of their advantage. It's an interesting back and forth that I think we often overlook, especially in media in general. We want to paint this picture of like a fight to the death kind of a battle. But that's not always the case.
Patrick [00:28:45] No, no. And it's not necessarily zero-sum in some of these ways. There are some services and some things that they offer that are very valuable to our customers and that I use and that you use, and we find valuable as we go through that. And even the ones that are competing unfairly, again, I think there's a solution, which is, you know, spin them out and make them stand on their own.
Patrick [00:29:06] And if you create the best product and have a solid business there, then you're in a good spot. But don't use the monopoly profits from search to be able to do predatory pricing in hardware, for instance.
Kinsey [00:29:21] Yeah.
Patrick [00:29:21] Or, you know, and then efficiently infringe on other people's intellectual property. And so there is a solution. It's nuanced, but it's not super-complicated. It's not hard to see what makes sense here. And that's what you see in the House committee report. So, these are solvable issues and we just have to be more active as a society. We have to enforce the rules that are there.
Patrick [00:29:43] And I think it would be better for everybody, quite frankly. At the end of the day, one of the things that people often say is that in some of these cases where there have been spinouts in the past, the two companies end up being more valuable than the one was anyways, over a longer time period. And so maybe some of these companies become five instead, and maybe those are five much more valuable companies down the road. And so that's an interesting aspect to think about as well.
Kinsey [00:30:08] Yeah. One of the earliest episodes of Business Casual, actually, it might have been our first episode, Scott Galloway made the comment that if Amazon were to spin out Amazon Web Services, it would be in every single person's 401(k). That would be an incredibly valuable company. But the likelihood of that happening right now seems pretty outlandish.
Patrick [00:30:26] Yeah.
Kinsey [00:30:27] All right. Well, Patrick, we are going to take a short break to hear from our sponsor, and when we come back, we're going to take an eye to the future, figure out what comes next. —
Kinsey [00:30:37] And now back to the conversation with Patrick Spence. So, Patrick, you have had a long career in tech, certainly had a front row seat to a lot of innovation as it happens. I want to talk about the future of innovation.
Kinsey [00:30:47] When we think about the ways that big tech is or might be infringing upon existing tech and inventions, it's not hard to imagine that this might have something of a chilling effect on innovation and on entrepreneurship more broadly. You know, why build something new if the next big tech company is just going to come and rip you off?
Patrick [00:31:07] Yeah, well, a couple of things. One is, you know, we do have half the number of public companies we did 20 years ago. And new business starts, I believe, have been at a 30- or 40-year low in the last few years. And so I think we're seeing the ramifications of not enforcing the rules and allowing kind of a laissez-faire attitude towards all the consolidation in tech and these other industries.
Patrick [00:31:29] But, I'm also an optimist. There are also lots of companies that are starting. And then when we look particularly in tech, one of the things that has happened is there's more new businesses starting in tech specifically. And people with a lot of ideas, a lot of great stuff in the auto space, in the healthcare space, wellness climate as well. And so the human spirit is an amazing thing.
Patrick [00:31:52] And people are finding ways to persevere and finding ways and innovation to win. What we have to make sure is that as companies do all this great innovation and start to reach critical mass, that they're not kneecapped by a few companies that have a strong balance sheet and can just invest at a loss for a long time to try and grab land as we go through that. But at the end of the day, look, the human spirit, as we've seen through the pandemic, is an incredible thing.
Kinsey [00:32:20] Yeah.
Patrick [00:32:21] And we figure it out and we persevere as we go through these things. I just think we also need to be mindful that we haven't been enforcing some of the rules over the last 30, 40 years. And we need to get back to ensuring that there's a level playing field as we think about the kind of businesses that can be built in the way that we think about competition at the end of the day. Because we want competition. It's a good thing. Again, being big isn't a bad thing, but we want to make sure that people are competing on a level playing field.
Kinsey [00:32:50] So let's say, Patrick, that you were to start a new company tomorrow. It could be Sonos. It could be something else. But let's say you're starting a new company that's going to compete with big tech tomorrow. What kind of competitive advantages or moats would you try to dig for yourself if you had to compete with big tech as a scrappy, young startup right now?
Patrick [00:33:09] You would want to make sure that you're playing in a space that is not right at the heart of something that they see. And not something that's obvious. You want to have some sort of insight if you're starting the next thing that's a little bit different and perhaps in a smaller—it's small today, but expected to be big way down the road. And you've got that.
Patrick [00:33:29] And then the other thing I would say is you make sure you've a clear mission and how you're going to go do it. And I do think focus can be your friend here. So if you're really focused on delivering in one particular area, you've got one particular kind of approach, you can go execute that better than a big company that's trying to do everything, at least for a while, until they actually see that it's become a big business and then they can bring the power of their balance sheet to bear on that.
Patrick [00:33:55] But I think the other important thing that differentiates us and a few other companies from some of those that haven't been so fortunate is intellectual property and making sure that you are patenting your inventions as well. And I think people have become much smarter about that as more and more invention has happened. So the system's there for the very reason that we're using it right now.
Patrick [00:34:19] And so, one piece of advice for anybody starting out in the tech space would be making sure that they are patenting their inventions and making sure that they have those patents. Because there is a system that helps protect you should others start to infringe on that intellectual property and inventions. So, that's an important aspect of it.
Kinsey [00:34:39] Right. We've talked a lot, Patrick, about the ideal set of rules and how they would be enforced could the Congress and the people who—the powers that be [laughs]—if they could enforce the rules that should exist, what tech would look like, how everybody would benefit. But let's say, with the rules as they exist today, with the enforcement as it exists today, do you think that the company you just described, this young startup, could actually have a fighting chance against big tech?
Patrick [00:35:06] There will always be exceptions through this. And I think we have to be mindful that when we see a Sonos or we see a Zoom, we recognize that, hey, like, shouldn't there be a lot more of those? And going through instead of the one or the two that are able to kind of cut through the noise, you know, and kind of find their niche, if you will. And so that's what I think we will see. More examples, for sure.
Patrick [00:35:38] But at the same time, it's become harder and harder over the 20 years I've seen in the space, given kind of the things that the big tech companies have learned and how they put their balance sheets and the kind of their power in different categories to work. So, we'll continue to see it.
Patrick [00:35:54] Again, the human spirit is an amazing thing as we go through this. But I certainly think that we should, as a society, endeavor to help make sure that we have a robust economy and robust competition. And so there's more to be done.
Kinsey [00:36:06] Yeah, absolutely. There's been this renewed focus, I would say, in the last several months throughout the pandemic, on supporting small businesses when we can, shopping small when we can, because, you know, Amazon is not going to go under. Like they have no—there's not a snowball's chance in hell, right, that like Jeff Bezos is going to lose all his money. But these small industries, like small shops, they actually may. That's a reality that could come to pass.
Patrick [00:36:31] Absolutely.
Kinsey [00:36:31] But, I love thinking about this other aspect of it's not just shopping small. It's also taking a second to wonder why aren't there more of X company? It's because of big tech or it's because of X, Y, Z reason. What else can we do? You know, is it writing your senator? Is it continuing to shop small? Is it, like, getting out on social media? What should we be doing?
Patrick [00:36:53] Yeah, I mean I love what Tobi and the team at Shopify are doing because they're really arming the rebels. And so they're enabling a lot of those small businesses to go online, which is fantastic. And so that's important. And I think what we've seen through the pandemic is our direct-to-consumer business has been up 84% year over year. It's a huge part. It's gone from 12% of our business last year to 21% this year, which is massive. A few years' worth of change, all in a few months.
Patrick [00:37:22] And I think people are being a little more mindful of the companies they interact with, and the brands they interact with, and how they interact with them. And I think some of the—I think people are willing to shop directly with the brands that kind of engage with more companies and are being a little more thoughtful about that.
Patrick [00:37:37] But look, even as you think about something like the Facebook boycott this summer, it didn't really put a dent in the general trajectory of where they are. And through the pandemic, all of the big tech companies have benefited in a massive, massive way. You've seen their market caps go up dramatically, right, while we've seen small businesses get absolutely decimated.
Patrick [00:37:59] So you can see that should be just another signal to us that the system is not working the way that we've intended it to. And so what are we going to do about that? And again, of course, as consumers, we can make good choices on a daily basis. But at the end of the day, most people are going to go back to like, what's the decision from a cost perspective or an ease perspective?
Patrick [00:38:21] And so we can't be naive about the fact that we need to make sure the system is working, and there's not things that are getting in the way of making sure that we're giving entrepreneurs and small businesses a fighting chance.
Kinsey [00:38:34] Yeah. I think if there is one theme from 2020 that I will take away, number one is acceleration and number two is resetting the system. Sometimes you have to break the bone and get it reset. And it's a necessary pain, but it has to happen.
Patrick [00:38:47] That's right.
Kinsey [00:38:48] Thank you Patrick, so, so much for taking this time to come on Business Casual. I absolutely loved this conversation. I feel like you offered such incredible insight into this problem as it exists. But also offering solutions is a fantastic way to go about it. [laughter] I really appreciate your time and all of your analysis here. Thank you very much.
Patrick [00:39:07] Thanks, Kinsey. It was fun. Appreciate it.
Kinsey [00:39:17] Thank you so much for listening to this episode of Business Casual. Patrick did a fantastic job of answering so many questions that I threw his way, but he also gave me a ton more questions I want to ask. I'm going to do just that in our next episode with tech reporter Casey Newton. Make sure you are subscribed to Business Casual so you don't miss this episode with Casey. I know you're going to love it. See you next time. [sound of a ding]