The colossal failure of Amazon’s Alexa business model

  • Amazon’s Alexa was Jeff Bezos’ favorite project; now it’s a target for business cost reduction.
  • Insider reported that the Amazon division that built Alexa is set to lose $10 billion this year.
  • Voice assistants were supposed to be revolutionary, but nobody figured out how to make them profitable.

The division that houses Amazon’s Alexa is poised to lose $10 billion this year alone, as Insider’s Eugene Kim reported. And as layoffs hit Amazon, the Alexa team, once 10,000 strong and a passion project for then-CEO Jeff Bezos, is now a juicy target for cuts.

The Amazon Echo debuted in 2014 and was the company’s first real success as a hardware manufacturer. Early versions of voice assistants were around from the start, and Siri debuted on the iPhone in 2011, but Amazon’s Echo spawned a whole new class of gadget: the smart speaker. The standalone voice assistant was immediately useful, and in 2018 the company sold over 100 million Alexa-enabled devices.

Amazon sold the Echo device at cost to entice people to buy things from the site, but the smart speaker never became the significant sales driver the company hoped for. Then again, having to listen to Alexa read two minutes of copy over dishwasher pellets to make sure you’re ordering the right brand isn’t exactly a great user experience.

But as initial Echo sales exceeded expectations within the company, Amazon and others began to look to Alexa and voice computing as a new platform. It created an app store, Alexa Skills, hoping to spark the same wild innovation that Apple saw when developers were allowed into its App Store in 2008. And it launched proprietary products like microwave ovens and televisions with built-in Alexa. It even licensed the Alexa voice assistant to other manufacturers, hoping to make the assistant ubiquitous in homes.

One of the main weaknesses of Amazon’s ambitions to be in almost everything is that it doesn’t have a platform. It doesn’t control a PC operating system like Microsoft or Apple, and doesn’t have a mobile platform like Google’s Android or Apple’s iOS (even Amazon Fire tablets just run a modded version of Android).

Voice computing, many thought, could be the next platform, and Amazon could own it.

‘Glorified Clock Radios’

But internal Amazon data and user surveys have begun to show that voice commands are ideal for a narrow range of tasks: setting a timer, playing music and knowing the weather. You may have heard Alexa plaintively remind you that it can do so much more than set a timer – that’s because Amazon knows most people don’t do much beyond that. Some people even stop using the product after a few weeks.

The pessimistic view was that “Amazon has managed to sell a lot of glorified clock radios,” as Benedict Evans, a former partner of Andreessen Horowitz, wrote in 2019.

It’s a fundamental paradox for voice assistants like Alexa or Google Assistant: the technology has been hugely successful. Many consumers find it really useful. And no one can make money from them.

Amazon can’t get people to buy more stuff with Alexa, and it’s chosen not to require Amazon Echo users to have an Amazon Prime account, the only other credible way to earn money. Amazon Skills collapsed when the developers realized there was no money to be made for the platform. Amazon uses voice queries to help with ad targeting, but advertising makes up a small percentage of Amazon’s total revenue.

Amazon is not alone. Google has shifted spending from its Google Assistant to improving its Google Pixel smartphone, The Information reported earlier this year. Other potential competitors to Alexa, like Microsoft’s Cortana or Samsung’s Bixby, are pretty much dead.

The only company apparently not suffering from the voice assistant blues is Apple with Siri. That’s because Apple knows its smart speaker isn’t a loss leader. He sold the original HomePod for $349 and his MiniPod sells for $99. For comparison, you can buy an Alexa Dot for $15 right now.

Bezos told shareholders in 2013 that Amazon sells its devices at break-even because “we want to make money when people use our devices — not when people buy our devices.” Apple took the opposite route, deciding that if it sold anything for listening to music, setting timers and checking the weather, it needed to maintain healthy margins.

Amazon, hoping to entice users by keeping the price low, made the Echo and Alexa a basic gadget: cheap and unremarkable.

There’s money to be made selling basic technology products – many businesses stay in business selling laptops, home office printers and WiFi routers. But as Amazon faces a new era of cost discipline, a “glorified clock radio” can’t lose $10 billion a year or employ 10,000 people.

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