Amazon’s foray into the realm of smart home technology with the Echo devices and the Alexa assistant, which began in 2014, has led to extensive financial setbacks. The original plan to sell these products at low prices, with the expectation of future revenue from other Amazon services, has not borne fruit as anticipated.
The Initial Strategy
Amazon’s approach was similar to Gillette’s tactic of selling razors at a loss to profit from blade sales. The company hoped Echo users would shop more on Amazon, thereby boosting sales across its ecosystem. However, this usage pattern did not become widespread as projected.
Many users primarily employed Echo devices for basic tasks such as setting alarms and checking the weather, rather than for shopping on Amazon. This limited engagement resulted in Amazon’s device division, which includes Echo, Kindle, Fire TV Sticks, and video doorbells, suffering substantial losses. According to internal data, from 2017 to 2021, the company recorded losses exceeding $25 billion in this sector.
Downstream Impact and Internal Metrics
The “downstream impact” (DSI) metric, introduced in 2011, played a considerable role in Amazon’s sustained investment in its device business. This metric estimated the financial benefit of a product based on related spending within the Amazon ecosystem. While DSI supported investments in products such as Kindle, it did not yield similar results for Echo devices. The devices team could claim broader revenue benefits even if direct sales weren’t profitable, thanks to DSI.
Amazon’s strategy also faced pressures from competitive moves by Google, which priced its smart speakers aggressively to gain market share. In response, Amazon employed aggressive pricing and extensive promotions, including freebies, to expand its user base. These tactics, however, did not translate into the expected revenue from Alexa-driven shopping.
Leadership and Strategic Shifts
During Jeff Bezos’s tenure, the devices team received strong backing despite growing losses. However, since Andy Jassy became CEO in 2021, there has been a pivot towards focusing on profitability. Jassy’s business reviews led to the discontinuation of projects working on unprofitable devices and an increased emphasis on developing new revenue streams.
To address these financial challenges, Amazon is planning a comprehensive redesign of its Alexa service, codenamed “Banyan.” This project will introduce a two-tier system, including a premium version potentially costing about $5 per month. The premium Alexa will feature generative conversational AI, set to compete with similar products from Google and OpenAI.
Last Updated on November 7, 2024 3:31 pm CET
