When Amazon.com Inc. first introduced its Echo smart speaker in 2016, it was mocked in some parts of the tech press as a gimmick. Why would anyone want a speaker to tell them the day of the week, or ask how many teaspoons were in a tablespoon? It turns out lots of people do. An estimated 65 million Echo units were sold globally last year, and sales are projected to continue increasing. When it comes to scale and popularity, the speaker’s digital assistant Alexa has been a tremendous success. But the snark at the start of Alexa’s life was partly right. Financially it’s been a flop. Amazon sells its device at cost and with more than 10,000 employees working on the project, it is bleeding cash.
Amazon’s devices and services unit, which oversees Alexa, had an annual operating loss of $5 billion in recent years, according to a report earlier this month in the Wall Street Journal. A more recent report from Business Insider, which spoke to more than a dozen former and current employees, paints a worsening picture: the division is on course to lose about $10 billion this year alone, according to an employee familiar with the team cited by Business Insider. It is also a prime focus for some of Amazon’s biggest-ever layoffs.
Amazon is experiencing a perennial dilemma: Great technology by itself doesn’t make money, business models do. Some of the world’s most popular tech platforms still struggle with that concept. WhatsApp, which Meta Platforms Inc. bought for more than $19 billion and is used by more than 2 billion people, still brings in little revenue. Twitter Inc., which has about 300 million active users, has struggled to maintain profitability and branch out from a business model other than advertising. Today’s mass, unprecedented layoffs are the painful price of that dilemma.
Amazon needs to experiment with a strategy better suited to hardware, such as emulating Apple Inc.’s iPhone. It should focus on improving the technology and services around Echo and Alexa so consumers are willing to spend much more than cost price for the device, and for an upgrade every two years or so, just as they do with their smartphones.
In its first TV commercial for the product, Amazon teased how it hoped its smart assistant would make money. A woman speaks to the device in her kitchen and asks it to “add wrapping paper to the shopping list.” You can imagine from there that the shopping list could turn into actual orders made through Alexa. That makes sense in theory. Amazon is the world’s biggest e-commerce platform, and its digital assistant could be another helpful interface for its customers to do their shopping. At the very least, they could use it to re-order regular items like toilet paper or cleaning materials.
That idea never materialized because, of course, no one trusts Alexa to buy things for them. Stories abound of Alexa ordering things its owners don’t want. There’s the story of the six-year-old girl in Dallas, Texas who ordered cookies and a $170 dollhouse through the device when her parents weren’t around. A news reports about the incident, in which a TV anchor repeated the girl’s commands, ended up triggering more orders in households where Alexa heard the broadcast. More importantly though, consumers want to be sure their commands aren’t misinterpreted when money is at stake, which is why Amazon’s visual interface still wins out years after Alexa came on the scene.
The Echo’s other potential revenue stream has been to glean insights from people’s commands. But not only is that creepy from a privacy standpoint, there’s also not much valuable information to collect from people asking Alexa the time, weather or to set a timer.
The company may be gearing up to change its approach. Amazon made an unusual pivot in September 2021 when it launched a much more expensive, $1,500 home robot called Astro. (The Echo usually costs around $99.) If Amazon’s head of devices & services, David Limp, is gunning for higher-income consumers, that could spell a path to greater financial success for Alexa.
The company should flip its script even as it raises prices: Focus on streamlining its array of Echo speakers into a few sleek offerings that cost a few hundreds dollars more and which people are willing to pay to upgrade — and drop the astronomically-priced Astro, which doesn’t sport the same kind of utility as Alexa. The Echo itself is useful and much beloved by millions of consumers. Just don’t infringe on privacy to capitalize on the multitude of Alexa fans.
Amazon Chief Executive Officer Andrew Jassy cited Alexa as a unit that still has “big opportunities,” in a statement about company layoffs last week. That bodes well for its future — if Amazon can finally settle on a business model that works.
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Parmy Olson is a Bloomberg Opinion columnist covering technology. A former reporter for the Wall Street Journal and Forbes, she is author of “We Are Anonymous.”
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