May 10, 2017 - 7 minutes read time
Riding on a recent surge in share price, Amazon sent another shock wave through the tech world on Tuesday by launching a smart Wi-Fi speaker that not only hears what you say, but also shows you what it sees. This 7-inch touchscreen-equipped digital assistant — Echo Show — is the latest addition to the Alexa family, which began as a simple voice-controlled alarm clock and is fast becoming the central hub of digitally connected homes. All your home appliances and accessories, including your vehicle, will soon be connected to the Internet and voice controlled. Someday in the future, when the milk is running low, your fridge will text you a shopping list while routing your Volkswagen to the closest Walmart on the way home.
This vision is not new. For years, smart home automation has been touted by IT giants like Apple AAPL -0.25% and Microsoft, as well as by upstarts like Nestand Canary. What most distinguishes Amazon is the speed of execution. According to eMarketer, some 60 million Americans use a voice-activated assistant device at least once a month — that’s one-fifth of the number of smartphone users. Amazon’s Echo leads the market by a margin of over 70%, leaving Google GOOGL +1.03% with less than 25% of the market share and all others, including Samsung, LG, and Harmon Kardon, with negligible single-digit shares.
No doubt CEO Jeff Bezos has shaped much of Amazon’s strategy, for he is the most ardent champion of speed. “You have to somehow make high-quality, high-velocity decisions,” Bezos wrote in a letter to shareholders last April. “Speed matters in business – plus a high-velocity decision-making environment is more fun too.” But exactly how does Amazon stay ahead in the battle for connected homes, which is such an obvious market for competition?
Kickstart A New Platform
Among business school academics, the so-called “network effect” is a favored explanation for the rise of Uber, Airbnb, eBay, and Facebook. In each of these cases, a company took on the role of a platform (another favored term), facilitating sellers on the supply side and buyers on the demand side in their efforts to exchange goods or services.
The value of a platform depends largely on the number of users on each side of the exchange. The convenience for Uber’s customers is largely due to the high number of drivers in the city. Conversely, drivers are attracted to work for Uber because there are many potential riders using the platform.
As a result, in most situations, a platform company’s profit margins tend to improve when its user base grows. Users are willing to pay more for access to a bigger network. That’s why when Snapchat went public last March, the number of daily active users became the single most important metric for potential investors. The more users chatting on Snap, the more willing big brands like Coca-Cola or P&G are to buy ads, and the higher Snap’s share price becomes.
The same logic also applies to Amazon. From Amazon Web Services (AWS) to the Kindle e-reader to Fire TV, when the user base grows, not only can Amazon reap the benefits of economies of scale in hardware manufacturing with a drop in unit cost per device, but end-users will also find the services delivered on those devices increasingly irresistible. That explains why Kindle e-readers are priced at a rock-bottom $59.99 apiece. Amazon must lure a large user base to force book publishers to opt for its e-book format, which in turn increases the size of the library for consumers.
This low-cost strategy has also been the touchstone for Amazon’s Echo family. The Echo dot was sold as low as $29.99 during Black Friday last year. No one can make much money at this price point. But for Amazon, this is a race for a large installed base. As Bezos likes to say, “your margin is my opportunity.”
But a low-price strategy is not sufficient to guarantee long-term growth. Amazon is building a defensible position based on a new capability to tie all its businesses together: Artificial Intelligence. Echo Show is a mere shortcut to reach this end goal before the competition.
The Power Of Others
Baked into Echo Show is Alexa, similar to Microsoft’s Cortana, Apple’s Siri, or Google Assistant. “Google on paper is much better positioned to do something like this than Amazon,” said Jan Dawson, founder of Jackdaw Research. Because Google has acquired considerable knowledge about the world, having spent almost two decades parsing data for search queries, Google’s conversational assistant appears to be far more intelligent than Amazon’s Echo. When asked, “Play the Shakira song from Zootopia,” Google knew to play the correct track, whereas Amazon’s Alexa fumbles at this sort of cryptic request.
Knowing that Amazon could never rival Google in neat party tricks, Jeff Bezos turned his attention to making Alexa an open standard that works with third-party gadgets around the house, thus integrating an ever-growing number of services into people’s lives. That strategy might help win the platform war.
From early on, the Amazon CEO has aggressively pushed his 1,000-employeeEcho team to speed up certifying third-party apps, aka “skills.” Back in June 2016, the company announced that they’d reached more than 1,000 skills – up from 135 in January. Today, Echo masters more than 10,000, including Uber (hail a ride), Fitbit (review health stats), Mixologist (make a cocktail), Domino’s (order a pizza), Kayak (book a hotel), Capital One (check your account balance), CNN, NPR, and the like (get news), plus applications from other device makers (Philips, Samsung, and GE), and, more recently, Twitter. How many third-party apps does Google Home currently have? As of December 2016,
How many third-party apps does Google Home currently have? As of December 2016, there were about 30. In a hilarious video showdown, Joanna Stern of The Wall Street Journal interviewed both devices and asked them to remind her “to buy a monkey.” Amazon Echo did it with ease, as it includes Google Calendar support. Google Home, however, feebly replied “Sorry, I can’t set reminders yet.”
Bezo’s stamp is everywhere when it comes to embracing to third-party apps. In fact, this has been the guiding principle of all things Amazon.
Sometime back in 2012, when the company was building Amazon Web Services (AWS) for the enterprise market, Jeff Bezos insisted that all AWS services be built to easily communicate with each other and with external parties over Web protocol. For cloud computing services, computers have to swap information with the servers in the cloud. That means Amazon must enable a common language, so that computers, regardless of different operating systems and software, can talk to one another.
His instructions for creating such a common interface — an application programming interface, or API — were written in an email that finished with a characteristic signature, “Anyone who doesn’t do this will be fired. Thank you; have a nice day!” Such authoritative tactics seem harsh, but it’s precisely this kind of intervention that breaks silos inside a large company and puts app developers first.
This is also how Amazon Echo developed the 10,000 third-party skills mentioned earlier. In June of last year, Amazon released improved “Skill Kits”for developers. Third-party programmers can easily reuse common skills (e.g., navigate to the next item in a list, pause an action-in-progress, go back to a previous item, or resume an action), and integrate these basic functions into more advanced features. It may sound easy to open a system to third-party developers, but building a set of easy-to-use tools and motivating people to use them is often less than straightforward.
A Multi-Platform Strategy
The primacy of artificial intelligence (AI) is all too obvious for Amazon. Whether it is selling your favorite books, picking an outfit you love, playing an unforgettable album, sending you must-have groceries, or streaming a great movie, AI will be able to understand your wants and satisfy them exactly when needed. But a company can improve its AI’s performance only as fast as it grows its user base. Machine learning’s progress depends on how much data a firm can capture. Improvements brought forth by AI will, in turn, improve the customer experience, making users even more loyal. The same can be said for Google Assistant, Apple’s Siri, or Microsoft’s Cortana.
What is most remarkable for Amazon is the speed at which the company is able to execute this well-known strategy. It forfeits short-term profits to pursue a larger installed base. It embraces an open standard and prioritizes the needs of third-party developers like no one else. It adds new functionalities to the existing platform to excite developers to further innovate. From a simple Wi-Fi speaker on the original Echo, Amazon built Echo Look with a camera lens, and now Echo Show that comes with a touchscreen as well. Compared to Microsoft or Google or Apple, Amazon might not be the most sophisticated IT firm. But it might end up being the first to finally crack the connected home market.
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