Amazon’s devices and services division, 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 track to lose about $10 billion this year alone, according to an employee familiar with the Business quoted team. Insider. It’s also a major focus for some of Amazon’s biggest layoffs ever.
Amazon faces an eternal dilemma: great technology alone doesn’t make money, business models do. Some of the world’s most popular technology platforms still struggle with that concept. WhatsApp, which Meta Platforms Inc. bought for more than $19 billion and used by more than 2 billion people, still generates little revenue. Twitter Inc., which has about 300 million active users, is struggling to maintain profitability and break away from a business model other than advertising. Today’s massive, 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 that consumers are willing to spend much more than the cost of the device and upgrade every two years, just like 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, asking 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 largest e-commerce platform and its digital assistant could be another useful interface for its customers to shop for groceries. At the very least, they could use it to reorder common items like toilet paper or cleaning products.
That idea never materialized because of course no one trusts Alexa to buy things for them. There are a lot of stories about Alexa ordering things the 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 report about the incident, in which a TV presenter repeated the girl’s commands, eventually spurred more orders in households where Alexa heard the broadcast. More importantly, consumers want to be sure that their commands will not be misinterpreted when money is at stake. That’s why Amazon’s visual interface is still winning years after Alexa came onto the scene.
The Echo’s other potential revenue stream was getting insights from people’s commands. But not only is that creepy from a privacy standpoint, there’s also not a lot of valuable information to glean from people asking Alexa for the time, the weather, or how to set a timer.
The company may be preparing for a change of 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 about $99.) If David Limp, Amazon’s head of devices and services, preys on higher-income consumers, it could mean a path to greater financial success for Alexa.
The company should flip its script even as it raises prices: focus on streamlining its range of Echo speakers into a few streamlined offerings that cost a few hundred dollars more and that people are willing to pay to upgrade – and let dropping the astronomically priced Astro, which doesn’t have the same kind of utility as Alexa. The Echo itself is useful and much loved by millions of consumers. Just don’t invade privacy to take advantage of the multitude of Alexa fans.
Amazon Chief Executive Officer Andrew Jassy called Alexa a unit that still has “great opportunity,” in a statement about corporate layoffs last week. That bodes well for the future — when Amazon can finally settle for a business model that works.
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This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Parmy Olson is a Bloomberg Opinion columnist on technology. She is a former reporter for the Wall Street Journal and Forbes and author of “We Are Anonymous.”
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