Amazon’s Echo Strategy Backfires: Billions in Losses and a Rethink of Alexa
Amazon.com Inc.‘s AMZN strategy of selling its Echo devices at low prices in the hopes of generating profits elsewhere within the company has backfired, resulting in billions in losses. This news comes as Amazon plans to launch a paid tier of Alexa this month and re-evaluates its approach to the devices business.
Key Takeaways:
- Amazon’s Echo devices have failed to generate the expected profits, with the devices business incurring over $25 billion in losses between 2017 and 2021.
- This miscalculation under Jeff Bezos‘ leadership is now being addressed by CEO Andy Jassy, who is launching a paid tier of Alexa and re-evaluating Amazon’s "downstream impact" metric.
- While some engineers remain skeptical of the paid Alexa tier, Amazon maintains that its devices division is well-positioned for success.
- This news comes as Amazon plans a major overhaul of its Alexa service, incorporating conversational generative AI, and faces competition from Google and OpenAI.
- Amazon’s original book business has seen a resurgence, highlighting the diverse performance across the company’s various sectors.
Amazon’s Echo Strategy Backfires
Amazon’s Echo devices, powered by the Alexa voice assistant, have been a popular choice for millions of customers. Yet, the company’s plan to leverage this popularity to drive sales on its e-commerce platform has not been successful, according to The Wall Street Journal. The publication cites internal documents and people familiar with the business, revealing that customers primarily used Echo for free applications like setting alarms and checking the weather. As one former senior employee remarked, "We worried we’ve hired 10,000 people and we’ve built a smart timer."
Jassy Tackles the Problem
The report states that Amazon’s devices business, which includes Echos, Kindles, Fire TV Sticks, and video doorbells, has incurred losses of over $25 billion between 2017 and 2021. This represents a significant miscalculation made under the leadership of Jeff Bezos, which current CEO Andy Jassy is working to rectify.
As part of this effort, Amazon is set to launch a paid tier of Alexa this month. However, some of the engineers working on the project are skeptical about this move’s success. An Amazon spokesperson countered this skepticism, stating that the devices division has created several profitable ventures and is well-positioned for continued success. The spokesperson added, "Hundreds of millions of Amazon devices are used by customers around the world, and to us, there is no greater measure of success."
Re-evaluating "Downstream Impact"
Jassy is also re-evaluating the "downstream impact" metric used within Amazon. This metric, developed in 2011, assigns a financial value to a product or service based on how customers spend within Amazon’s ecosystem after they buy it. While successful in some instances, such as with the Kindle e-reader, it has not worked as intended for devices like the Echo. This re-evaluation suggests that Amazon is acknowledging the shortcomings of its previous strategies and seeking to adapt its approach to the devices business.
Competition and a Resurgent Book Business
Amazon’s struggles with its devices business come at a time when the company is making significant changes to its Alexa service. In June, news surfaced of a planned major overhaul of Alexa, integrating conversational generative AI. This project, internally known as "Banyan," is expected to introduce a two-tier system, with a premium version potentially costing around $5 monthly.
Amazon also plans to launch a more conversational version of Alexa later this year, potentially positioning it to better compete with new generative AI-powered chatbots from companies like Google and OpenAI. This increased competition underscores the challenges Amazon faces in its pursuit of a profitable devices business.
In contrast to the financial struggles of the devices business, Amazon’s original book business has seen a resurgence, generating $16.9 billion in gross merchandise sales in the first 10 months of 2022. This success highlights the diverse performance across Amazon’s various sectors, indicating that the company’s overall strategy remains robust, despite the challenges faced in its devices business.
Amazon’s efforts to address its Echo losses signal a shift in strategy. The move towards a paid tier of Alexa, along with the re-evaluation of the "downstream impact" metric, signals a willingness to adapt, innovate, and confront the challenges posed by a changing market environment. This effort, alongside the success of Amazon’s book business, paints a picture of a company navigating diverse challenges and opportunities.
