Podcast Summary
Alexa's Financial Losses: Amazon's voice assistant, Alexa, has caused significant financial losses for the company, totaling over $25 billion between 2017 and 2021. Despite initial success in getting Alexa into homes, Amazon now faces concerns over monetizing the technology.
Amazon's voice assistant, Alexa, which is installed on over 500 million devices worldwide, has been a significant financial loss for the company, with Amazon's devices team reporting losses totaling over $25 billion between 2017 and 2021. Despite this, Amazon initially saw the value in getting Alexa into homes and planned to figure out monetization strategies later. However, these losses are now a concern for the company. The origin of Alexa can be traced back to Jeff Bezos' fascination with the idea of a Star Trek-like computer that could answer questions, play music, and potentially control home systems. Amazon began working on this concept in 2012, and the team aimed to create a device that could be interacted with through voice commands.
Alexa's unexpected popularity: Amazon underestimated demand for Alexa and sold 3 million Echo devices at or below cost to quickly establish Alexa in households, eventually leading to profitability and expansion to various Amazon products.
Amazon's introduction of the Echo with Alexa in 2014 was a surprise hit. Initially, Amazon was unsure of the demand for this new technology, producing only 80,000 units and offering a waitlist for customers. However, the demand far exceeded their expectations, making the Echo one of the most popular Christmas gifts in subsequent years. Amazon sold over 3 million devices, often selling them at or below cost to quickly get Alexa into people's homes. Alexa, the voice and technology, is separate from the Echo, the speaker, and is now found in various Amazon products. At the time of launch, there was no immediate profit motive, but instead, Amazon aimed to establish Alexa as a household name and figure out monetization strategies later.
Alexa shopping experience: Early Alexa shopping experience was confusing and overwhelming, presenting users with long lists of hard-to-understand options, making the shopping experience unnatural and less appealing
Amazon's early strategy with Alexa was focused on getting the technology into people's homes and winning their trust, with the expectation that they would eventually make money through various interactions and shopping experiences. However, the shopping experience on Alexa was not optimal at the time, with users often being presented with confusing and overwhelming options when trying to make a purchase. For instance, if you asked Alexa to buy a black dress, you would be met with a long list of options, many of which were hard to pronounce and understand without being able to see the actual product. This made the shopping experience unnatural and less appealing to users. These issues, according to people on the Alexa shopping team, were common pitfalls that could lead to mistakes and frustration. Overall, while Amazon's vision of using Alexa to sell products was ambitious, the execution left room for improvement in terms of the shopping experience.
Alexa losses: Amazon's Alexa-enabled devices, despite being in millions of homes, have lost the company billions over a decade due to lack of revenue generation from primary functions and challenges in advertising, while losses are masked by internal accounting metric.
Amazon's Alexa-equipped devices, such as the Echo speakers, have lost the company billions of dollars over the past 10 years. Despite being used in tens of millions of American homes, the primary functions of Alexa, like setting timers, playing music, and providing information, do not generate revenue for Amazon. Advertising on Alexa has been a challenge due to user annoyance, and shopping through Alexa accounts for only a portion of its losses. Amazon uses an internal accounting metric called Downstream Impact (DSI) to mask these losses by attributing some revenue from related purchases to the devices division. While the division has established profitable businesses, the significant losses from Alexa have not been fully disclosed.
Amazon's Downstream Impact metric: The imprecise nature of Amazon's Downstream Impact metric led to internal disputes and potential inaccuracies in revenue reporting, but it still played a significant role in justifying losses and driving growth in product lines like Echo
Amazon's Downstream Impact (DSI) metric, which measures the revenue generated from sales influenced by certain Amazon devices, played a significant role in justifying losses and driving growth in product lines like Echo. However, the lack of precision in attributing DSI to specific product teams led to internal disputes and potential double or triple counting of revenue. This "Monopoly money" approach allowed teams to continue expanding and developing new products, but it also created confusion and potential inaccuracies in revenue reporting. Overall, DSI served as a crucial metric for Amazon, but its imprecise nature led to challenges and debates within the company.
Amazon's shift towards profitability: Amazon, under new CEO Andy Jassy, is focusing on making businesses, including Alexa and Echo, more profitable through the development of a 'remarkable Alexa product' with advanced generative AI capabilities, potentially offered as a subscription service.
Amazon, under its new CEO Andy Jassy, is shifting its focus towards making its businesses, including the devices team responsible for Alexa and Echo, more profitable. Previously, the company had been known for its willingness to invest in innovative, customer-pleasing ideas, even if they weren't immediately profitable. However, under Jassy's leadership, there is a new emphasis on profitability. This shift was highlighted when Jassy, who previously led Amazon Web Services, took over from Jeff Bezos as CEO in 2021. During his review of the company, Jassy identified the devices team as an area of innovation and investment. However, he also saw room for improvement in terms of profitability. To address this, Amazon is reportedly working on a "remarkable Alexa product," which will have more advanced generative AI capabilities than the current version of Alexa. The hope is that this new technology will be such a differentiator and add so much value that it could be offered as a subscription service. In essence, Amazon is looking to monetize Alexa and Echo in a more significant way, reflecting the company's new focus on profitability under Jassy's leadership.
Amazon's DSI division losses: Amazon's DSI division, which includes Alexa, has been operating at a significant loss for over a decade, but its role in Amazon's broader ecosystem, particularly in voice technology and smart home devices, may make it a harder decision to discontinue than other unprofitable products.
Amazon's Devices and Services (DSI) division, which includes Alexa, has been operating at a significant loss for over a decade, totaling billions of dollars. Despite this, DSI was protected due to its role in justifying the division's existence through Amazon's internal accounting metric, DSI's development was driven by good intentions, but the unprofitable product has been a surprise given Amazon's focus on profits. With the change in leadership at Amazon, there have been discussions about discontinuing Alexa, but it's unclear if this will happen. Hardware, especially unprofitable ones, can be challenging for companies like Amazon to justify due to the high costs of R&D and manufacturing. However, the importance of DSI in Amazon's broader ecosystem, particularly its role in voice technology and smart home devices, may make it a harder decision to discontinue than other unprofitable products. Ultimately, Amazon will need to carefully consider the potential impact of continuing to invest in DSI versus cutting their losses and moving on from the product.
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