Tech

As Amazon floods the market with Alexa devices, the business model is getting fresh scrutiny

Key Points
  • Some Amazon analysts and investors say the financial benefits of Alexa are unclear.
  • The longer-term goal could be to make money off an app marketplace through skills.
  • Dave Limp, who runs Amazon’s hardware business, told CNBC in an interview that Amazon doesn’t generate much profit from the sale of each device.
Todd Haselton | CNBC

Following the runaway success of the original Echo device, Amazon has launched a dizzying number of new Alexa-powered products to get its gadgets in more living rooms and kitchens.

The company continued with that approach this week, announcing over a dozen new voice-controlled products, including wireless earbuds and smart glasses that can interact with Alexa.

Amazon has found a massive audience for its portfolio of Echos, giving the company a clear early lead in the burgeoning voice assistant space. But some investors and analysts are starting to question the financial strategy behind Alexa and whether there's a profitable business model emerging for the devices and underlying technology.

"Amazon has successfully shipped millions of devices to millions of customers — but to what end?" said Andrew Murphy, managing partner at Loup Ventures, which invests in start-ups and publishes research on consumer technology. Murphy said he owns Amazon shares personally, though the firm does not.

After the last Christmas holiday season, Amazon said it had sold over 100 million Alexa-powered gadgets, and a report soon after from Consumer Intelligence Research Partners showed Amazon with 70% control of the U.S. smart speaker market. Unlike Apple, which commanded only 6% of the market at the time, Amazon isn't aiming to make money off device sales but sees them as a means for getting customers into the Amazon universe, where presumably they'll spend in other ways.

Amazon Echo Frames
Todd Haselton | CNBC

That helps explain why you can get the small Echo Dot for $50 and a number of products for under $100, while an Apple HomePod, powered by Siri, will run you $300. Amazon's devices are consistently best-sellers in the electronics category of its website, but the company doesn't disclose how much revenue they produce.

Dave Limp, the head of Amazon's hardware business, told CNBC in an interview on Wednesday that the goal is to make money when "customers use the products, not just when they buy them," echoing an earlier interview where he said that people who own the devices buy more digital items like music and audiobook subscriptions.

Murphy said the approach so far has been a "head-scratcher" because shopping by voice remains difficult. His firm recently ran a test that showed Alexa lagging far behind the Google Assistant in answering commerce-related queries, and underperforming Apple's Siri in overall performance.

"We can envision Alexa as a seamless e-commerce platform, but the reality is that it's just not there yet," Murphy said.

App store model

Ben Schachter, an analyst at Macquarie Research, said that Amazon's longer-term focus may be in building an app store model where it takes a cut of each transaction. The app store equivalent for Alexa is called skills and includes over 100,000 services, like guided meditation, oral quizzes, exercise offerings and comedy shows from third-party developers.

Schachter didn't provide an estimate for how big the skills business could eventually become, but he noted that the traditional app market exceeds $100 billion globally.

"We don't think Amazon intends to make significant money from hardware sales directly, but rather from increasing touchpoints to the overall ecosystem and app store-like models," Schachter wrote in a note on Thursday.

In a statement to CNBC, Amazon said, "Our focus is on building the best possible experience for our customers, and the rest will take care of itself."

For now, the company is focused on making Alexa even more ubiquitous. In addition to the wireless earbuds and smart glasses introduced this week, Amazon also showcased a ring that can talk to Alexa and announced a partnership to bring its voice assistant to millions of General Motors vehicles.

D.A. Davidson's Tom Forte, one of the most bullish analysts on Amazon, said the market is still vastly undervaluing the potential for Alexa. It's already become the leading voice technology for connected devices, and shopping from the gadgets is still in its very early days, he said.

"We, the consumers, are all lab rats in Amazon's lab as it tries to figure out how to best monetize Alexa," Forte said.

Amazon has the luxury of a forgiving investor base that's been trained to expect low profit margins. Even with the rapid growth of its highly profitable Amazon Web Services unit, the company's operating margin in the latest quarter was below 5%, compared to 24% for Alphabet and 21% for Apple. So breaking even For Amazon would hardly pull down its overall earnings.

"Investors give Amazon more freedom to experiment with unprofitable businesses than perhaps any other big tech company," Murphy said.

WATCH: Amazon debuts Alexa-powered wireless Echo earbuds

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Amazon debuts Alexa-powered wireless Echo earbuds