Amazon's ambitious foray into the smart device market, especially into Alexa-enabled products, has proven to be a huge financial burden. According to recent reports from various news outlets, including The Wall Street Journal, the company has incurred staggering losses of over $25 billion between 2017 and 2021 on its devices division, which includes Echo smart speakers, Fire TV sets, and Kindle readers. Despite impressive sales figures of over 500 million units, the strategy has not translated into the expected profitability.
The bold plan to offer affordable devices to drive future sales has been a double-edged sword for Amazon. As the report shows, Alexa users mostly use the devices for basic functions like checking the weather and setting alarms, rather than making big purchases. As one former senior employee pointedly summarized, “We hired 10,000 people to make smart timers, so I'm worried.” The sentiment is emblematic of Amazon's executives' struggle to commercially harness the potential of their smart assistant.
At the helm, CEO Andy Jassy is under pressure to shift strategy around Alexa. Since taking over the Seattle-based giant in 2021, Jassy has made clear his intentions to cut costs and improve efficiency. The devices business, vital to Amazon's ecosystem, now appears in shaky shape.
Internally, Amazon's management has long embraced a “no profit timeline” approach, prioritizing innovation over short-term financial gain. This ethos was articulated by former senior vice president Dave Limp in 2019, when he said, “We don't need to make money when we sell a device. Instead, we make money when people actually use our devices.” This philosophy led teams to develop products with some disregard for potential profitability.
But Jassy's new leadership style seems to emphasize accountability, and the old system's methods are coming under scrutiny. Teams that didn't show a clear path to profitability have faced cuts, especially those that rely on a vague notion of “downstream impact.” This shift in strategy marks a major departure from the permissive environment that allowed the Devices division to function with limited oversight.
Losses in its devices business, particularly Alexa, have not only triggered investigations into its financial viability but also sparked failures in product development: For example, the Alexa division reportedly lost more than $5 billion in 2018, yet it continues to invest in ambitious projects such as consumer robot Astro and game streaming service Luna, neither of which have yet generated profits that would justify their development costs.
Despite its ongoing financial woes, Amazon hasn't shied away from expanding its foothold in the smart home space. Echo and similar products have been best-sellers during events like Prime Day. But while products have flown off virtual shelves, this success hasn't translated into the long-term business relationships it had hoped for. Meanwhile, revenue from high-margin sales has dwindled as more and more users turn to Echo devices primarily for the free features.
In an effort to stem its budget deficit, Amazon is reportedly preparing to introduce a paid Alexa tier with upgraded AI capabilities. The new service, internally dubbed “Remarkable Alexa,” is expected to generate revenue from users who want enhanced features beyond the standard service. However, there are early whispers of skepticism among Amazon engineers that such an initiative will significantly change the business landscape.
The challenge looms large amidst stiff competition from other tech giants. Google and Apple have stepped up their strategies in this area, with Google preparing a new service that integrates Google Assistant with its own AI model, Bard, while Apple recently announced a major update to Siri with Apple Intelligence. The challenge for Amazon is whether its new pricing structure can attract existing and potential customers when similar features are available elsewhere, possibly for free.
Alexa's struggles seem a symptom of broader challenges in the tech industry, as platforms try to balance initial sales with ongoing user engagement and profitability. Amazon remains committed to its big vision, and some Amazon insiders argue that planned Alexa enhancements could help restore its standing in both the company and the consumer market. But with winds of change blowing among executives, only time will tell whether Alexa can evolve from a mere timer into a revenue-generating powerhouse.
The stakes are especially high not just for Alexa but for Amazon’s entire ecosystem, where the company appears to need to rapidly evolve its current efforts to avoid shutting down one of its most public-facing brands. This internal revolution, with a focus on monetization and accountability, could pave the way for a more sustainable model in the burgeoning world of smart technology if it can embrace it effectively.
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