AMAZON ECHO
Commonly referred to as the “Internet of Things” (IoT), the wave of internet-connected (“smart”) devices is well under way. The convergence of the Internet, with the capabilities of embedding computers into products (“things”), has changed the relationships between consumers and consumer products, thereby challenging companies to rethink their internal and external strategies. One of the largest markets for this paradigm shift is the smart home market. Companies such as Amazon have launched products that act as intermediaries for a smart home, providing hands-free virtual assistants with capabilities of connecting smart devices to the cloud. This paper will focus on the connected home hub market (“smart hub”), with a focal point on the Amazon Echo.
Porter’s Five Forces Analysis reveals that the smart hub industry is an attractive market. The emergence of smart hubs will weaken the bargaining power of buyers[OO1] . Since artificial intelligence provides the opportunity for users to have more customizable experiences with their connected devices at home, competition will be based less on price and more on product differentiation. (Porter 2014). The smart hub will reduce rivalry among competitors as opportunities for product differentiation rise. However, the opportunity for increased value-based services may result in competition wars around providing additional features and put pricing pressure on companies. There are tremendous barriers to entry: the high fixed costs of creating complex artificial intelligence, along with increased customer loyalty and high switching costs, will make it difficult for new players to enter the smart hub market. The threat of substitutes is low, since there will be very little competition from traditional products; the closer a user’s home gets to complete automation, the more synergy increases, and the less a consumer will be inclined to revert to substitutes. However, since this market is still developing, there are threats of substitutes from new product entrants, which may have additional capabilities. Once a consumer has utilized a smart hub, suppliers’ bargaining power decreases as the need for replacing physical products decreases; smart hubs will be able to update through software transmitted by Wi-Fi, and they will be less likely to break and need a full replacement of components (Burkitt 2014). The complementors of smart hubs are the third-party application developers that can use artificial intelligence to engage consumers with their products and services. Customizable connected devices that offer value-based services will dominate the consumer market, making it crucial for players like Amazon to fully embrace this market, since most of Amazon’s revenue comes from sales of electronics and other general merchandise, and media services (Exhibit 1).
The Amazon Echo is a connected speaker that uses Amazon’s artificial intelligence, Alexa, to act as a control interface for a smart home. It can work with devices such as Nest Thermostat to control home temperatures or Philips Hue light bulbs to control home lighting (Wolf 2015). In the smart hub space, Amazon Echo is considered an “enabler” — it allows consumers to engage with their home devices through voice activation (Burkitt 2014). Once users have invested in the Echo ecosystem, it becomes easier for them to keep connecting more devices and taking advantage of Amazon’s additional services, such as ordering a repairman or replacement parts for a device or simply listening to an audiobook, thereby increasing willingness to pay. Amazon has been able to incorporate AI into the user experience without the use of a phone or tablet. This encourages users to begin using Alexa more often, thereby influencing consumers’ tweak [OO2] behavior and moving users closer towards automation. Amazon realizes that to tweak consumers’ behavior, it needs to first market the Echo as a home speaker with a few additional smart perks, such as playing music and setting an alarm clock (Exhibit 2).
The platform uses an open interface, making it easy for third-party application producers to make Echo-enabled applications called “Skills.” There are thousands of Skills, resulting in lower unit costs. The easy integration has inspired suppliers to integrate Alexa into their devices. Furthermore, the Echo makes it easier for consumers to tap into Amazon’s powerful distribution channel for hardware products that can connect to Alexa. Devices connected to Echo and using Alexa will be able to reach quicker full automation by self-monitoring and ordering replenishments. Amazon will get an incredible amount of data from Echo, which it can use to reach even better operational effectiveness.
The Echo fits right into the company’s primary mission to be the “most customer-centric company” on Earth (Amazon 10-K 2015). The company’s primary strategy is to provide customer products at the lowest price possible, as opposed to differentiation. The company’s online platform makes it easy to shop on the Web, and its Echo is poised to generate billions in sales through device sales, incremental voice-driven shopping sales, and platform revenues. Two activities the firm has used to implement its strategy are: 1) marketing the Echo as a high-quality home speaker with added capabilities, encouraging more users to bring the Echo into their homes, and 2) providing an open interface for developers that has decreased the barrier to entry for new Skills to get added, resulting in a large number of applications for consumer use.
The Echo is able to use AI to complement Amazon’s e-commerce business to deliver a comprehensive user experience. Amazon Prime members spend 83% more per year on Amazon than non-members — the Echo adds another connection point to further build the relationship with members, which increases WTP (Levin & Lowitz 2016). Prime costs members an annual fixed fee[OO3] . Therefore, the more one uses it, the more spread out the fixed cost is, and the less expensive it becomes. This increases customer loyalty and diverts members from shopping at retail competitors. Amazon’s recent purchase of Whole Foods makes it easier to order groceries with Echo. Whole Foods consumers on average have a higher WTP, and are more likely to own an Echo and be part of the Amazon Prime ecosystem.
Amazon’s strategy is working, as Amazon Echo has an 88% market share of the home speaker market as of Q4 2016 (Ablondi & Watkins 2017). This paper demonstrates that the smart hub industry is an attractive market, which, ceteris paribus, the Echo will continue to dominate with continued employment of its current strategy.
Exhibit 1:
http://csimarket.com/stocks/AMZN-Business-Description.html
2016
Exhibit 2:
References
Ablondi, Bill and Watkins, David (2017). “Intelligent Home Speaker Vendor and OS Market Share.” Strategy Analytics (March 2017).
Amazon.com, Inc. (2015). Form 10-K 2015. Retrieved from SEC.Gov Database.
Burkitt, Frank (2014). “A Strategist’s Guide to the Internet of Things.” Strategy+business (November 2014).
Levin, Michael R. and Lowitz, Joshua N. (2016). “Amazon Prime Grew 35% in 2015”. Consumer Intelligence Research Partners, LLC (January 2016).
Porter, M. E. (2014). “How Smart Products Are Transforming Competition.” HBR(November 2014 Issue).
Wolf, Michael (2015). “What Exactly Is Amazon’s Smart Home Strategy.” Forbes (April 2015 Issue).