The Amazon-ing Race for the Smart Home and One More Thing

Since Google Home was announced it has been hailed as Echo’s smarter brother, nightmare and slayer. I would agree too — if we were predicting the outcomes based on competitive strategy; but we’re not — we are predicting outcomes based on platform strategy.

The rules, strategies and tactics in how platforms launch and compete with one another is different than companies. Companies compete by controlling unique internal resources and erecting competitive barriers. Platforms compete by orchestrating external resources and engaging in vibrant communities. In a previous post I went into greater detail to explain the differences.

Amazon understood the difference, and in the past two years since the launch of Echo and Alexa, they have rapidly executed the right tactics to orchestrate the conditions to yield powerful cross-side network effects.

But before we get there, let’s understand how Amazon first moved into our home.


When advantages become disadvantages

In 2007, two major releases, 1) iPhone & iOS by Apple and 2) Android by Google marked the start of decade long battle to become the dominant platform for you smartphone. Their increase in market cap over the past decade has been a testament to their success.

Google Finance — Apple (blue), Google (red)

However, winners often develop skewed and myopic views of the future. In the past, Microsoft couldn’t see a future where personal computers were not at the center of the universe; currently, Apple and Google can’t see a future where smartphones are not the center of the universe.

“What makes companies great is inevitably what makes companies fail, whenever that day comes.” — Ben Thompson, Curse of Culture

When it came time to a build a platform for the smart home both Google and Apple immediately looked to their strengths and started from there, but at the expense of the user experience. They assumed that building the smart home platform on your smartphone was the obvious choice because it was with you all the time. But if you observed users in the context of their home you would have noticed that their smartphone is not always with them. A smartphone needs to be charged, often in their bedroom, making it inaccessible to them in other rooms in the home. Even when it is, to access a control you have to unlock your smartphone, find the right app, tap it, wait for it to load and navigate the UI…it’s just too many steps to turn off or on your lights. It’s no surprise that both Google’s Brillo and Apple’s Homekit platform has seen slow adoption among users, despite having access to key partners and developers.

On the other hand, because of their fortuitous lack of success with smartphones Amazon was able to start from a position where they were able to conceive of a platform where the smartphone was not at the center. By observing users they knew the platform had to be accessible, accurate and available at all times in your home. With those requirements it was clear that the platform was not going to be another app on your crowded smartphone or require you to be near or within sight to interface with it. Amazon’s answer was Echo — a speaker where you used your voice to speak commands to Alexa, your digital personal assistant. It was and still is a compelling magical experience and in the span of two years they have sold over 3 million devices.

Mary Meeker — 2016 Internet Trends

Creating a compelling product to draw users was critical to Amazon’s success as a platform because it helped overcome the chicken-or-egg problem by proving to developers that it had an attractive market on a proven infrastructure. It also helped that it wasn’t the first time they’ve done this, anyone heard of Amazon.com?

But head starts don’t always mean much? Plenty of companies in the past have proven that second-movers can emerge as leaders. This time though, it’s different.


When head starts matter

Head starts matter in scenarios where there are:

  1. Low incentives for users to switch platform which provides protection for the first mover.
  2. Lack of platform alternatives for developers which reinforce positive cross side effects for the first mover.
  3. Advantages in distribution exist especially for first movers that have absolute control over.

Low incentives to switch

Previously in the smartphone industry, differentiation by devices enabled second-movers like Apple to succeed in over taking first-movers like Blackberry because their devices were better. However, when the core user experience is not tied to physical form factor like touch, speed, or battery the basis of differentiation filters down to just services.

As a result users have:

  1. Low incentives to switch devices for performance gains because the improvement in service quality and variety is agnostic to the device
  2. Replacement cycles for devices lengthen

The risk of 3+ million Echo users leaving the platform in the near term is low and provides enough assurance for developers to be willing to invest in the platform for the long term.

Besides with no other alternative smart home platform with major user adoption, what choice did developers really have?

Lack of platform alternatives

From the start, Amazon knew there was a short potential window after Echo where they would be only platform that could provide developers access to users in their home. Consequently the were swift to launch two sets of APIs:

  1. Alexa Skills Kit (ASK)— a simple API that enabled developers to build apps for Alexa powered devices.
  2. Alexa Voice Services (AVS) — that enabled third-parties to embed Alexa into their own hardware.

Within a year there are now over 1000+ Alexa Skills and the first generation of Alexa powered devices are entering the market like Scout and Pebble. As the use cases of Alexa expands, it further locks-in existing users, attracts new ones and garners more developer support. The cycle repeats and positive cross-side network effects take off.

However, it would be naive to think that a single platform could lock-in developers. Consoles face similar issues — game developers are incentivized to support as many platforms as necessary to maximize sales. To mitigate commoditization among consoles they often secure exclusive rights to blockbusters (i.e. Final Fantasy for Playstation, Halo for Xbox, Super Smash Bros for Nintendo) either by acquiring the license or providing attractive terms.

In Amazon’s case there are two types of developers that they could attempt to use the ‘exclusivity’ tactic with:

  1. Developers that build Alexa skills.
  2. Developers that build Alexa powered devices.

Each segment of developers however have different revenue streams.

  1. Developers that build Alexa skills — monetize through the service they provide.
  2. Developers that build Alexa powered device — monetize through the device being sold.

For developers who are incentivized to be on as many platforms as possible, it will be difficult for Amazon gain exclusivity over them but they can provide a unique benefit for developers who monetize through device sales that others can’t.

Amazon controls the shelf space of the modern era.

In Q4 of 2015, Amazon generated 25% of the US e-commerce sales and 69% of the US population shopped on Amazon; in other words Amazon owns the online shelf space.

It can utilize this asset to secure exclusivity for key devices in the household by providing strong promotion for their devices within their online store. The selection of devices providers they decide to sign exclusivity with will be a critical moving forward since you can expect Google and Apple to follow suite, luckily they get first pick.

Amazon can also apply this tactic to their own Alexa powered devices.

Mary Meeker — 2016 Internet Trends

When the competition heats up, Amazon has shown that it is willing to remove similar devices from their store. In 2015 they removed TV streaming devices like the Apple TV from their store and in response Apple removed the Amazon Video app from their store.

Moving forward it will fine line to balance for everyone.


When monetizing scale matters

From the day one scale has been king at Amazon. Jeff Bezos made it clear in his famed shareholder letter of 1997.

The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital…we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model. — Jeff Bezos

To achieve scale, Amazon’s modularize their infrastructure into ‘primitives’ that can be both used internally and by outside developers for a fee. Ben Thompson does a great job of explaining how this approach has given rise to dominant platforms like AWS, Amazon’s Marketplace and now Alexa.

Ben Thompson — Amazon Tax

Today, Amazon’s infrastructure powers a large portion of compute and commerce. It’s estimated that their level of investment and geographic scale is five times that of Google’s Cloud Platform.

Scale is important to Amazon. Unlike Google that relies on advertising for the majority of it’s revenue or Apple that relies on device sales — Amazon relies on taxing infrastructure usage.

As a result Amazon can make strategic decisions that Google and Apple would find difficult to follow. For example they can attract developers by lowering or completely forgo app revenue since they already generate revenue from developers who use their infrastructure. Or at the other extreme they can give Alexa powered devices away for free to Prime members because they have already generated revenue from their membership and purchases.

It’s not impossible for Google and Apple to compete, especially when there is so much as stake but Amazon can make it very difficult to do so. That being said, there are some significant risk that Amazon faces as it looks to sustain it’s lead in this market.


What are the risks?

Here are a few of the most salient risks that Amazon faces:

Demand side risk

  • Primary cause — A poor user experience from a lack of governance of the quality of apps and devices, leading to users abandoning the platform and causing a negative cross-side network effect.
  • Competitor to Watch — Apple
  • Mitigation strategy — Focus on enhancing the API for deeper integration for core smart home applications. Amazon has already started making progress in mitigating this risk with the Smart Home Skills API.

Platform facilitation risk

  • Primary Cause — Lack of access to data sources like relationships, messaging, location history and photos to personalize, match and provide services to you — especially in the form of intelligent agents.
  • Competitor to Watch — Google
  • Mitigation strategy — Target key strategic partnerships with companies that have access to those data sources by providing them with deep integration within your own platform.

Neighboring platform envelopment

  • Primary Cause — Messaging apps are emerging as the next major platform for developers because of the central role and attention it commands among users. The increasing use cases for messaging apps leads to potential threats as becoming the preferred platform in your home.
  • Competitor to Watch — Google, Apple
  • Mitigation strategy — begin to experiment with new access points for Alexa in messaging apps to asses the risk or opportunity

One more thing

To finish, there is one interesting opportunity I think Amazon should explore further and that is to — own our voice identity.

As it currently stands Facebook owns our social identity, LinkedIn our professional identity and Google our online identity. But no one owns our voice identity. No one can identify who we are from our voice, no one has indexed how our tone and pace of our speech impacts meaning of our sentences and no one has the data to understand how we respond to other voice interfaces. Owning our voice identity, Amazon will be able to allows us to seamlessly connect to devices, have a deeper understanding of our needs, and provide better tools for to build more empathic and intelligent services.

Amazon may have missed out on the smartphone platform, but it won’t miss this time.

TL;DR — Amazon gained a sustainable head start in the smart home with Echo and Alexa because there is 1) low incentive to switch for consumers 2) lack of platform alternatives for developers and 3) they control the shelf-space of the modern era.

Thanks Nir Eyal, David Cheng, Tim Chen, Larry Wei, Gareth Cross and Rob Bremmer for reviewing earlier versions of this essay.