How Alexa And Intelligent Speakers Are Integral To The Amazon Ecosystem

by Trefis Team
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Despite ambitious and large-scale expansion plans, Amazon (NASDAQ:AMZN) has managed to improve its profitability in the last few years across segments, as shown in the table below. In order to continue to improve margins, enhance profitability and continue its growth spree, it will be important for the company to build a self-sustaining ecosystem where customers use Amazon’s services for most of their purchasing and day-to-day needs. Amazon Echo and corresponding voice assistant Alexa are central to that idea. In this note, we discuss how Amazon can leverage its technology to attract, gain and retain customers on its platforms.

The Value Of Subscribers

Amazon’s reported North America and international segments include revenues generated by e-commerce sales as well as through subscriptions (Amazon Prime) in these regions. While Amazon has already achieved a strong presence in various markets, the company has firm plans to ensure that it continues to reap benefits from these markets. Across regions, Amazon intends to focus primarily on subscriptions in order to create and sustain an ecosystem for customers. While online retail (or food and grocery) is a relatively easy market in which to acquire new customers and drive traffic, it can be tricky to retain customers or to ensure that they stick to only one platform. As a result, it is key for Amazon to have as many Prime members as possible, to help in two ways: to generate recurring revenues from membership fees, and to ensure that customers primarily use Amazon for their purchasing needs. In order to enhance the user experience, Prime membership includes access to video and music content and other benefits to customers such as one-day (or even same-day) deliveries and no shipping fees. Additionally, Amazon’s foray into the intelligent speaker market should further improve customer retention in the long run.

Intelligent Speaker Crucial To Amazon Ecosystem Vision

Amazon intends to further enhance the Prime membership by venturing into the smart home market, particularly through intelligent speakers. The intelligent home speaker market is still relatively nascent at the moment, but serves as a gateway to smart homes by allowing users to connect with and control smart home apps and devices through voice controls rather than pressing buttons on a smartphone. Amazon entered this market segment when it launched the Echo back in 2014. At the time, the company listed Echo as a speaker with just a few in-built smart commands rather than selling it as a voice assistant. In September of this year, Amazon launched a refreshed Echo priced at $150 and $100 to compete with other similar products such as Google‘s Home (priced at $130) and Apple‘s HomePod ($350).

According to Forrester Research, Amazon sold roughly 6 million Echo devices in 2016, which increased tremendously to over 20 million devices sold in the first three quarters of 2017. Amazon has also expanded the addressable market for Echo and Alexa to India and Japan in recent months. Comparatively, Google Home sales stood at just over 4 million in the same period, while Apple Homepod is expected to be launched in December. Alibaba (NYSE:BABA) also introduced the Tmall Genie in a limited beta launch for RMB 500 ($75) earlier this year.

Amazon’s built-in voice assistant Alexa competes with Apple’s Siri, Google Assistant and Microsoft‘s Cortana. A major advantage that Echo-Alexa users have over many competing products is the presence of add-on capabilities of the technology or “skills“, such as using voice commands to post tweets, book an Uber, track a misplaced phone or integrate a car system with Alexa. In addition, Amazon has seamlessly integrated its core retail platform, which can be used for making purchases on Amazon’s platform using Alexa, showcasing the extent of Amazon’s ecosystem. According to various market estimates, Alexa has likely overtaken competing voice assistants due to its high quality and wide range of offerings as well as the open software to build skills on.

Amazon had an estimated 65-70 million Prime members at the end of last year. The annual Prime membership fee is $100, with an additional $180 (or $15 a month) for Amazon Fresh grocery service. Assuming an average subscription fee of $200 per paying Prime member, Amazon’s revenues through subscriptions alone can add around $14-15 billion to net revenues. And this number will likely continue to increase, in addition to the incremental benefit of Prime members sticking to Amazon for retail purchases. As a result, we forecast Amazon’s North America and international segment revenues to increase in double digits in the coming years, despite the already large base factor. Moreover, with economies of scale and a recurring revenue stream, we forecast Amazon’s profitability across consumer segments to continue to improve.

Our $1,000 price estimate for Amazon’s stock is around 20% lower than the current market price. You can modify the interactive charts in the note to gauge how a change in individual drivers can have on our price estimate for Amazon.

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