Will Alexa Be Spared in Amazon Cost Cutting Initiative?
The Wall Street Journal reports that Amazon CEO Andy Jassy has initiated a “cost-cutting review of the tech giant and paring back on businesses at the company that haven’t been profitable.” The report continues:
As part of the monthslong cost-cutting review, Amazon’s leadership is closely evaluating its Alexa business, according to some of the people. The business has more than 10,000 employees and is a major recipient of investment capital, some of the people said. Internal documents viewed by The Wall Street Journal show that in some recent years Amazon’s devices unit, which includes Alexa, had an operating loss of more than $5 billion a year.
Amazon said in October that third quarter sales rose 15% over 2021, but the revenue was lower than analyst expectations, and profits were down from last year. There are also concerns that the macro economic environment could lead to lower than expected fourth quarter sales. Given the situation, the cost cutting efforts are not surprising.
The Status of Amazon Echo
A $5 billion loss in the Amazon devices unit does not mean that all of that was related to Alexa. The Echo product line is surely a part of that, but it is also a good revenue driver, while some other products have proven less popular. It seems reasonable that Amazon would, at this point, reduce any remaining subsidies for Echo products and at least recoup the marginal cost of each new unit sold. There was a time when these devices were frequently selling at below total cost and even component costs in an effort to grab market share.
This would probably be justified even without a company-wide cost-cutting initiative. The smart speaker market has changed. Smart speaker adoption growth has stalled in the U.S. and elsewhere. While not at market saturation, it appears that the current smart speaker feature set is valued by someone between 35% and 45% of the general population, depending on the country. In addition, Google and Apple have scaled back their ambitions in this product category, so price competition for market share will not drive the next wave of user growth.
How Will Alexa Make Out?
The bigger question will be about the expense of maintaining and extending the software behind Alexa and the promotional activities behind it. Amazon has pursued many high-profile initiatives around driving Alexa revenue which has not yet reached any sort of scale that could be described as meaningful revenue. A report from The Information in 2019 showed that Alexa skill revenue totaled less than $2 million of a modest $5 million target. New initiatives such as Alexa Shopping Cart and some other voice commerce programs may have lifted that figure, but no one seems to be generating a lot of revenue through Alexa today.
We also have not heard much this year about the adoption of Alexa Custom Assistant, Hospitality, and Smart Properties. All of these have costs associated with maintenance and new feature introduction, while the revenue picture remains uncertain.
Amazon may have the luxury of pulling back a bit on Alexa investment now that Google has curbed its ambitions. However, there are no indications that the voice assistant is going away or significantly reducing ambitions for further expansion. If the mandate comes down that Alexa must start showing stronger returns on investment quickly, you should expect the expansion of advertising and voice commerce on the platform. These are the key options available to drive short-term revenue.
The real question is not whether Alexa will survive but whether the “Alexa Everywhere” strategy will survive the cost-cutting program. Amazon’s wide-ranging ambitions for the product carry the cost of being in many markets simultaneously. The fiscal reality of voice assistant development, support, and adoption may lead to a strategic revision to “Alexa [Almost] Everywhere.”