Launched in 2014, Amazon's Echo devices, powered by Alexa, the voice assistant, operated on a business model similar to Gillette: sell the hardware cheaply and make a profit from subsequent purchases. Users were supposed to use them to order goods using their voices. However, ten years later, this strategy did not pay off as expected.
Although millions of customers use Alexa-enabled devices, the expected revenue from voice purchases on these low-priced speakers has not materialized. Instead, most users use Echo primarily for free features such as setting alarms and checking the weather.
As a result, Amazon's device business, which includes Echo, Kindle, and Fire TV Sticks, has suffered significant losses. Internal documents and sources indicate that the division lost more than $25 billion from 2017 to 2021. Losses for other periods remain undisclosed.
Andy Jassy, who took over as Amazon's CEO in 2021, is now tasked with reversing those losses. Part of his strategy includes launching a paid version of the Alexa voice assistant, even though some engineers have expressed doubts about its success.
Jassi is also revising an internal metric known as "customer impact" (DSI) that has been used to justify spending related to Echo and other devices. Developed in 2011, DSI determines the financial value of a product based on a customer's spending in the Amazon ecosystem after purchase. This metric is applied to a variety of Amazon services, including Prime memberships and digital content.
In practice, the DSI model has worked well for products such as the Kindle e-reader, which has led to significant e-book sales. However, for Echo devices, the metric often overestimated their financial impact, relying on optimistic revenue forecasts to justify the cost.
Echo devices typically sell for less than cost. The device development team used DSI to present best-case revenue scenarios to senior management, which helped secure resources and support despite growing losses. This approach sometimes led to double counting of revenue across product teams, further inflating the perceived value of Echo devices.
Andy Jassy's profitability analysis led to significant changes, including disbanding teams that were working on unprofitable new devices and promoting more mature products to create sustainable revenue streams. That's why in October 2022, Amazon discontinued the Amazon Glow, a video calling device that was not profitable at all.
The drive for profitability has also led to layoffs and the termination of other projects, such as the Halo fitness tracker. At the end of 2023, Dave Limp, the head of Amazon's device division, resigned after more than 13 years with the company, emphasizing his continued belief in Amazon's device business.
Efforts to monetize Alexa and Echo continue, with a new project led by Amazon VP Heather Zorn. The project, codenamed Banyan, aims to develop Remarkable Alexa, a subscription service with advanced features, including better smart home management and the integration of generative artificial intelligence. The service is expected to launch soon, but there are concerns about whether customers will be willing to pay for it.
Despite the challenges, Amazon representatives claim that the company is closer than ever to creating the world's best personal assistant, emphasizing the potential value beyond the immediate financial performance.