In many ways, the 2014 launch ofAmazon Alexa smart assistantwas like the launch of ChatGPT eight years later. Both were marvels of machine learning that fundamentally changed the way we framed our interactions with technology. Both had rendered fact from what had previously been science fiction and techno-fantasy, and both inspired millions of people to ask them meaningless questions to experience the novelty of “talking” to a machine. But whereas ChatGPT is on track to make its parent company, OpenAI, $1 billion this year, Alexa is reported to have cost Amazon upwards of $10 billion in the same time frame. To get an idea of why, we will have to get into the weeds a little.
What would you say… you do here?
The idea of Alexa is actually pretty cool: an AI-powered digital assistant that can (mostly) understand what you’re saying and provide a voice response (mostly) apropos to your query. You can also use it to buy stuff. However, it turns out that even though youcanbuy stuff with your Echo, nobody wants to.
So, what do people use Alexa for? Lots of stuff. The most popular use for Alexa is as a voice-activated smart speaker. It can stream from popular music services, and you can use it as a basic Bluetooth speaker. People also like to check the weather and set timers. In other words, it can do a lot of stuff that you can already do with your phone.
One thing Alexa doesn’t do is make money. For all of the millions of Echo units sold and billions of interactions it processes, no one atAmazon has figured out how to monetize it.
Selling Alexa-enabled devices isn’t profitable — and it was never meant to be. Ten years ago, Jeff Bezos said as much in his2013 letter to investors: “Our business approach is to sell premium hardware at roughly breakeven prices. We want to make money when people use our devices – not when people buy our devices.” Granted, this was a little over a year before the first Echo was released, and Bezos was speaking about the Kindle, which was estimated to be generatingover $500 million in profitat that time.
Whereas the Kindle effectively created its own e-book market and massively boosted Amazon’s e-book sales, the Echo doesn’t offer a built-in product
But the Echo is definitely not the Kindle. Whereas the Kindle effectively created its own e-book market and massively boosted Amazon’s e-book sales, the Echo doesn’t offer a built-in product. Amazon planned on Echo ownership driving Amazon purchases, but that dream has failed to materialize.
What the Echo does have (unlike the Kindle) is a massive cloud-computing back end that powers all of the AI magic that Alexa performs, and even though Amazon owns the computing architecture that powers every voice interaction, it still costs money to run it. We don’t know how much it costs, but we do know that a company like Netflix (which uses AWS) spends about$1 billion per yearon cloud computing costs.
Aside from keeping the lights on, there are also the human costs involved. At its peak, Amazon employed over 10,000 people to work on Alexa and Alexa-related products. Given that the average salary for Alexa employees is over $100,000, Amazon pays over $1 billion per year in labor costs for the Alexa team. At least, Amazon used to. Along with the alleged $10 billion loss,Amazon has cut around 27,000 jobs in 2023.
Stayin’ alive
So, just to do a quick recap: Alexa is a speaker that does some of the things your phone can do (but not all of them), and it costs Amazon billions of dollars to keep it alive. This is a blatantly untenable situation for Amazon, so what’s next for Alexa?
We reached out to Amazon, and a spokesperson told us, “The numbers that have been reported are inaccurate and don’t paint the full picture of Alexa’s business.” That $10 billion number that’s been tossed around comes from aBusiness Insider storythat relies on anonymous sources for most of its details. Amazon is very recalcitrant when it comes to the details of its cash flows, so it’s impossible to know for certain from the outside. Perhaps looking at how Google is faring in the same space willshed more light on the profitability of smart assistants.
Regardless of how much cash Alexa makes or loses, there’s no question the ecosystem is thriving. Over 500 million Alexa-enabled devices have been sold since 2014, including everything from speakers and tablets to TVs and smartwatches, not to mention the hundreds of millions of smart home devices that connect to Alexa. “This is, and will continue to be, a successful business for Amazon,” we were told.
What’s certain is that Alexa is going to follow in the footsteps of ChatGPT. Amazonannounced a partnershipwith Anthropic — the creator of ChatGPT-competitor Claude — back in September. This announcement came just days after Amazontouted the generative AI–powered future of Alexa. Amazon has yet to mention Anthropic and Alexa in the same sentence, but it’s hard to believe that Amazon won’t take advantage of its minority ownership position to inject some vitality into its flagging service. Our spokesperson wouldn’t directly comment on it but told us, “We are optimistic the investments we’re making in generative AI are going to get us even closer to our north star vision of delivering a world-class personal AI for customers.”
What’s less certain is how Alexa makes its money. Remember that dribble of Alexa users shopping with Amazon’s Echo? Apparently, that’s grown into a trickle. But Alexa’s future likely isn’t tied up in shopping. To see the future of Alexa, look to subscriptions, smart homes, and Star Trek.
Amazon tells us that Alexa users signed up for millions of subscriptions last year to services like Audible and Amazon Music, money which goes back into Amazon’s pocket. But the outgoing Senior Vice President of Devices at Amazon, David Limp, also believes a subscription model is coming to Alexa because the costs involved with training and running future AIs is going to be prohibitively expensive to just give away.
Limp revealed Alexa’s long-term goal back in 2017 when he said that the computers from Star Trek were the “north star” for the platform. For the non-Trekkers in the room, the Star Trek computers were voice-activated, had access to the totality of human knowledge, and could control every feature of the ship. Amazon’s vision for the smart home is a ubiquitous, ambient home computer, and it’s hoping you buy your connected appliances, lightbulbs, TVs, and doorbells from Amazon while using it.
