Amazon’s Echo smart speaker, which features the virtual personal assistant Alexa, has reportedly cost the company billions of dollars in losses despite strong sales and popularity around the world.
CEO Andy Jassy, who took over the helm of the Settle-based e-commerce giant in 2021 following the departure of billionaire founder Jeff Bezos, is looking to cut costs, with the smart devices business reportedly at risk of being scaled back.
Amazon expects to sell more than 500 million Alexa devices as of 2023. But the company lost more than $25 billion on its devices business between 2017 and 2021, according to internal documents. Reviewed by The Wall Street Journal.
Since first launching in 2014, Alexa and Echo products have been sold at ultra-low prices to compete with rivals and to incentivize customers to ensure widespread use of the products.
Amazon hoped that by having customers talk to Alexa to order products from Amazon, the speaker would then guide future purchases.
Amazon’s Kindle, for example, often encourages users to buy e-books or e-book subscriptions from Amazon, so Kindle profitability figures don’t tell the whole story, an Amazon spokesperson told The Washington Post in a statement.
But that theory hasn’t played out across Amazon’s devices business, which includes the Echo, Kindle, Fire TV Stick, video doorbell and more, The Wall Street Journal reports.
It’s not because device units aren’t being sold that profits are taking a hit.
For example, the Fire TV Stick was one of Amazon’s best-selling items during the two-day Prime Day sale, but its products often lead to future purchases, such as streaming service subscriptions.
Meanwhile, customers have been using Echo products as alarm clocks, music speakers, weather forecasts and more through Amazon’s free apps.
“It concerns me because they employed 10,000 people and they made smart timers,” a former Amazon employee told The Wall Street Journal.
Under Bezos, Amazon’s engineers reportedly sought to drive innovation rather than necessarily prioritizing profits.
To defend products like Echo speakers, which have low return rates, employees often resorted to “downstream impact” — the idea that the economic value of a speaker should be determined by how much customers spend on Amazon after their initial purchase, not just the initial sale.
“We don’t make money when we sell a device,” Dave Limp, a former senior vice president of Amazon Devices, told The Wall Street Journal in 2019. “Instead, we make money when people actually use the device.”
Downstream Impact was founded in 2011 by a team of economists, including a future Nobel Prize winner, according to The Wall Street Journal.
The Wall Street Journal reported that the company’s expensive equipment team, which employs more than 15,000 people, used the term to excuse losses on Echo speakers because the devices are typically sold for less than the cost of making them.
“At Devices and Services, we’re focused on the value created when customers use our services, not just when they buy our devices,” an Amazon spokesperson told The Post in a statement.
“With hundreds of millions of Amazon devices in use by customers around the world, there is no greater measure of success for us,” she said.
Jassy is focusing on the devices business after overhauling the company’s profitability, shifting away from the business model of Amazon billionaire Jeff Bezos, who reportedly protected the devices division even as losses grew, The Wall Street Journal previously reported.
The new CEO disbanded the team developing new devices whose profitability wasn’t clear – a team that relied on the old “downstream impact” argument.
According to the Wall Street Journal, in October 2022, Amazon stopped selling Amazon Glow, a year-old video-chat device that was seeing rapidly declining revenue.
This was followed by some internal staff reductions, primarily in the device team.
In 2023, Amazon also discontinued its wearable fitness tracker, Halo.
Jassy has reportedly been pushing the devices team to find ways to make Echo more profitable through subscriptions or fee-based monetization.
According to Business Insider, the team is working on a more advanced version of Alexa called “Remarkable Alexa,” and the company is taking its time to unveil the new technology in an effort to wow customers and increase profits.
“The technology isn’t there yet, but they have a deadline,” a person who worked on the Alexa team told The Wall Street Journal.
While Jassy has focused on streamlining operations and cutting costs by cutting jobs, the company is still performing well overall. Amazon beat expectations on first-quarter earnings per share and revenue, and Analysts revised their forecasts upwards Second-quarter results are due to be announced in August.
