Billboard added Jeff Bezos and Steve Boom, Amazon CEO and VP of Music respectively, to its 2017 Power 100 List. The duo came in at number 12 and Billboard’s Stephen Witt snagged an interview with Bezos and Boom about the ranking. Amazon’s 2016 re-entry into the music streaming business with its Amazon Music Unlimited service was one of the more notable news items for the industry last year. Bezos and Boom have some interesting things to say about music streaming, but the comments that have caught everyone’s attention came from this exchange:
Stephen Witt (Billboard): This is about more than just music, isn’t it? If you succeed, you’ll have placed an Amazon cash register in every house in the country.
Jeff Bezos (Amazon): It’s not about that. For sure, if you have a 2-year-old and you see that you’re running low on diapers, we want to make that easy for you. But voice interface is only going to take you so far on shopping. It’s good for reordering consumables, where you don’t have to make a lot of choices, but most online shopping is going to be facilitated by having a display. Alexa is primarily about identifying tasks in the household that would be improved by voice. Music is one. Another is home automation.
The Value of Echo for eCommerce – $600 million trending $1 billion
Techcrunch reported in September that an NPD Group study, “found that owners of the Echo spent around 10 percent more [with Amazon] after they bought the voice-powered smart speaker than they did before.” If true, this is a tremendous statistic. A Consumer Intelligence Research Partners (CIRP) study cited by Fortune found that Amazon Prime members spend about $1,200 annually compared to $500 for non-prime members. CIRP also estimates that Prime members now represent more than half of Amazon shoppers.
Voicebot estimated in December that Amazon had sold about seven million Echo devices. There are some higher estimates in the market, but we will stick with the seven million for a conservative estimate. We also estimate that Echo users skew toward prime membership, but there are also some buyers that don’t use Amazon for purchases. A simple model can be built based on the assumption that 70% of Echo users are prime members, 20% are non-prime Amazon customers and 10% don’t buy from Amazon at all.
4.9 million Echo User Prime Members x $120 extra spending annually = $588 million in added revenue
You currently need to have a Prime account to order through your Echo, so total commerce users would be 4.9 million. Since 10% of $1,200 is $120 we can estimate that Echo users have increased their Amazon ordering by $588 million. Based on Echo sales growth estimates from VoiceLabs, we can estimate that Echo users are likely to generate over a billion dollars in incremental retail sales revenue in addition to the cost of purchasing the devices. This is quickly becoming a meaningful business for Amazon.
But, It’s Not About Retail Revenue?
So, do the comments by Bezos suggest that increased retail sales is simply a happy coincidence? It’s possible, but ordering through Alexa has been available for Prime members since July 2016. Amazon also didn’t waste time attempting to capitalize on increasing sales from Echo users by introducing daily deals in November that are only available through Alexa (the deals on February 12, 2017 were Godiva chocolates and diamond stud earrings).
Retail revenue is surely part of the story. However, Bezos downplaying the retail angle likely comes from a genuine belief that Alexa means much more to the company than increased retail sales. Alexa on the Echo or aboard third party devices is about convenience. Bezos’ comment about reordering through Alexa as being more convenient makes sense, but so is his comment that most online shopping needs a display. Alexa-based shopping is at best an incremental strategy for boosting retail sales.
Why Only Highlight Home Automation and Music?
It was a little more surprising that Bezos only referenced home automation and music as examples of Alexa uses. Most of the Alexa skills today are information applications and Amazon is heavily recruiting brands and media companies to build more skills that logically fall into this category and are not at all about automating tasks in the household. If voice assistants in the home were really only about automation and music then Apple wouldn’t be viewed as so far behind. Of course, Bezos did mention earlier in the interview that interest in easy access to a weather information service has led him to place Echo dots in many rooms throughout his home. We should expect to hear more about information services on Alexa from Amazon in the future.
How about Higher AWS Revenue Too
What a lot of people are not considering is how Alexa usage can drive AWS revenue. Today, you spin up Alexa skills on an AWS Lambda. At low volume usage, this is free for the skill host. However, as usage grows this service will start to incur infrastructure costs. Again, this is likely viewed as long-term incremental AWS revenue similar to the impact on retail, but it is also another way that Amazon can generate more income.
Alexa is About Much More than Retail Sales and AWS Services
We should take Bezos at his word that Alexa isn’t about retail sales in the conventional sense. And, its not really about AWS hosting fees either even though he didn’t comment on that topic. The adoption of AI and voice recognition is moving quickly and Amazon wants to be a critical player in that computing stack. Having a strategic position in the most important technology platform shift in a decade is worth far more than a 10% uplift in prime sales to Echo users.