The Journal. - Alexa is in Millions of Homes and Amazon is Losing Billions

Episode Date: July 31, 2024

After ten years of sales, 500 million Amazon smart devices have found their way into homes around the world. But the company is losing billions of dollars on the devices. WSJ’s Dana Mattioli discovered an accounting tool that’s kept the huge losses under wraps.  Further Reading: -Alexa Is in Millions of Households—and Amazon Is Losing Billions  Further Listening: -Amazon's Secret Operation to Gather Intel on Rivals  -What Is Amazon's Secret 'Project Nessie'?  Learn more about your ad choices. Visit megaphone.fm/adchoices

Around the world, there are over 500 million devices enabled with Amazon's voice assistant, Alexa. Have you ever used an Alexa? Yeah, for setting timers when cooking, to ask it the weather, the time, and then to play music sometimes. Actually, much to my chagrin, one of my son's first words was, Alexa, to talk to the speakers. No way!

That's my colleague, Dana Mattioli, who covers Amazon. And Dana has been looking into the business of Alexa, the digital voice installed on Amazon's smart speakers. Okay. How much money do these products make? None. Zero.

Zero. They actually lose a lot of money for Amazon. How much is a lot? So I was able to learn between 2017 and 2021, Amazon's devices team, which makes more than just these Echo speakers and Alexa, lost more than $25 billion. Billion, 25 billion with a B. How is that possible?

Yeah, it's an enormous loss. And the idea was just get them in the homes and they'll figure out how to monetize them later. We'll worry about profits later. But now these massive losses are a problem Amazon is trying to fix. Welcome to The Journal, our show about money, business, and power. I'm Kate Leimbach. It's Wednesday, July 31st. Coming up on the show, the billions of dollars that Alexa loses and what Amazon is doing about it.

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Non-investment advice. Crypto trading involves risk of loss. See kraken.com slash legal slash ca dash pru dash disclaimer for info on Kraken's Go to kraken.com and see what crypto can be. Can you tell us the story of how Alexa came to be? So Jeff Bezos was enthralled with the idea. He's a big Star Trek person, and he was enthralled with the idea of having a Star Trek type of computer. It could sit in your bedroom or in your kitchen or in your living room and play music for you, answer questions, and ultimately even be the way that you might control some of your home systems, things like lighting. And this is back in the 2012 timeframe.

So they set up this team at Amazon to start working on a secret device that you could talk to and that would answer simple commands. In 2014, they announced the Echo with this Alexa personal assistant function. And it was kind of interesting at the time. They were a little bit gun-shy. They didn't know if this would be a hit. They actually, you know, didn't do a big rollout. And they only started with 80,000 Echos and had people sign up for like a waitlist for

it. And they quickly exceeded the amount that they had produced. So it was clear that they were going to have a hit on their hands in terms of the amount that people wanted. And that's what's fascinating here. People really did want this. You know, this was like one of the most popular Christmas gifts for every Christmas thereafter. If you got an Amazon Echo for the holidays, you weren't alone.

Amazon sold more than three million of the devices. Amazon priced it in a way where they were selling it either at cost, sometimes below cost. They didn't sell it at a high dollar price to make money off of it. The idea was to get it into people's homes and they could figure out the monetization after. You call them Echoes. I like calling them Alexas because that's who I interact with.

That's two different things. The Echo is the speaker, the hardware, and the Alexa is the voice and the technology. Now the Alexa is in the Echo, that's what you're conversing with, but it's also in other products that they have. Like your Fire TV could speak to it and you know there's other devices that have Alexa. So they start sending out Alexa's. Was there a vision for how Alexa was supposed to make money for Amazon and these Echo speakers? So I spoke to someone who was involved in the early days, a long time executive in this business. And this person said, you know,

when launching products back then, we didn't have to have a profit timeline for them. We had to get the system and people's homes and we'd win. Innovate and then figure out how to make money later. They were hoping that people would get this product into their home and then interact with different parts of Amazon's businesses and make money that way.

So for one main area is that they would hope that people would shop on these devices because Amazon's the world's biggest e-commerce platform. So like Alexa, I want to buy laundry detergent. Exactly. Based on your order history, I found Tide Plus Ultra Oxy Powder laundry detergent, 73 loads, 127 ounces. It's $19.97. It was delivery by tomorrow. She's still going.

I added it to your Amazon cart for review. She's added it to my Amazon cart. No, Alexa, I don't want to buy it now. And Alexa, can you take it out of my cart? Sure. Tide laundry detergent removed from your Amazon cart. Okay. That laundry detergent showed up on my doorstep yesterday.

And Dana says mistakes like that can happen a lot. So I spoke to a lot of people on the Alexa shopping team and they mentioned a bunch of pitfalls. First of all, they said that a lot of people have tried to shop on their Echo devices, but it's not a great experience. So I'll give you an example. If you tell Alexa, buy me a black dress, Alexa will come back and name a bunch of different black dresses, oftentimes with like unpronounceable names.

Okay, let's try it out. Alexa, buy me a black dress. A best-selling option is Anra Best Women's Summer Casual Sleeveless Square Neck Smocked Ruffled Backless Boho Mini Dress. It's $34.19 after $4.80 in savings. With delivery by Sunday, July 28th. This is also available in three other size options. You see where I'm getting at? Okay, Alexa, stop. She would have kept going, giving you more options. And by the way, you can't see them.

So that's part of the problem. People like to see what they're shopping for and the description of it, making sure that it's adding the right one to the cart. And it's just like not a natural behavior. The other area that's been very hard for them to monetize is advertising because people have a very short fuse with Alexa when she starts trying to sell them things

and advertise toward them, it becomes annoying. So they haven't been able to pump all of their ad inventory through Alexa in a very meaningful way. pump all of their ad inventory through Alexa in a very meaningful way. An Amazon spokeswoman said more than half of people who have Echo speakers have used them to shop, but declined to answer questions on how much they bought and how often they did so. Dana says what most people use Alexa for are things like this. Alexa show me pasta recipes from side chef. Okay for pasta here's a few recipes. Alexa play music for studying. Here's a station

you might like. Alexa start my day. So asking it to tell you the weather, setting a timer, asking it for the time, use cases like that. And that doesn't, that's non-revenue generating for Amazon. Correct, it doesn't make them any money. After 10 years, Alexa and the Echo speakers have lost Amazon billions of dollars. The Amazon spokeswoman said the Devices division has established numerous profitable businesses

and is well positioned to continue doing so. Coming up, how Alexa was able to lose so much money for so long. Introducing TD Insurance for Business with customized coverage options for your business. Because at TD Insurance we understand that your business is unique so your business insurance should be too. Whether you're a shop owner, a pet groomer,

a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD insurance advisor to learn more. Amazon's Alexa-equipped devices are used in tens of millions of American homes, but they lose money. And the size of those losses has been obscured by an internal accounting metric called downstream impact, or DSI. DSI allows loss-making divisions within Amazon to claim revenue from other parts of the business.

Here's how it works. Say a customer orders laundry detergent from their Echo speaker. The devices team can claim some revenue from that purchase. I kind of geeked out on the downstream impact. And in some ways, I could understand why they would have a metric like this. Because Amazon is so big, and, you know, buying something there because it's so big,

it doesn't exist in a vacuum. Like, maybe you do, you know, sign up for Amazon Prime, and then you start shopping more or watching more videos. It made sense in certain cases, or in another case where it does totally make sense is, you know, people love their Kindle e-readers and there's a behavior that happens right after someone buys an e-reader. They buy e-books and that makes sense and that's not part of the device's team's revenues.

It's part of the shopping and the retail revenues. But what was really interesting to me was how certain product lines within Amazon, specifically Echo, hid behind this metric. And they were able to escape by while losing lots of money. How so? A lot of times the devices team and the Echo team would claim the top end of a range for the estimated revenue that they would get from downstream impact and that would sort of justify the costs and the losses.

And at one point the devices team swelled to more than 15,000 people across all of its products because they kept adding more products and building more products. Someone who worked on the Echo team told me, this is a quote from this person, basically DSI or downstream impact was the golden thing that kept us afloat all these years. Was everyone on board with DSI? No, there were internal fights over DSI. And they were also led to some tricky situations where I'll give you a hypothetical,

say an Amazon customer has an Echo device and also a Fire TV device, and then it signs up for Amazon Prime. There would be situations where both the Echo team and the Fire TV team would say, well, we're the ones that caused them to buy the Amazon Prime membership, we should both get a piece of that and they double account or triple count the DSI.

So it was definitely not precise. This was something that was sometimes fought over. It seems like DSI creates a problem. One person I spoke to who interacted with my story on LinkedIn and worked in Amazon shopping sort of called it monopoly money. And that was an apt analogy for me. Amazon says the company plans to continue measuring the success of its businesses, in part by how they help other parts of the business grow.

In 2021, when Amazon got a new CEO, all of this came to a head. At that point, there was this big transition in leadership. There was a new CEO for the first time in the company's history. And the new CEO's name is Andy Jassy. Now, Andy Jassy was the CEO of Amazon Web Services, which is their cloud computing division, which is a very, very profitable division at Amazon. So he takes over from Jeff and he starts to do a review of the entire company

where he hasn't spent as much time and has some insights. He starts seeing that things are run differently in different parts of Amazon's organization. And the devices team really stands out to him, we've reported. Alexa and Echo and the devices team was an area of innovation, an area of investment, even wonky ideas would get greenlit as long as you know leaders made the case that customers might like it. And then when Andy Jassy came in he started wanting these businesses to be profitable before DSI and not to use it as a crutch.

So what is the plan now for Echo? The plan now is that they're trying to monetize Alexa and Echo by creating what they're calling a remarkable Alexa product. Excuse me? Remarkable? Yeah, there is a secret team within Amazon that's been working on this remarkable Alexa product, and it will be an entirely new technology stack, and it will have more generative AI capabilities for Alexa

than the current version that's installed on Amazon devices, and their hope is that this will be such a differentiator and it will add so much value that this could be something that they charge a subscription for users to access. Have they ever considered just discontinuing Alexa? You know, not that I've heard of. That's a question that I get a lot from people

that have worked at Amazon, just given how much devices has come into focus since Andy Jassy took over. And to be fair, they have sunsetted a lot of different products in the last few years. They stopped making their fitness wearable called the Halo. There's a bunch of different devices that they've stopped making where customers have complained that they can no longer like use them because they're not updating anymore. I think it would be a stretch to think that they would discontinue Echo, but this wasn't Andy Jassy's baby.

Yeah. It feels like it's a pet project that was protected by this internal accounting metric. Yeah. And that's what people that I spoke to on the team have said. You know, with a little bit of distance, they have some clarity on this, and they realize how important DSI was for just justifying their existence, and that if not for DSI, that the patients probably would have run out sooner. Amazon says,

the Devices division established numerous profitable businesses and is well positioned to continue to do so. I guess my takeaway is that, you know, I think DSI was developed with good intentions in mind and, you know, to be fair, it works in some scenarios. But, you know, for 10 years now, it's also had this unintended billions of dollars of losses, like really staggering losses. And it's just been surprising to me that no one's taken a closer look at

that until now. Yeah, what does having a massively expensive and unprofitable product mean for Amazon? You know, it's really tough to say you know Amazon is just this giant conglomerate and I think that that is the big challenge. Hardware is notoriously hard you know it's this is our expensive to commit R&D to hardware you know products and especially if there's not a profit motive in sight it could be hard to justify at a juncture when the company is really focused on profits. That's all for today, Wednesday, July 31st.

The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.