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Amazon's Alexa Is Everywhere but Revenue Is Elusive

Amazon has fallen short of revenue targets for Alexa skills, according to a recent report. Despite the voice assistant's popularity, it has yet to generate a killer app beyond basic voice controls.
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Amazon has come a long way in making Alexa ubiquitous, but revenue has proved a bit more elusive.

According to a report from The Information, Amazon has fallen well short of internal revenue goals for Alexa derived from in-skill purchasing and other streams. Amazon  (AMZN) - Get, Inc. Report shares were up 1.02% to $1,787.19 Tuesday.

Beginning with the Echo, which first came out in 2014, Amazon was the first to popularize voice-activated smart speakers. Five years later, hundreds of millions of Alexa-enabled devices have been sold, including Amazon’s ever-expanding array of Echos and other smart gadgets and third-party devices that use Alexa as a voice interface. Despite its success as a consumer product -- Amazon has around 70% of the U.S. smart speaker market, for instance -- a clear business model for Alexa has not yet materialized.

According to The Information, Alexa skills generated just $1.4 million in the first ten months of 2019, compared to the company’s target of $5.5 million.

Skills revenue falls into a couple of main categories: In-skill purchases, which are paid add-ons for Alexa skills that are akin to in-app purchases on mobile devices, and paid skills. Examples of each include a sleep sounds app that charges for additional sounds, and a 99 cent paid skill that changes Alexa’s default voice to that of actor Samuel L. Jackson.

Some bullish analysts have postulated that Alexa could generate as much as $19 billion in annual revenue by 2021, through a combination of device sales, paid skills, and other areas such as advertising and voice shopping or transactions.

Steve Rabuchin, Amazon's VP of Alexa voice services and Alexa skills, told TheStreet in June that the company was seeing early traction in paid skills. Much like Apple’s App Store fees, Amazon takes a 30% cut of revenue generated through Alexa skills.

“We're seeing promising early signs that developers are making money, and we're getting more and more skills that are incorporating payment products," Rabuchin said in June. Rabuchin also saw promise in subscription skills, such as a TuneIn radio skill that delivers sports broadcasts to Prime members for $3 per month.

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Amazon began rolling out in-skill purchases in the U.S. in 2018, and expanded the option to a handful of other countries this year. It’s also sought to boost the appeal of the platform among developers through updates to its development framework and other under-the-hood improvements.

Alexa may be popular, but research indicates that device owners still use the voice assistant for a relatively limited range of tasks: Music, checking the weather, setting timers and reminders, and basic queries are a few of the most common.

Of the roughly 100,000 skills available today, the medium has yet to produce a “killer app,” at least one that generates revenue. And outside of low-margin device sales, it’s not entirely obvious yet how the voice assistant ties into Amazon’s core businesses -- commerce and cloud -- or what the proliferation of Alexa will eventually mean for the company’s bottom line.

According to The Information, Amazon recently held talks with Spotify  (SPOT) - Get Spotify Technology SA Report to propose an agreement under which the two companies would share ad revenue, but the discussions didn’t move forward.

At a hardware event in September, Amazon unleashed an array of new Alexa-enabled gadgets, including a high-end Echo speaker, a smart ring called Echo Loop, and Echo Buds, a set of premium wireless earbuds, all of which come with Alexa. Dave Limp, Amazon’s head of devices and services, said at the event that there are “billions of dollars flowing through the Alexa flywheel every year,” without getting specific about what those transactions are.

In September, Loup Ventures partner Gene Munster wrote that while the proliferation of Alexa is impressive, the business model for the ecosystem is “a bit of a head-scratcher.”

“Google’s business model aligns well to the smart speaker business — understanding and collecting information. Apple’s business model also aligns – selling an ecosystem of products and services. Amazon’s isn’t as clear,” he wrote, citing as an example the failure of Alexa shopping to catch on.

While Amazon currently holds the leading position in the smart speaker market, its continued dominance is not assured. Based on a quarterly “digital IQ” test, Munster pointed out that Alexa lags behind Google Assistant and Siri in accuracy, and postulated that Google could overtake Amazon in smart speaker sales by 2021.

Amazon shares are up 16% so far this year.