Digitizing Our Homes

How Amazon is trying to build a bridge between our digital and physical worlds.

Amazon (NASDAQ:AMZN) is the world’s largest e-commerce retailer by market capitalization and revenue, and the world’s largest internet company by revenue. In 2015, Amazon generated over $107 billion in net sales, and, as of market close on November 17th, 2016, had a market capitalization of over $370 billion1. Amazon has grown to become a digital behemoth by disrupting traditional, physical brick and mortar retailers. But as the e-commerce portion of its business has matured, Amazon has embraced the physical world through the Internet of Things (IoT), attempting to both bolster its core online retail business and add completely business lines.

IoT – Connecting the Physical and Digital Worlds

Amazon’s first foray into the IoT world came in November 2014 with the announcement of Echo, a home speaker that, more importantly, also acts as a personal digital assistant2. Users can activate their Echo by speaking a key phrase (“Alexa”), followed by a prompt. Echo can answer factual questions (e.g., “What is the capital of Canada”), play media (e.g., “Play Beyonce on Spotify”), and even fulfill household requests with the right connected hardware (e.g., “Turn on the living room lights”). And of course, Echo allows customers to make online purchases through voice commands, connecting this new business with Amazon’s existing e-commerce core.

Amazon Echo
Figure 1: Amazon Echo

The release of the Echo led to meaningful changes in Amazon’s business and operating models – Amazon was now also a hardware manufacturing and software development business. As a result, the company needed to create a supply chain of multiple parts suppliers and develop a manufacturing process and capacity for the new product3. It also needed to work with other IoT providers (e.g., Belkin for power outlets) and digital content providers (e.g., Spotify for music) to create integrations that Echo could tap into to provide its rich functionality.

These efforts have been unquestionably successful. Over the past two years since its release, Echo has been installed in an estimated 1.6 million homes and has become one of Amazon’s pillar products4. More recently, Amazon released a lower priced version called the Echo Dot to further penetrate the living rooms and bedrooms of its customers. However, as it moves forward, Amazon must address new business and operational challenges posed by both its competition and external threats.

Amazon Echo Dot
Figure 2: Amazon Echo Dot

 

Figure 3: Estimated Echo Installed Base over Time
Figure 3: Estimated Echo Installed Base over Time4

Competition from Tech Giants

Though Amazon was the first to market a home digital assistant, many other personal assistants have existed on consumers’ phones (e.g., Microsoft’s Cortana, Google’s Assistant, and Apple’s Siri). It’s no surprise that many of these companies are trying o bring those assistants into the home. Most recently, Google launched Home on October 4th this year, its response to the Echo. Using Google’s artificial intelligence algorithms and the power of Google Assistant, Home presents a significant challenge to the Echo.

Figure 4: Google Home
Figure 4: Google Home

For an IoT product that is intended to be the centerpiece of home automation, hardware has become less important than the software that connects the physical and digital. As competitive pressures mount, Amazon must redouble its efforts as a software company, in combination with its strengths as a hardware business, to ensure its digital assistant remains as smart, or smarter, than others on the market. This will be no easy task given the scale and technical know-how of its competitors, and the complexity of effectively managing a software, hardware, e-commerce, and logistics business is immense.

Challenges in Privacy and Security

One significant concern customers have with putting Echo into their homes is privacy, given that the device is always passively listening. In order to promote mainstream adoption, Amazon must be able to convince its customers that their private conversations will not be recorded. As Robert Graham from Errata Security says, “it’s like willingly bugging your own home and hoping no one tunes in”6. Amazon insists that the device does not record any data and only sends information through the internet after a user says the activation phrase, but the company must do a better job of educating its customer base. Additionally, Amazon must consider its position on law enforcement – will it take a hard stand against privacy violations, even from law enforcement, or will it allow wiretapping of Echos? For the consumer, it is clear which option is preferable.

Amazon must also make significant investments to combat security risks from hackers and other malicious third parties. Security threats have become more sophisticated, widespread, and damaging in an increasingly connected world, and Echo presents a prime opportunity to maliciously intrude into the homes of millions of people. In addition to investing in its virtual assistant software, Amazon must create world class security protections against malicious digital threats.

The Echo has given Amazon a foothold in the home as the market for IoT starts to take off, but it must continue to innovate on its products, its operations, and its strategies to remain a market leader. [799 words].

 

[1] Amazon.com, Inc. (2015). Form 10-K 2015. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml

[2] Stone, Brad; Soper, Spencer (2014-11-06). “Amazon Unveils a Listening, Talking, Music-Playing Speaker for Your Home”. Bloomberg Businessweek. Bloomberg L.P. Accessed 17 November 2016.

[3] Brustein, Joshua (2016-04-19). The Real Story of How Amazon Built the Echo. [ONLINE] Available at: http://www.bloomberg.com/features/2016-amazon-echo/. Accessed 17 November 2016.

[4] Business Insider Intelligence. 2016. How many Amazon Echo smart home devices have been installed? [ONLINE] Available at: http://www.businessinsider.com/how-many-amazon-echo-smart-home-devices-have-been-installed-2016-6. Accessed 17 November 2016.

[5] Roberts, Daniel (2016-10-04). Google launches Home, its answer to Amazon Echo. [ONLINE] Available at: http://finance.yahoo.com/news/google-launches-home-its-answer-to-amazon-echo-170913655.html. Accessed 17 November 2016.

[6] Cranz, Alex (2016-03-15). Amazon’s Alexa Is Not Even Remotely Secure and I Really Don’t Care. [ONLINE] Available at: http://gizmodo.com/alexa-is-not-even-remotely-secure-and-really-i-dont-car-1764761117. Accessed 17 November 2016.

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3 thoughts on “Digitizing Our Homes

  1. The privacy issues are at best creepy and at worst dangerously invasive. Alexa is always listening. At best this means you and your spouse are talking about a roomba and then you get ads for a roomba. Worst case, Amazon not only knows what you buy but everything you discuss at home, and sells that information to a third party.

    That said, I think millennials are actually used to giving up their information and don’t mind doing so. I think we are waiting for some event – like the FBI requesting transcripts of conversations or wiretapping, before we see the fall-out. Until then I think people will continue buying.

  2. Great post! Agree with Margaret above, the privacy issue is a big concern but I wonder how much Millenials will actually care about. We know that we’re always having our data tracked so I’m not sure we mind. That said, I think it will only take one big breakdown in trust for the general public to become very anti-tracking. I also wonder if law enforcement could try to use it to prevent crimes. If you could hear a murder taking place, could Alexa alert the authorities? It’s a very grey area and should be interesting to see what both Google and Amazon do to make people feel their data is safe.

  3. I actually have an Echo in my apartment but I’m with Margaret with my concerns around privacy. At the risk of sounding paranoid, my concern is more focused on Amazon itself. If I’m discussing buying a new toaster at home with my partner and the Echo is listening and collecting this data, what is to stop Amazon increasing the prices of toasters by 5-10% on its site? Detecting such abuse of information would be hard to do (given the small increase in price).

    I believe that we as consumers need to be more assertive in protecting our privacy and the regulators need to support private individuals. However, progress here is slow and far behind the pace of innovation. I wonder what it will take to make consumers pay attention and regulators give this nascent technology the guide rails it needs?

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