Amazon’s broken business model

‘‘ Amazon seems faced with a choice: find a way to make Alexa profitable, or cut its losses and move on. — Navneet Alang

Amazon needs to acknowledge that the razor-and-blades business model only works when people actually want or need blades

It was a Black Friday deal, and — heaven, help me! — I couldn’t resist. In a corner of my office now sits a shiny new Amazon Echo smart speaker that I neither needed, nor can really justify. But at half off — a mere $65 — it was hard to say no. Maybe this is why Amazon has sold over 100 million of them. It’s predicated on that classic “razor and blade” business model: sell the razor for cheap, make it up on the blades.

Alas, despite huge sales, Amazon is facing two tiny problems with that approach: One, it isn’t working; and two, it’s losing the company billions of dollars.

As has been widely reported, Amazon’s “Worldwide Digital” group, responsible for all those devices who use “Alexa,” the company’s voice assistant that can tell you the weather or play your favourite radio station, is facing huge cuts.

In a report from Business Insider, it was revealed that the division is on track to lose a staggering $10 billion this year, and will be the main focus of10,000 job cuts at the company.

One former employee described the Alexa voice products as a “colossal failure of imagination.”

In retrospect, none of this should be surprising — neither the zeal with which Amazon pursued the strategy, nor the fact that a revenue stream hasn’t materialized.

Now, as the future of Amazon’s Alexa line is in doubt, it’s worth asking: What is a smart speaker even supposed to do?

The razor-and-blades model deployed for Alexa likely made sense at the time. Building out a business and figuring out how to monetize it after acquiring a huge user base was the norm for digital businesses for years. Google, Facebook, and others grew their way to billions using just that approach.

For their part, Amazon execs assumed their voice products would eventually translate into voice-based shopping. As people grew accustomed to this virtual assistant in their home, asking it questions and using it for basic tasks, it would spur them to also ask “Alexa, reorder toilet paper.”

That never happened, for perhaps obvious reasons. For one, if occasionally asking Alexa to “play Dire Straits” results in it telling you what Diet Coke is, one is hardly going to trust it to buy things. Voice shopping wasn’t and still isn’t compelling.

Amazon’s other plan — that third-party companies such as Domino’s or Uber would have voice-based transactions, while Amazon got a cut — simply never materialized, for reasons very similar to why Alexabased shopping never took off.

Of course, hindsight is 20/20, but one might still fairly ask: Why did an e-commerce company ever delve into smart speakers at all?

The answer is AWS, Amazon’s cloud computing business, which turned out to be Amazon’s most profitable division. Netflix, for example, doesn’t run all that streaming video off its own hardware; it uses Amazon’s. Instead of only selling its capacity to others, Amazon decided it could also be used to crunch requests for its own products — everything from “Alexa, do I need an umbrella today?” to “Alexa, who was the actor in Mission Impossible?”

It seemed like the perfect synergy … at least, until it became clear there’s no clear revenue stream.

Now Amazon seems faced with a choice: find a way to make Alexa profitable, or cut its losses and move on.

The latter option is unlikely, both for the hit to its brand — imagine millions with now useless Echo devices! — and that voice is genuinely helpful. As I wrote last week, using voice is not just easy, but also more accessible to many such as seniors.

What are Amazon’s options then? For one, it needs to acknowledge that a razor-and-blades model only works when people actually want or need blades.

One possibility is to find a service, which is actually useful, attached to Alexa devices — likely related to the smart home — and charge a monthly fee for it to bring in recurring revenue.

There are, however, significant challenges there: whether it is privacy, or the consumer pushback against paying to make things they own work or keep working.

If, however, there is nothing to recoup the loss of selling something at cost, then Amazon needs to do something radical: pitch the Alexa line as a product worth paying for. If a device is actually useful — based on my many Alexa products, they are — then it makes sense to simply charge more for them.

In that sense, Amazon needs to think more like Apple: That company’s Siri-based HomePod line may not have set the world on fire, but like everything Apple sells, its price means Apple still makes a healthy margin.

Cuts will help. So, too, will a leaner, more aggressive focus on the devices themselves.

But for Alexa to finally become profitable, the company will have to focus on something very simple: making a product that people want to buy because of what it can do for them … not what it might do for the company that makes it.