Amazon still has the upper hand which it is showing no sign of losing
Amazon increases its aggressive land grab. Not content to sit on 70% market share, Amazon is aggressively compensating for the lack of Alexa on smartphones by effectively giving the devices away and pushing e-commerce as hard as it can. A land grab strategy makes complete sense because the more Amazon can drive Alexa usage, the more data it will generate and the better it can become. Usage is the key to making all digital assistants better and this is the one area where Amazon has huge ground to make up compared to Google.
Amazon has launched yet another Alexa device which costs $20 but this is immediately credited back to the user when it is registered with an Amazon account making it effectively free. The latest addition to the family is called the Amazon Dash Wand which can be used to scan bar codes or Alexa to order products from Amazon. Alexa is present on the device and while this is clearly aimed at driving e-commerce, there is no reason why it can’t be used to answer inquiries or control the smart home. The one thing it won’t do is play music or radio but when the whole device costs $20, it is obvious that the audio experience would not be worth the effort. At the same time, Amazon is also offering $50 off the Amazon Tap reducing the price of the portable speaker to $79.99.
The two weaknesses of Amazon in the digital assistant space are that it is inferior to Google and that Google Assistant is present by default on every Android smartphone that ships. This means that if Google can convince users to use their smartphones to access the digital assistant, then Amazon will be at a big disadvantage. However, at the moment over 60% of all digital assistant usage occurs when the user’s hands are busy with another task which obviates smartphone usage as the device almost always has to be removed from a pocket to be activated.
This, combined with the fact that Google is still really struggling in the smart home, is why Amazon still has the upper hand which it is showing no sign of losing. This move is clearly aimed at seeding as much of the market as possible before Google can get its act together. If a large number of households have Alexa which is working nicely with the other smart devices they have at home, it will be increasingly difficult for Google to win them back even with a superior product. This is particularly relevant given that the market is still lowly penetrated in USA and is almost non-existent overseas. Given Google’s very slow progress, we are increasingly of the opinion that we are witnessing a repeat of the VHS vs. Betamax battle. We continue not to like either Alphabet or Amazon (even if it wins the smart home) on valuation grounds, preferring instead Tencent, Baidu and Microsoft.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.