Smart Speaker Wars

Posted: May 31st, 2018 | Author: | Filed under: amazon, apple | No Comments »

Kind HomePod

Like the Apple Watch and AirpPods before it, many think the HomePod is a flop. There are common criticisms and rationale behind this sentiment. In the end, the HomePod will play out like the Watch and AirPods. It’ll be the most loved and most profitable product in its market.

The “Smart Speaker” category is just getting started. Amazon, with their Echo family of speakers owns 70% of the market. Google owns 25%. But, only 20% of US Adults own a smart speaker. From the iPhone to the Watch this is one of the least mature industries Apple has entered in awhile.

Apple’s foray into Smart Speakers is the same playbook they’ve followed for decades. Apple is never the first mover, they’re always “overpriced” and “under featured”. The HomePod is all of these to the T yet those who follow Apple closely believe this time is different. That Amazon has an insurmountable lead.

The HomePod’s strengths compared to the competition is voice recognition and sound quality. Siri may not be as accurate and robust as Alexa but the HomePod is most likely to hear your command. The price point is much higher than Amazon’s and Google’s products but the sound quality is arguably the best. Smart Speakers largest use case so far is to play music. Apple is making sure they nail this.

Ben Thompson believes HomePod’s sole native integration with Apple Music is an example of Apple’s strategy of squeezing more out of current customers. He cites Apple’s iPod’s interoperability with Windows as a clear difference in Apple’s strategy with HomePod. Ben forgets the first generation iPod was only MacOS compatible. Time well tell if Apple provides better support for Spotify and Amazon Music.

Apple continues to follow Apple’s strategy since its inception –  ensure Apple products work best within the Apple ecosystem first and foremost. Airplay from an iPhone, using Siri to play Apple Music – make sure these experiences work 99.9% of the time before rushing to support other systems.

Amazon’s strategy is much different. Amazon is focused on creating cheap devices. They’re on the lower end of sound quality and the price point implies the margins are slim or non-existent. Amazon doesn’t announce their strategy but there are two strategies that make sense when selling something at a loss. The first is to ensure market share and slowly but surely raise the price until you’re profitable. The second is to make money off of the device in other ways. Microsoft famously lost money on every Xbox but made it up on licensing from games sold. Google doesn’t make money off of Android but off of Google Searches on Android phones. Amazon believes those with an Alexa device in their home will buy more stuff from Amazon. Will this be true? So far there is evidence of correlation but not causation.

Beyond price, Amazon’s Alexa is a better voice assistant than Apple’s Siri.  But…both leave a lot to be desired. Despite the majority of people having access to voice assistants on their phone, only 46% have used them once. Of those who do use it, only 39% found that voice assistants accurately respond to their commands most of the time. Imagine if Google Search was only 39% accurate? Voice assistants aren’t quite ready for prime time.

Apple is behind on market share. HomePod is expensive. But HomePod is the best at what people use Smart Speakers for – playing music. The price point will drop, the HomePod will support more third party devices/streaming apps and Siri will catch up to Alexa and Google Assistant. Ultimately the HomePod will never have the most market share but they will own the most profit in the category.

The Amazon Empire

Posted: June 24th, 2017 | Author: | Filed under: amazon | Tags: , | 2 Comments »

Everyone loves Amazon buying Whole Foods. Some so bullish they worry Amazon is now too powerful. Why aren’t pundits questioning a tech company buying a 36 year old grocer for $13.7 billion? Why is this deal a sure thing to so many?

The Numbers

Whole Foods Revenue

Revenue and profit of Whole Foods

Whole Foods is healthy but stagnant. 2016 revenue came in at $15.7B and $507mm of income. This income is lower than the two previous years. Sales have declined in six straight quarters. Whole Foods closed nine stores in February. At $500mm of income a year, Amazon is 27 years away from recouping the $13b spent. Of course this isn’t Amazon’s plan. Amazon believes they can modernize Whole Foods, improve logistics and empower online purchasing. Using the 462 Whole Foods locations for Amazon’s needs is the icing on the cake.

Competitive Advantage, Company Mission and Identity

Google & Motorola. Microsoft & Nokia. AOL & Time Warner. These are the disasters that come to mind when you think of a tech company acquiring an older company. In each example the tech company attempted to enter a space that was not part of their core competency.

Amazon has had an amazing run. Amazon has shown they can sell online better than anyone. Ecommerce at scale is Amazon’s core competency. Along the way to becoming the largest ecommerce company in the world Amazon had to learn how to create software at scale efficiently. AWS was born from this and Amazon developed a new core competency. AWS has been a massive success, generating $12.2B in revenue with a 31% profit margin in 2016. But Amazon has become drunk with success. AWS has lead Amazon to believe they can do everything. Core competencies be damned.

Amazon’s Former Vision –

Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.

Amazon use to have an identity. Amazon sold shit online and wanted to sell anything you could imagine online. This vision was edited to “Our vision is to be earth’s most customer centric company” which is broad and meaningless. It would have been a lot harder to justify a brick-and-mortar purchase with the old vision statement.

Midas Touch?

Some only remember the hits –, AWS, Kindle and Alexa but there have been failures as well. A $170mm write down on the Fire Phone. A $175mm loss on a LivingSocial investment. Failed attempts at payments (WebPay), auctions (Amazon Auction) and Q&A (AskVille). Not everything Amazon touches turns to gold.

Why Whole Foods?

I don’t love Amazon buying a brick-and-mortar store but the $5tn market size of the food retail industry is attractive for Amazon. Is Whole Foods the best fit? Whole Foods is known for their high-end, expensive food and stores. Amazon is known for their low prices. Do the customers of Whole Foods want lower prices? Sounds silly but some believe the high prices at Whole Foods keep the riff raff (like me) out and make the store more desirable to their core customer.

There are two grocers who seem like a better fit. Trader Joe’s, with their 461 stores in 41 states and low price model. Kroger, with ~2700 locations in 31 states and a $20b market cap also seems like a better fit. I’d love to know what other options Amazon considered and why they settled on Whole Foods.

Stretching Thin

Ben Thompson believes Amazon’s goal is to take a cut of all economic activity. Is that feasible? Is Amazon getting too big for their britches?

Ben Thompson –

I said at the beginning that Mackey mis-understood Amazon’s goals, strategies, and tactics, and while that is true, the bigger error was in misunderstanding Amazon itself: unlike Whole Foods Amazon has no desire to be a grocer, and contrary to conventional wisdom the company is not even a retailer. At its core Amazon is a services provider enabled — and protected — by scale.

Indeed, to the extent Waterloo is a valid analogy, Amazon is much more akin to the British Empire, and there is now one less obstacle to sitting astride all aspects of the economy.

In Ben’s bullish post he compares Amazon to the British Empire. Does Ben remember the British Empire’s fate? In the British Empire’s attempt to control all economic activity they stretched themselves too thin. The colonies and territories under their thumb revolted.

Can this happen to Amazon? Will Amazon’s ambitions cause customers to revolt? For example, if Amazon Video becomes more of a threat to Netflix will Netflix move away from AWS instead of feeding their competition?

Bottom Line

Keep in mind 70%-90% of M&A deals fail. Amazon’s purchase of Whole Foods is far from a no-brainer. This deal is a risky $13b bet with tremendous upside. Can Amazon utilize Whole Foods to improve what Amazon does best – allowing people to buy stuff online? Or will the Whole Foods deal become an expensive lesson on focusing and staying humble?