Why Amazon Echo Is Not The Next Big Thing
Summary
The technology and investment world has been captivated by new home automation products from Amazon and Google.
Is Amazon Echo really the next big thing in technology with services replacing hardware?
For clues, I look at the most successful technology device of all time.
In the recent months, the world of technology and investment has been captivated by new home automation products from Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL). The SA community is not an exception, with contributors Motek Moyen and Michael Blair praising Amazon's Echo Dot as an innovative product with a great price and vast potential. In her 2016 Internet Trends report, venture capitalist Mary Meeker even suggests that the Echo could pose a threat to Apple's (NASDAQ:AAPL) mighty iPhone. Are we really witnessing the arrival of the next big thing in technology with services replacing hardware? Or is this just another dead end?
Services vs. hardware
Amazon Echo is a good example of the company's low-end hardware strategy aimed to support its services-oriented business model. With the Echo's voice-only interface and limited feature set, Amazon mitigates its weakness in hardware while playing to its strength in cloud computing and services. This approach is in stark contrast to Apple's premium product strategy and a device like the iPad Pro which the company calls "the clearest expression of our vision of the future of computing". With the iPad Pro, Apple positions rich experiences as the reason for customer purchase. These are made possible thanks to a strong hardware component with a wide variety of input methods (touch, voice, and optionally keyboard and digital pen) and outputs (display, speakers, and soon no doubt, haptic feedback).
Which of these two fundamentally different approaches represents the future of technology? For clues, I look at the most successful technology device of all time and a product which will supposedly be challenged by Amazon Echo - the iPhone.
Mobility and flexibility
The success of the iPhone (and smartphones in general) has demonstrated the importance of mobility and flexibility in technology. A mobile device with a flexible user interface can constantly adapt to the user's changing needs based on time, place, and activity. Different settings and conditions lend themselves to completely different control and communication methods. For example, using a voice assistant makes much sense when driving a car, however, it would probably not be a good idea in the middle of an office meeting or at home at 12am. No matter how good your deep learning and AI are, a world in which we would solely rely on voice control as the primary input method is simply not realistic. On the other hand, a device with a rich variety of input and output methods fits very well in our varied and complex daily lives.
The Echo's limited mobility and voice-only interface (so far in English only) presents a considerable problem for the device's usefulness and limits its value and potential.
Price and value
Amazon Echo is further praised for its affordable pricing ($89.99 for the Echo Dot model) which is supposed to further boost the product's prospects. However, as business theory and market reality teaches us, the price is only a part of the story and one of many considerations in the consumer decision making process. Factors as value, quality, trust, and convenience are also considered in the marketplace. The iPhone is a shining example of consumers recognizing and paying a premium price for a high-value product. Just as the iPhone's higher price is not an obstacle for the success of Apple's premium product, I don't see the Echo's lower pricing as an advantage for what is essentially a connected speaker with limited value.
The next big thing
The next big thing in technology will expand on the success of the smartphone and its core concept of making technology more personal, mobile, and flexible. The Amazon Echo is not such a product as it goes exactly the opposite way and trades off the high value of mobility and flexibility for the low value of a more powerful speaker.
Amazon Echo vs. iPhone: Looking for the next big story
Home automation products like Amazon Echo and Google Home will find their niche and continue to evolve. Apple is rumored to update its Apple TV to include a microphone and speaker which would make sense as this would further expand its interface and increase the value of the home device. But mobile devices like notebooks, tablets, smartphones (and soon smartwatches) will continue to play the most important role in technology as we want to access our apps, services, and connected devices from wherever we are and via a rich, flexible interface.
In this light, a smartwatch is ideal for home automation and tasks like controlling music, lights, or temperature. Its versatile interface including a microphone, display, and haptic feedback is always on you, wherever you are. I consider the smartwatch to be the next big thing in technology as it takes mobility to the next level while introducing new unique use cases related to health, convenience, and fashion. The car as the ultimate mobile device is another example where technology can have a significant impact on our lives - self-driving cars in a ride-sharing network is quite a powerful combination. A voice-controlled speaker? Call me a skeptic.
Investor takeaway
I think the buzz, press coverage, and positive sentiment surrounding the Echo tell us more about the maturity of the smartphone market than about the inherent value of Amazon's product. Look beyond the novelty and promise of a hardware-free future and there is little to be found.
However, this is not say that Amazon is making a mistake here. Instead, let's see the Echo for it really is - just another device complementing Amazon's low-end product portfolio designed around the strength of its service business model and weakness in hardware. Once the hype dies down, it will be back to basics - Amazon as a tremendous retailer and services provider.
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