Amazon Alexa and the battle for your home

Amazon Alexa and the battle for your home

Alexa is creating a new market: the voice-activated computer for the smart home.

15 March 2018 · 5 min read

Are voice-controlled assistants the next operating system?

Windows was a goldmine for Microsoft, it helped them spawn Internet Explorer (IE) and their Office Suite which continues to rule the white-collared worker. By owning the operating system (OS), Microsoft commoditised hardware providers who compete to make windows faster and cheaper, attracting more users, and in turn more developers, who made the same Windows computers better with new software. All with Microsoft collecting a wonderful licensing fee.
We’ll dive deeper into this later in this article.

The end result was one of the most powerful business models in history. By owning the operating system, Microsoft was able to abstract away the hardware underneath (forcing suppliers to compete on price), while attracting more developers (because Windows was where the users were), all while cashing in on licensing.

Abstraction is an important concept to touch on before we dive deeper... It’s an idea from computer science where you use a standard way of interacting with a system (in this case Windows UI), suppressing the more complex details to the below level (the operating system). For users, it means a better experience and for developers, quicker development time. Win-win.

This gave Windows the win in the desktop race, and it’s looking like Amazon might win the next OS race.

Alexa is Amazon’s voice-powered personal assistant. Amazon isn’t a hardware business, Amazon is a service provider, and Alexa is their latest service.

Why voice matters

Alexa is creating a new market, the voice-activated computer for the smart home. Our homes are the one place where neither the smartphone nor the computer rules. At work, we use our desktops/laptops, and the rest of the world is ruled by the smartphone. At home, phones are on charge.

The whole ecosystem around the smart home is still forming, and it’ll likely form around a voice-activated assistant who controls your smart lights, fridges, TVs, and everything else. The problem with the current market is that it relies on the smartphone. It’s easier to flick a switch off than reach for your phone to do it. There is no OS for the smart home.

Alexa fills this gap, it's ever listening, waiting for its wake-word (such as Echo), while other devices require you to push a button to activate (ignoring the useless hey Siri).

The reasons we think Alexa will take over are as follows:

  • Amazon is letting all kinds of manufacturers build devices powered by Alexa, which will inevitably compete with each other to improve performance and price.
  • More devices plugging into Alexa's platform will result in more applications for Alexa, which will result in more people using Alexa, making it more attractive to developers, and so on.
  • Amazon doesn't need to make any money off Alexa. When we shop online, we usually do it from our homes and if it becomes as easy as "Alexa, reorder my week's shopping", it makes switching to an alternative like Apple's HomePod or Google Home much less attractive.

The two key points to understand above are that Alexa is being used by people outside of Amazon, and outside developers can build and publish skills for Alexa (using the Alexa Skills Kit). Amazon is letting the community build the next-generation hardware for Alexa (which will result in lower prices and better performance) and the next-generation of apps (which will attract more users).

The kids growing up today won't be known as the smartphone generation, they'll be voice-powered natives. Amazon is thinking a few steps ahead of the competition, embedding inaudible commands to prevent Alexa devices from waking during their own commercials. It’s not too far-fetched to believe that one day Alexa will be able to respond to your voice and your voice alone (or set preferences for any house you step into based on your voice).

Why owning the OS matters

An operating system is a piece of software that manages both the hardware and software of a computer by providing a set of interfaces that other programs can use on top of it.

For technology companies, owning an operating system is particularly powerful:

  • By abstracting away the hardware, they reduce hardware providers to pure performance providers, rather than differentiators. This increases competition amongst hardware providers, which benefits the operating system provider (by reducing costs), then when hardware becomes "good enough" the only differentiator is the operating system, which captures the majority of profits.
  • By providing a consistent set of interfaces for software, operating systems create a network effect: the more users of an operating system, the more developers want to develop on it, this leads to more apps, which leads to more users, and so on.

You only have to look at Microsoft's dominance on Desktop or Apple's dominance on mobile to see how powerful owning the operating system is.

United States v. Microsoft Corporation

In 2001, Microsoft was accused of abusing monopoly power on personal computers because it bundled Internet Explorer with the Windows operating system. The United States thought that bundling them together was the reason Microsoft won the browser wars (as every Windows user had a copy of Internet Explorer). It was alleged that this restricted the market for competing
browsers (like Netscape Navigator or Opera) that were hard to download or had to be purchased at a store.

Microsoft argued that merging Windows and Internet Explorer was the result of competition, and the two were now the same product linked together, giving consumers the benefit of IE for free.

This is an interesting case because it shows that dominance in the operating system can lead to dominance in the next stage of software, too. Windows forced competition between suppliers of early every part of a computer's hardware, leading to massive increases in computing power and massively lower prices.

Once Windows was the default operating system, it meant there was a huge and rapidly growing market for developers, increasing the attractiveness of the Windows operating system as we mentioned above. It's a virtuous cycle.
The end result was one of the most powerful business models in history: commoditised hardware providers competing to make Windows computers faster and cheaper, with more developers making those same Windows computers better with new software. All with Microsoft collecting a licensing fee.

Ignoring the Internet Explorer case above, it's easy to see how Microsoft benefitted by looking at their Office franchise. It is still the default white-collar work tool. If you get paid to sit in front of a computer, chances are Word, Excel, or PowerPoint are part of your daily routine. In 2012, Microsoft had 90% market share on PCs for office productivity software.

Alexa may be able to replicate Microsoft’s desktop success, displacing the smartphone in the home, and fortunately for Amazon, they don’t need to make money from devices (or licensing). They sell stuff and, in exchange for an operating system for the home, you’ll give Alexa (and Amazon) the data they need to sell you more stuff.

The information in this article is prepared by Spaceship Capital Limited (ABN 67 621 011 649, AFSL 501605). It is general in nature as it has been prepared without taking account of your objectives, financial situation or needs.

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