When Amazon.com, Inc. (AMZN +0.53%) introduced the Echo smart speaker powered by its virtual assistant, Alexa, what started off as a novelty soon blossomed into an industry. Every major tech company has its own version, and it won't be long before smart speakers will be found in a majority of homes. The capabilities and performance vary by device, but the trend is undeniable. A forecast by Global Market Insights predicts that growth in the smart speaker market will hit $13 billion by 2024, with sales of over 100 million units.
These devices are at their core wireless speakers, but with a host of other capabilities. In addition to streaming music from a variety of sources, the speakers use far-field microphones to accept voice commands, and they can function as the heart of a home automation system. Some can link with other smart speakers. The most intriguing feature of these devices is the artificial intelligence (AI) powered virtual assistant at the heart of each one, similar to those found on any smartphone. The more they are used, the more useful they become. They can perform a variety of tasks, including checking the weather, ordering a pizza, scheduling a Lyft, and checking credit card accounts.
Investors looking to capitalize on this trend should look no further than three of the biggest companies in tech: Amazon, Alphabet Inc. (GOOGL +2.53%) (GOOG +2.83%) and Apple Inc. (AAPL +1.18%).
How should investors buy into the growing trend of smart home speakers? Image source: Getty Images.
Is there an Echo in here?
With no early competition, Amazon's Echo quickly emerged as the dominant force in smart speakers. The company released a skills kit to developers early on, which allowed them to incorporate voice commands. The number of apps that integrate with Echo now total more than 15,000. The novelty and utility of the device has resulted in a groundswell of consumer interest. Consumer Intelligence Research Partners (CIRP) estimates that since its release in 2014, 10.7 million Amazon customers in the U.S. have purchased one of the devices.
Amazon has expanded its lineup of Echo devices to include the smaller form feature Dot and the portable, battery-operated Tap. The Echo Look includes a camera and can make fashion recommendations, and the recently released Show features a touchscreen for a variety of uses, including video chat and viewing content from Amazon Prime Video.
Amazon currently dominates the market it created. Image source: Amazon.com.
Amazon's advantage extends beyond its early installed base. Mark Mahaney and Jim Shaughnessy from RBC Capital Market's estimate that 17% of consumers have used the Echo family of devices to order products from Amazon's website, which could result in an additional $10 billion in sales annually by 2020.
Search at its core
Google Home has several distinct advantages over the competition. Google was an early pioneer in artificial intelligence, and it combines that with its search capability to form a powerful one-two punch. Due to its work in voice recognition, Google Home can be trained to recognize up to six different users in a household and differentiate between them. It also has the ability to daisy-chain multiple speakers for a seamless experience.
Google Assistant will also venture to answer any request, while Echo is limited by the syntax of very specific commands. In a test conducted by search and digital agency 360i, a series of 3,000 questions were asked to both Google Home and Amazon Echo. The test concluded that Google Home was six times more likely to provide an answer.
This innate ability to answer based on search data and provide answers will give Google the advantage in years to come.
Google Home is quickly stealing market share. Image source: Google.
Fashionably late
Apple is known for taking its time when entering a new market and developing a high-end product. The HomePod is Apple's entry into the smart speaker market, though it won't be available until December. Apple is focusing on the musical capabilities of its smart speaker, which features an upward-facing woofer and an array of 7 beam-forming tweeters marketed to the music lover. HomePod will also feature spatial awareness or "room-sensing technology," which will adjust and optimize the sound based on its position and size of the room, along with the ability to detect and balance multiple speakers.
The smart part of HomePod will have Apple's virtual assistant Siri at its core and will be able to check the weather, get news and sports updates, and control smart home accessories that integrate with its HomeKit. We'll have to wait until the release of the HomePod to get a full understanding of its capabilities, but historically, Apple has been a force to be reckoned with in any market it enters.
HomePod will focus on the music. Image source: Apple.
Investor takeaway
Let's be clear: These devices are not yet a meaningful part of any company's revenue stream -- yet.
eMarketer estimates that Amazon controls over 70% of the smart speaker segment, a market it created, but competition is heating up. Google Home was released in November 2016, and it has already garnered nearly 24% of the market.
The smart home speaker market is still in its infancy and is expected to grow dramatically, reaching 36 million users in the U.S. by year-end, an increase of 129% year over year. These three companies provide investors with a way to tap into this fast-growing segment.
