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Can Microsoft's Cortana Smart Speaker Counter Amazon's Echo?

By Leo Sun - Oct 10, 2017 at 11:20AM

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It’s going to be an uphill battle for Microsoft in this “me too” market.

Microsoft's (MSFT 3.20%) Cortana will likely join the smart speaker race soon with Harman Kardon's new Invoke speaker. The device was recently spotted on a Microsoft Store page with a $200 price tag, although the page has since been removed.

The device was already revealed earlier this year, so its arrival wasn't surprising. At the time, Microsoft claimed that 145 million people already use Cortana, so Invoke already had a built-in user base. The device will connect Cortana to all of a user's Windows 10-powered devices, and can be used to make Skype calls, making it a potential replacement for a home phone.

Harman Kardon's Invoke speaker.

The Cortana-powered Invoke speaker. Image source: Harman Kardon.

However, the market is already filled with similar devices, most notably from Amazon (AMZN -0.03%) and Alphabet's (GOOG 2.15%) (GOOGL 2.37%) Google, so the Invoke speaker is clearly a "me too" device instead of an innovative one. Is it too late to catch up, or can Microsoft leverage its strength in operating systems to make Cortana a contender in the smart speaker market?

Why Microsoft needs a smart speaker

Over the past few years, Microsoft reduced its dependence on Windows operating system sales and invested more heavily in the growth of cloud-based services. This was a more sustainable business model, since Apple (AAPL 4.01%) and Google popularized free operating systems and subscription-based cloud revenues were usually stickier.

A key component of that cloud-based ecosystem is Cortana, the voice-activated personal assistant that accumulates data from Windows 10 users. Data gathered by Cortana strengthens Microsoft's Bing search ads, but ad revenues accounted for less than 1% of the company's revenues last quarter.

Instead, Microsoft wants Cortana to be the universal voice of all its Windows devices. By ensuring that a user's PCs, tablets, and smart speaker are on the same page, Microsoft potentially widens its moat against Amazon's e-commerce ecosystem and Google's search-based ecosystem. Cortana also accumulates valuable data for its AI and machine learning efforts, which could be applied to predictive analytics and other services for enterprise customers.

Why Microsoft could be too late

Unfortunately for Microsoft, Amazon has a clear first-mover's advantage in this space with Echo, which was widely released in 2015. Amazon subsequently expanded the Echo family with the hockey puck-sized Dot, portable Tap, camera-equipped Look for AI-powered fashion advice, and the Show, which features a 7" screen for media playback and video calls.

Amazon's Echo smart speaker.

The Amazon Echo. Image source: Amazon.

The latest additions to that family are the Echo Spot, which is a smaller version of the Show, and Echo Plus, which resembles the original Echo but functions as a hub for smart home devices.

This scattergun strategy enabled Amazon to conquer 76% of the smart speaker market this year according to a recent report from Consumer Intelligence Research Partners (CIRP). The remaining 24% of the market belonged to Google Home -- making it tough for late arrivals like Harman Kardon's Invoke and Apple's HomePod to gain ground.

The Invoke's $200 price tag is lower than the HomePod's $350 price, but Amazon's Echo devices cost between $45 and $200. Therefore, consumers who are dependent on Amazon's ecosystem -- particularly Prime members -- will likely purchase Echo devices instead of speakers tethered to another ecosystem. CIRP claims that Amazon's Prime user base grew 35% annually to 85 million during the April to June quarter.

Lastly, Microsoft claims that Cortana has plenty of users, but those users could simply use a Windows 10 PC or tablet to make the same queries. The Invoke can't be used to place orders like the Echo or instantly access Google services like Google Home. Simply put, many consumers could consider the device redundant, and tethered to an ecosystem which is less essential in their daily routines.

But does it matter for Microsoft?

Financially, the Invoke matters more to Samsung (NASDAQOTH: SSNLF), which owns Harman Kardon, than Microsoft, which provides the software. But it's still a minor product for Samsung, which owns a massive portfolio of consumer electronics and semiconductors.

Even if the Invoke flops, Microsoft can rely on other hardware partners -- including Intel and HP  -- to produce Cortana-powered speakers. In theory, those partners could help Cortana gain market share in the same way Windows became the dominant operating system for PCs.

Cortana smart speakers aren't a make-or-break product for Microsoft. But if the company lets Amazon, Google, and Apple carve up the market, it could miss an opportunity to gain a foothold in the fledgling smart homes market.

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