Despite not being first to market with virtual assistants, Amazon.com (NASDAQ:AMZN) was able to secure an early lead with Alexa by being the first major company to open up the virtual assistant to third-party developers back in 2015. It's not a coincidence that there are now over 13,000 Alexa Skills available, empowering the virtual assistant to perform a diverse set of tasks.
However, there's been one critical aspect missing: monetization.
A new way to pay
TechCrunch reports that Amazon is now introducing paid subscriptions for Alexa skills, in a huge step that will help developers monetize their work. The importance of platform economics cannot be emphasized enough, since developers need to earn a living, too -- particularly smaller ones that may not have other revenue streams like larger companies might. The first third-party Alexa skill to support premium subscriptions is the Jeopardy! skill, which will cost $2 per month, but more will inevitably follow.
In May, Amazon started paying out money to developers that build popular Alexa skills, which was the first semblance of monetization, however modest. The program started off with games before expanding to other categories in August. The specific details around how Amazon calculated its payouts was unclear, though. More importantly, it's intuitively unsustainable for Amazon to effectively subsidize the development of third-party skills if it's not directly collecting any revenue from customers from the Alexa platform.
"Bringing a subscription model to skills for Alexa will bring customers the benefit of new, engaging, and high-quality experiences while providing developers an additional way to earn money from their skills," an Amazon spokesperson told TechCrunch. The e-commerce giant has not specified what the revenue-sharing model will look like, but 70-30 is fairly common and many platforms drop that to 85-15 for long-term subscriptions.
The Prime twist
As is often the case, Amazon hopes to leverage the new offering as a way to push Prime subscriptions on Amazon customers. Prime members will receive access to premium subscription content for free, which incidentally undermines developers' ability to monetize their skills. While Amazon still won't disclose Prime members, it's safe to say that most customers subscribe to the service. Cowen and Co. estimates that over half of all U.S. households will have Prime memberships by the end of 2017.
Amazon continues to cram more and more benefits into Prime, to the point where the value proposition is so good that it's a no-brainer for anyone that even occasionally makes purchases from the e-commerce platform. The flip side of that is there's probably not much money left over that Amazon can allocate toward supporting Alexa monetization -- not that Amazon would have any qualms about subsidizing Alexa with other, more profitable parts of the business (looking at you, Amazon Web Services).
Still, other voice-controlled virtual assistant platforms don't appear anywhere ready to turn on monetization engines; they're still preoccupied with growing their respective catalogs of third-party services, which is easiest when those services are free for consumers or an extension of existing mobile apps. Investors shouldn't underestimate Amazon's ability and willingness to maintain its lead, no matter the cost.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.