Amazon (NASDAQ:AMZN) kick-started the smart speaker market when it launched the Alexa-enabled Echo speaker three years ago. The e-commerce giant's decision to move further into the hardware business might have surprised some, but its early initiative is turning out to be a smart bet in hindsight given the potential in this area.
Smart speakers have turned out to be one of the hottest growth items in the tech space thanks to their impressive functionality and ease of use. They can order cabs and groceries, change the lighting or thermostat setting, or play your favorite music tracks at your verbal command. Not surprisingly, sales of smart speakers across the globe nearly tripled to 17 million units during the second quarter of 2018, according to Canalys. Such terrific momentum is expected to continue, with eMarketer estimating that the number of smart speaker users is growing at an annual rate of 48%. This bodes well for Amazon, as it's currently sitting at the top of the market, but can it retain its throne?
The challengers have arrived
Two years ago, Amazon was the only big name in smart speakers, as it held close to 94% of the market. But the space has become crowded since the likes of Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple followed Amazon's lead and launched their own intelligent speaker devices.
As a result, Amazon's smart speaker market share slipped to 41% at the end of the second quarter. Alphabet subsidiary Google has turned out to be a potent competitor for Amazon, as it now controls 27.6% of smart speaker sales and occupies the second spot. Though Amazon remains dominant in key markets like the U.S. and India, it cannot be denied that the company will have to fight tooth and nail if it wants to continue leading this space. That is why the company continues to deploy its Alexa voice assistant into more smart home–centric devices and recently updated its speaker lineup.
Amazon's new Echo speakers -- the Show, the Dot, and the Plus -- are now packed with more features, look better thanks to sleeker designs, and have improved sound quality over the previous-generation devices. More importantly, the e-commerce giant has kept the prices steady despite the upgrades, allowing consumers to get into the Amazon Alexa ecosystem for as little as $50.
So Amazon has made it a point to match rival Google's cheapest Home Mini device, which retails for an identical price, to boost sales. But what sets Amazon apart from Google is the former's e-commerce ecosystem, which gives users a major incentive to a buy an Echo instead of a Home.
The Amazon advantage
Google's search-engine expertise might make its Home speakers better at delivering search results, but Echo devices are linked to the user's Amazon account, making it extremely easy to order a variety of items by just speaking to the device.
Google has also deployed the voice-ordering functionality into its speakers and has even waived the membership fee for the Google Express shopping service through which online orders are placed. However, the catch is that Google Express service is limited to only the U.S. right now.
Additionally, users will have to meet a minimum order size threshold at each partner store and even check out separately. This makes Google a middleman instead of an actual e-commerce platform, resulting in an inferior shopping experience. Amazon already has the platform thanks to its distribution network and delivery infrastructure.
But that's not where Amazon's advantage ends. Back in July, the Echo was supporting more than 12,000 smart-home products, as compared to the Google Home's 5,000, which makes Amazon more versatile. In fact, Amazon has set its sights on dominating the smart-home market, as its latest products indicate. Last month, the company released at least 15 additional hardware offerings, ranging from smart plugs to a microwave and even a wall clock.
All these products will work in tandem with the Echo devices, strengthening the case for buying Amazon's smart speakers.
The long-term play
We have already seen that smart speaker sales are expected to grow rapidly in the long run, and Amazon is primed to take advantage of the trend. Beyond that, smart speakers could potentially boost the company's e-commerce sales as well, since consumers will easily be able to order goods using voice commands.
Finally, the Echo smart speakers play a central role in enabling smart-home appliances, and Amazon is strengthening this capability by launching ancillary products. This should allow the e-commerce specialist to sink its teeth into the lucrative smart-home market, which is expected to hit $53 billion in size by 2022, according to Zion Market Research.
Amazon made a forward-thinking bet releasing its Echo speakers, and they now have the potential to boost the company's sales in not one but three verticals.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.