There's little doubt that data privacy has become a hot-button issue in recent years. Facebook (META 0.83%) has been in hot water with regulators around the world after a string of customer privacy breaches beginning with the Cambridge Analytica scandal. Google parent Alphabet (GOOGL -0.23%) (GOOG 0.29%) stepped in it when it was revealed that its social platform, Google+, had a security bug that exposed user information, and the company kept that knowledge to itself. These are just two high-profile examples of the multitude of companies dealing with the negative repercussions of not adequately protecting user data.

Until now, (AMZN -1.86%) has largely avoided the limelight, as the company typically doesn't share user data with third parties. Now, though, Amazon seems to have waded into what could end up being a data privacy and public relations nightmare -- or did it?

A gray Amazon Echo sitting on a bedside table with a lamp, plant, and watch nearby.

Image source: Amazon.

Is there an Echo in here?

Amazon employs a global team of thousands of people who listen to voice recordings captured by its Alexa-powered Echo Smart Speaker, according to a report by Bloomberg. These interactions between the Echos and their users are reviewed and transcribed by a combination of full-time Amazon employees and contractors in a number of countries around the world.

These steps are taken with the goal of improving the speech recognition and natural language algorithms used by Alexa to understand and interpret human speech, enabling it to more accurately respond to user requests.

A rigorous defense

It's important to put these developments into context. Alexa is not always listening, and captures input only after hearing the wake word that activates the Echo, which in most cases is "Alexa," but can be customized to "computer," or "Echo."

Additionally, the artificial intelligence that powers Alexa has certain limitations. The machine learning algorithms that underpin the system require feedback in order to learn from their mistakes. The process of providing instances where its response was flawed helps improve the system's understanding and accuracy in the future.

In its defense, Amazon said in a statement that its workers have no way of identifying the people in the recordings they're transcribing:

"Employees do not have direct access to information that can identify the person or account as part of this workflow. All information is treated with high confidentiality and we use multi-factor authentication to restrict access, service encryption, and audits of our control environment to protect it. ... We only annotate an extremely small sample of Alexa voice recordings in order [to] improve the customer experience."

Investor takeaway

By being the first to market with the groundbreaking device, Amazon grabbed a significant share of the nascent smart speaker segment. The company controls an estimated 70% of the installed base of smart speakers, according to data from Consumer Intelligence Research Partners. However, that early advantage is waning, with competing devices now available from Google, Apple (AAPL 0.31%), and others.

In order to maintain its dominant market position, it's important for Amazon to continue improving Alexa's ability to understand the requests of its users, which is only possible by providing the necessary feedback. It's also important to point out that this very same process is almost certainly used by other providers to improve the capability of their own smart speakers -- and digital assistants.

While the sensational headlines might initially be a cause for concern, it's really much ado about nothing.