Amazon.com (AMZN +1.26%) has introduced three new hardware product categories in 2014, and it doesn't look as if it's slowing down anytime soon. In September, Reuters reported that the company is expanding its Lab126 hardware research and development lab, spending $55 million to expand the facilities and workforce. Amazon plans to add 700 new employees over the next five years.
Amazon's new Echo. Source: Amazon.com.
Most recently, Amazon unveiled the Echo, a voice-activated device that sits in your living room, kitchen, or bedroom and works like Siri on an iPhone. It can give you weather and news, set an alarm, and answer questions. Its most useful function, though, is as a wireless speaker that streams music from Amazon's Prime Music service, with more services to come.
After the gigantic flop that was Amazon's Fire Phone, which caused the company to write down its inventory by $170 million, investors may be wary of Amazon's expanding efforts in hardware. But Amazon's work in hardware offers multiple ways for Amazon to benefit long-term, even if the company's efforts on some products completely fall flat.
Drawing in customers with a wide product portfolio
The simplest way Amazon benefits from creating new products is through direct sales. Even selling products near cost at least draws people to Amazon's website, where it can encourage customers to purchase complementary products. In fact, Amazon doesn't even have to sell the product to the customer if it can increase interest in that product category. It can still sell a competing product to a customer.
The Fire Phone. Source: Amazon.com.
Each new product Amazon introduces gives people another reason to check out Amazon.com.
On top of that, all of the products Amazon makes -- the Kindle, Fire Phone, Fire TV, and Echo -- encourage additional shopping on Amazon.com after the initial purchase. This has been a mainstay of Amazon's strategy since it unveiled the original Kindle e-reader, and it's what allows the company to sell these devices at relatively low margins.
By creating incremental sales, Amazon knows its successes in hardware such as the Kindle and Kindle Fire are able to make up for its failures, such as the Fire Phone.
Creating a product ecosystem
Amazon's product line expansion also allows it to create an ecosystem of products that all play well together. The Echo may eventually become the hub for future smart-home devices, allowing users to do much more than add items to a shopping list. The Fire TV looks equally capable of acting as a connected-home hub.
The key to capitalizing on that potential is to first get those products into people's homes, and creating numerous entry points will help Amazon penetrate consumers' homes more easily. That may be a reason Amazon created a $40 stick version of the Fire TV.
Down the road, Amazon will have the opportunity to sell smart-home devices such as smart locks, thermostats, and lights. But even if it doesn't sell those products, Amazon can still benefit from controlling the hub.
A cloud computing play
As I mentioned, Amazon's Echo currently has limited functionality. It has a few applications built by Amazon to check the weather and play music, but it doesn't offer much else.
The Fire TV and Echo could become platforms for developers to build on top of. Source: Amazon.com.
Both Echo and Fire TV offer a lot of potential for developers to build new applications on Amazon's cloud computing platform, Amazon Web Services. Whether those are applications for Fire TV or Echo themselves or a new device such as a smart thermostat that works seamlessly with either of Amazon's devices, Amazon stands to gain more cloud computing customers.
The worst-case scenario has already happened
For investors, Amazon's $170 million inventory writedown on the Fire Phone was the worst-case scenario. In the grand scheme of things, that's not so bad for investors -- as long as Amazon learns from its mistakes with that device and doesn't make a habit of it. The Echo's being available for purchase by invitation only indicates that Amazon is being more cautious with the release of a more unproven product. It sells for $199 with Prime members able to save $100 for a limited time.
Still, Amazon generated over $85 billion in revenue over the past 12 months, and investors don't have strong expectations for profits. Now is the time when Amazon can experiment with new products and can afford to fail without causing too much damage to its shareholders' equity. And if Amazon has another big hit, it can benefit the company in four ways: direct sales, incremental sales of other products on Amazon, sales of future products, and cloud computing sales.
