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Amazon's Hidden Internet of Things Advantage

By Chris Neiger – Jun 30, 2015 at 4:00PM

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By opening up its voice-activated assistant to developers, Amazon thinks it can sell more of its Web services to device makers.


Source: Amazon.

Over the past few months Amazon.com (AMZN 0.58%) stepped further into the Internet of Things market with its Dash Replenishment Service, allowing device makers to add automatic reordering of households goods directly through their devices, bringing us all one step closer to a fully automated home. 

But the company took another, different, Internet of Things step last week when it announced that it would open up the brains behind its voice-activated Echo speaker, Alexa, to third-party app developers. The move allows developers to better pair their devices with the Echo using voice-activated commands, but most importantly it allows them to add Alexa directly into their devices for their own purposes. 

These two moves both open up Amazon to using Echo as a main hub for home automation and as an integrated voice-activation system in new IoT products -- with some big benefits.

Here's the hidden advantage 
With the release of the Alexa Skills Kit, developers can now use the Echo to turn on connected sprinkler systems, tell the semiautonomous vacuum cleaner to get to work, or even tap into your kid's lunch menu and report back to you what he or she is eating at school that day (who wouldn't want to know that?!). 

Making it easy to both pair and integrate Alexa to connected home devices and services gives Amazon a broad approach in the IoT space, but it also offers one other advantage. 

Source: Amazon.

In a press release, Amazon said, "The easiest way to build a skill for Alexa is to use AWS Lambda, an innovative compute service that runs a developer's code in response to triggers and automatically manages the compute resources in the AWS Cloud, so there is no need for a developer to provision or continuously run servers." Essentially, the company strongly encourages developers and original equipment manufacturers to use its Amazon Web Services, or AWS, for the system. 

In first-quarter 2015, Amazon's revealed that its AWS business is earning $5 billion in revenue per year, and that could top $6 billion by the end of this year. Amazon is only selling the Echo speaker for $180, so the company is not likely to make a lot money from the device. But if it can convince developers that Alexa is worth integrating into their devices and get them to sign up for new AWS services as a result, the company can increase revenue in one of its most promising businesses. 

Now what
While it's still too early to tell whether the Alexa integration will spur new AWS sales, it's still a smart preliminary move for Amazon in the IoT space. Most companies are focusing on selling home automation hardware to customers, which is already quickly becoming a crowded space, while Amazon is trying to sell lucrative IoT hosting services. 

The size of the smart home market is expected to reach $59 billion by 2020, and companies that can control how users interact with all those home automation devices are poised to benefit. That's why in addition to selling hardware, both Apple and Google are trying their hand at creating their own smart home platforms. Amazon's approach is a bit unique because it is ultimately trying to sell IoT Web services -- and by giving away Alexa for free it might have just found a new Internet of Things niche. 

Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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