Amazon (NASDAQ:AMZN) is already the largest e-commerce site in the world by overall visitors. However, the company's ambitions extend far beyond selling physical and digital products -- it wants to expand into the growing Internet of Things market.
The Internet of Things, or IoT, connects everyday devices like home appliances, smartwatches, and cars with each other and the cloud. Networking giant Cisco estimates that the total number of connected devices worldwide will double from 25 billion this year to 50 billion by 2020. Research firm IDC estimates that annual spending on IoT devices and services will surge from $656 billion in 2014 to $1.7 trillion in 2020.
Amazon plans to tap into this booming market with "smart" devices which could boost the strength of Amazon's ecosystem.
1. Seamless (and mindless) purchases
Last April, Amazon unveiled Dash, a wand-like device which lets users scan barcodes or speak the names of products into a microphone. For example, if you're running out of milk, you can simply scan the barcode on the bottle or say "milk" to order it through an AmazonFresh, Amazon's same-day grocery delivery service. It is currently only available in Seattle, New York, and parts of California.
In March, Amazon introduced the Dash Button, a small button which can be stuck to various surfaces around the home. When pressed, it can automatically restock consumable products like Tide detergent, Glad trash bags, and Cottonelle toilet paper through Amazon. Amazon offered the Button to certain Prime members who requested an invitation. The idea is to make purchases as seamless (and mindless) as possible, thus increasing user dependence on Amazon's services at the expense of brick-and-mortar rivals like Wal-Mart.
Companies are already working with Amazon to integrate that technology directly into their household gadgets. Whirlpool is developing a washer and dryer which can directly order detergent. Brother is designing a printer which can order ink, and Brita is creating a pitcher which can order water filters automatically. If these products catch on, Amazon can link its e-commerce ecosystem directly to IoT devices.
2. Let us control your home
Last November, Amazon introduced Echo, a "smart speaker" which was constantly connected to the cloud. The $180 device is basically an "always on" version of Siri which reports the news and weather, plays music, sets alarms and timers, makes lists, or answers questions by pulling information off the Internet. Like the Dash, it can also be used to reorder products from Amazon.
The Echo is also compatible with select smart home devices from Wink, Belkin WeMo, and Philips Hue. This enables users to turn on lights, fans, space heaters, and other devices with voice commands. To prepare for rising demand for smart home devices, Amazon launched its own storefront for home automation devices in late 2013.
The Echo's role as a smart home hub threatens comparable products like Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Nest, Samsung's (NASDAQOTH: SSNLF) SmartThings Hub, and Apple's (NASDAQ:AAPL) HomeKit platform. The smart home market is expected to grow from $33 billion in 2013 to $71 billion by 2018, and the company that can sell the more dominant hub will ultimately tether more users to its ecosystem. This isn't the first time Amazon has entered homes. Its Kindle devices, set-top box, and streaming sticks are also designed to establish a digital presence in users' homes.
3. We'll be watching you
In addition to e-commerce benefits, Amazon's IoT efforts could provide it with a goldmine of user data. That's why it recently acquired 2lemetry, which develops a platform for tracking and managing IP-enabled machines and other connected devices. The acquisition complements Amazon's 2013 introduction of Kinesis, a platform which can analyze high-volume data streams from various sources in real time.
These platforms are designed for the enterprise market, but they could be integrated into platforms like Dash and Echo as well. Dash partners like Whirlpool could gain useful analytics regarding orders from its appliances. Echo could report usage data for smart light home devices back to their manufacturers. Subscriptions to this data could boost revenue at Amazon's AWS unit, which has an estimated annual run rate of $6 billion.
That data could also help Amazon create targeted product suggestions for users on its own website, which would help it maintain its lead over Google in product searches. According to Google chairman Eric Schmidt, "more than twice" the number of product searches started on Amazon instead of Google last year.
The upcoming disruption
Amazon's expansion into IoT devices and smart homes widens its defensive moat against Google and big box retailers. By planting these ambitious roots for future growth, Amazon could change how we shop again, and even dictate how we interact with our connected homes.
Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Cisco Systems, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. 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.