• Smart Home Technology
  • IoT
  • Amazon
  • Apple
  • Google

The Weird Economics of the Smart Home

Francesco Radicati
Feb 08, 2023

Person holding a tablet device with home controls on it outside of a single-family home

Most discussions of smart home technology in 2022 focused on how Matter would enable greater uptake of smart home devices. Guidehouse Insights itself has devoted several articles to Matter and its implications, following briefings with many of the companies who are participating in the initiative.

Yet it’s worthwhile to step back and examine whether other parts of the smart home ecosystem are trending as positively. The market is full of stakeholders with different incentives and motives, depending on whether their revenue comes from software, hardware, or services. The difficulty comes when a large company with multiple revenue streams, like Amazon or Google, finds that its smart home strategy isn’t generating the returns it was hoping for.

Alexa Is Struggling

In the fourth quarter of 2022, while the wider smart home market celebrated the launch of Matter, Amazon was cutting jobs, particularly in its Alexa division. The voice assistant has failed to generate profit on its own: early visions of customers buying from Amazon via voice command were overly optimistic, and third-party micropayments that would have given Amazon a cut of users’ pizza orders or Uber rides likewise never gained widespread adoption.

This is surprising because voice assistants are basically everywhere. When it launched in 2014, the Echo voice-activated speaker generated a lot of excitement among consumers (although possibly not as much as among technology analysts). Within a few years, Amazon reported selling 100 million Echo devices, mostly the cheaper Echo Dot, and companies were eager to integrate with Alexa or with rival assistants like Google’s. Car manufacturers have also been keen to integrate voice assistants with their infotainment systems, on the understanding that consumers want to use the same assistant in their car as at home.

None of this has driven significant sales for Amazon. As mentioned, consumers aren’t sold on the idea of buying items via voice commands—on the contrary, Amazon quickly had to publicize how to disable voice purchasing, so that families with children didn’t suddenly receive enormous orders of toys. As for the speakers themselves, because they’re sold close to cost, they haven’t brought in the hoped-for amounts of revenue, especially when consumers have chosen cheaper versions like the Echo Dot.

So Is Google Assistant, and Basically Everyone Else

Amazon’s main rivals have had the same problem. Google has also struggled to monetize its assistant, attempting, for example, to serve ads with search results on devices with screens. Apple’s first HomePod cost more than the Echo or Google Home, so at least it profited from device sales, but it was discontinued in favor of the cheaper HomePod mini, with a new full-sized version announced in January 2023. In recent years, Apple’s model has also shifted to include more ad revenue, reflecting the fact that hardware generates a relatively limited revenue stream.

This dynamic has also played out in China, where local tech giants like Baidu and Alibaba dominate the voice-activated speaker market. In 2019, Baidu stopped selling its Xiaodu smart speakers at a discount, after years of escalating discounts among the main manufacturers that drove down profit margins.

What Does This Mean for the Smart Home?

In the short term, nothing: the installed base of voice-activated speakers is large enough that Amazon should think twice about ending support for them. Unlike other forays into hardware, like the Fire Phone, the Echo has sold enough units to kick-start a category. Also, disregarding the question of how many Echo owners actually use the device for smart home control, voice-activated speakers have key advantages over traditional smart home hubs, in that they can be useful for voice or video calling, setting timers, checking the weather, and other functions for which people use smartphones.

Yet none of these functions generate additional revenue for Amazon. In our next post, we’ll consider the effects on the smart home market if the large voice assistants were to disappear.