Amazon (NASDAQ: AMZN) made a big push to get consumers to buy Alexa-enabled devices this holiday season, and its Echo Dot and Fire TV stick were top sellers. The online retailer may be disappointed in the short term, however, with how people are using those devices. That's only a minor negative, as Amazon is building a massive installed user base that may not be using those devices to buy things now but probably will in the future.
A full transcript follows the video.
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This video was recorded on Dec. 14, 2018.
Dylan Lewis: Dan, we can't talk holiday gadgets without doing a little bit of an update on Amazon devices, right? If you go over to Amazon, and you look at the best-selling stuff, it's a lot of Amazon devices.
Dan Kline: I think nine of 10 over the five-day Thanksgiving sales period, from Thanksgiving through Cyber Monday. This was the first year -- and I'm speaking very anecdotally. You and I put together a lot of the Black Friday coverage. This is the first year that Amazon unabashedly pushed its own products. They want you to have an Echo or an Alexa-enabled Fire TV product. The deals were incredible. $24 Echo Dots. I don't know about you, I have three bedrooms and five Echoes.
Lewis: I don't actually have any smart home devices. I still am slightly wary of the security issues and the invasiveness of having these devices in my home. But there are a lot of people who have made that plunge. And you look at that price point, especially compared to some of the other players in this space, Amazon has made it so cheap and so easy to have a fully integrated full house smart home solution.
Kline: Except -- and I think it's a big except -- most people aren't using it as Amazon would like you to use it. I bought the first full-size Echo, it was $99 for Prime members. That's still the one in my kitchen. I have Echo Dots in every other room in my house. And I use them 99% as stereos. "Alexa, could you play Bruce Springsteen?" "Alexa, could you play Buffalo Tom?" Whatever it is. I might listen to a podcast. I might ask for the weather. I am not using a single smart home feature. I've maybe used The Motley Fool Alexa skill a handful of times because I know it exists.
But this idea that Amazon wants you to say, like, "Alexa, please replace my paper towels," that just hasn't happened yet. So, yes, they're dominating the hardware market, the install base, but it's not driving sales yet.
Lewis: Way to sneak a Motley Fool Flash Briefing plug in there. I appreciate that, Dan!
Kline: I get a mug from Chris every time I do that.
Lewis: [laughs] I think the struggle, really, is that voice search isn't quite there yet. Ideally, Amazon would like to see people using this for commerce. That's the natural next step of this. But there's also this possibility that voice search takes over what mobile search has become, where we have all this information at our fingertips. The difficulty is rendering results for voice search is a lot different, and it's not nearly as lucrative for businesses because it's harder to serve up ads.
Kline: Amazon is also competing with itself. I order from Amazon this time of year maybe twice a day between random gifts and stuff I figure I need. When you go into the app on your phone, you can type in whatever it is, "wireless headset," and see exactly what you're getting. In my kitchen, if I say, "Alexa, reorder spaghetti sauce," maybe it buys the spaghetti sauce my wife likes and not the one I want. That's very easy to do on a phone. There's not really a driving incentive for me to do it via voice search.
It might be something that, maybe my son, when he gets buying power, would be more willing to do that. In his room, I hear him doing more ridiculous Alexa searches than, maybe, I do. And I'd like to have a smart home, but it still feels like a gimmick to me to say, "Alexa, lights on." My light switch is right when I walk in, I don't need that.
Lewis: The way I'm looking at this from a big picture strategy perspective is, Amazon is getting the devices in people's homes and getting people used to interacting with them. I think that they know that it's a long putt to get them to the point where they're really using stuff in a way that's profitable for the business. They probably about break even on a lot of these devices that they sell. If it means that they're a little bit more engaged with the service, maybe they wind up ordering a little bit more on Prime because they own those devices, then that's a nice cherry on top. But for them, this is a long bet on smart home and being the installed player there.
Kline: I agree. And by moving early, they priced everybody else out. Apple, it's hard to compete with the iPhone because of the base it has. Amazon really came to this first, and it's cheap, and I don't think you can do better. The Apple HomePod is dramatically more expensive, hundreds of dollars more expensive, and there is nothing it can do -- maybe the audio quality is a little better. But I love my Echo. When I moved from Connecticut to Florida, I didn't bring my stereo, because the Echo was more than good enough.
Austin Morgan: I would strongly disagree with that.
Lewis: [laughs] Audiophile Austin Morgan has some fighting words for your audio opinions.
Morgan: If you're using your Alexa to tell your stereo what to play, great. But those Dots sound like garbage.
Kline: No, not the Dot. The full-size Echo.
Morgan: Still garbage.
Lewis: Well, Austin might be a bit of an audio snob. If you guys wouldn't mind going back to your respective corners.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline owns shares of Apple. Dylan Lewis owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.