A lot more people will have a digital friend around the house in the near future. After smart speaker sales topped 30 million in 2017, they could surpass 55 million by the end of this year. A new report from Canalys Research estimates global sales will reach 56.3 million in 2018, with 38.4 million units sold in the United States alone.
That's good news for Amazon (NASDAQ: AMZN) and Google, a subsidiary of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). The two combine to account for about 94% of smart speakers in use today. The two will face increased competition this year, but they hold a major advantage as early movers.
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Partnering with manufacturers
Google and Amazon are each focusing on partnering with manufacturers that want to get in on the growing trend of smart speakers in 2018. This move allows the two platform creators to focus on developing better software -- what they're great at -- and lets the hardware manufacturers focus on developing hardware. Roku (NASDAQ: ROKU) skipped the part where it develops its own hardware, and it skipped straight to licensing its own smart speaker software.
As a result of easily accessible firmware, we will see an influx of different smart speaker models in 2018. Remember when Google released Android out into the wild, and manufacturers went hog-wild? Investors can expect a similar explosion in 2018.
Google has already partnered with 15 manufacturers to license Google Assistant -- the software behind Google Home -- in new smart speakers. Amazon, meanwhile, is expanding its Alexa technology to devices beyond speakers -- PCs, cars, and even toilets and light switches.
Dozens of manufacturers will release their own smart speakers powered by Google, Amazon, or Roku. And the companies behind the software will be able to monetize by gathering more advertising data, or encouraging shoppers to spend more, in the case of Amazon. As such, it doesn't make a big difference if they sell the hardware or not.
Expanding the lead
Both Amazon and Google are poised to benefit from their first-mover advantage. The two have combined to sell nearly 40 million devices in the last two years, according to Canalys's estimates.
The idea Amazon and Google are really pushing in 2018 is that you can have multiple smart speakers throughout the home to provide the ultimate experience. And repeat buyers are much more likely to choose a brand they already use over a new one.
75% of Alexa device users would choose another Alexa-powered speaker, and 69% of Google Home owners would choose another Google Assistant speaker if buying a new smart speaker, according to a survey from Strategy Analytics. More than two thirds of smart speaker owners are already planning to buy a new smart speaker within the next six months, according to the survey. That should give Google and Amazon quite a boost when it comes to winning market share.
But Roku may have an in with its popular streaming video devices. There are 16.7 million active Roku accounts as of the end of the third quarter, and Roku's smart speakers will work in conjunction with its set-top boxes and smart TVs. On the other hand, Roku is competing with Amazon and Google in the streaming video device arena as well, and if the two tech giants continue to win share of the smart speaker market, it could threaten Roku's core business.
The market Amazon and Google can't touch
The second-biggest smart speaker market after the U.S. is China. It's a distant second today -- 4.4 million units versus 38.4 million -- but it could surpass the U.S. as soon as 2021, according to Canalys's report.
Google doesn't operate in China, and Amazon's presence is extremely small compared to retail giants like Alibaba and JD.com (NASDAQ: JD), which each have their own smart speakers. JD.com was one of the first to market in China, and it shipped an estimated 1 million units last year, which makes it well suited to benefit from the same customer loyalty Amazon and Google see in the U.S.
Baidu (NASDAQ: BIDU) unveiled three new "smart speakers" earlier this month in the forms of a lamp, a ceiling-mounted projector, and a simple electronic display. The search giant could be a big second-player in the market with its expertise in AI and search, playing Google to JD's Amazon.
Investors interested in capitalizing on the potential growth of smart speakers in China could do well with any of the aforementioned companies. But much like Amazon and Google, they're all much more complex than just a smart speaker business.
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