“Alexa Is in Millions of Households—And Amazon Is Losing Billions”, Dana Mattioli2024-07-22 (mechanism design, model-free RL; similar)⁠:

Company’s strategy to set prices low for Echo speakers and other smart devices, expecting them to generate income elsewhere in the tech giant, hasn’t paid off…When Amazon launched the Echo smart home devices with its Alexa voice assistant in 2014, it pulled a page from shaving giant Gillette’s classic playbook: sell the razors for a pittance in the hope of making heaps of money on purchases of the refill blades.

A decade later, the payoff for Echo hasn’t arrived. While hundreds of millions of customers have Alexa-enabled devices, the idea that people would spend meaningful amounts of money to buy goods on Amazon by talking to the iconic voice assistant on the underpriced speakers didn’t take off. Customers actually used Echo mostly for free apps such as setting alarms and checking the weather. “We worried we’ve hired 10,000 people and we’ve built a smart timer”, said a former senior employee.

As a result, Amazon has lost tens of billions of dollars on its devices business, which includes Echos and other products such as Kindles, Fire TV Sticks and video doorbells, according to internal documents and people familiar with the business. 2017^–₄2021, Amazon had more than $25 billion in losses from its devices business, according to the documents. The losses for the years before and after that period couldn’t be determined.

…As [new CEO] Jassy tries to fix it, he is rethinking the obscure Bezos-era metric inside Amazon that helps explain why Echo and other devices could accrue such huge losses for so long with little repercussion. Called downstream impact, or DSI, it assigns a financial value to a product or a service based on how customers spend within Amazon’s ecosystem after they buy it. Downstream impact has been used across Amazon business lines, from its Prime membership program to its video offerings and music. The metric was developed in 2011 by a team of economists including an eventual Nobel Prize winner. In some instances, the model worked clearly. When customers buy Amazon’s Kindle e-reader—one of Amazon’s profitable devices—they are very likely to then buy ebooks to read on that device. Ebooks are part of the books business, not the devices business, but Amazon leaders said it made sense for the Kindle team to claim part of revenue when assessing their product’s internal value. Similarly, some revenue from advertisements displayed on Fire TV streaming devices is also claimed as Fire TV revenue. Some Amazon devices can count on direct revenue, such as by selling users subscriptions attached to the product. More than half of customers who buy smart-camera doorbells from Ring, another profitable Amazon device that the company bought in 2018, purchase security subscriptions. In other cases—especially Echo devices—the downstream impact idea broke down, said the people familiar with the devices business. Unlike the revenue, operating profit and other financial metrics Amazon and other companies report publicly, downstream impact is an estimate used internally, and not a particularly scientific or precise one.

Echo and other devices are generally sold at or below the cost to make them. The devices team, in internal pitch meetings to senior management, would claim the top end of a range of estimated revenue from downstream impact, some of the people said. The team relied heavily on the metric to justify costs related to Echo and other devices and the growing size of staff devoted to the business, which at one point swelled to more than 15,000 employees across all its products. The system also enabled divisions to count the same revenue more than once, according to former executives. For example, if a customer bought an Echo device and Amazon’s Fire TV streaming stick, and then signed up for Amazon Prime, both the Echo team and the Fire TV team could claim cuts of the revenue from the Prime subscription. Other downstream impact revenue that helped Echo devices look financially better on paper internally came from Amazon Music, a Spotify competitor with a $10 monthly subscription version. The devices team also claimed a piece of shopping revenue, because people can use Alexa to order or reorder goods—though former employees on the Alexa shopping team say that doesn’t contribute meaningful e-commerce revenue.

The Amazon spokeswoman said more than half of Echo owners have used it to shop but declined to answer questions on how much they buy or how often they do so. “Basically DSI was the golden thing that kept us all afloat all these years”, said a former longtime Amazon employee who worked on Echo.

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