Amazon and Google probably lost money on smart speakers but it doesn't matter

The build up to Christmas saw Google and Amazon both discount their smart speakers, but perhaps we should look at the hardware as nothing more than a expensive PR campaign.

Of course it would be criminal to assume that these two technology giants are not concerned about profits, but they are also very good at looking at the bigger picture. Combining expensive ATL advertising campaigns with production costs and pre-Christmas discounts probably means the pair didn’t make fortunes in this area, but perhaps there is more value in getting the operating systems into the hands of consumers.

According to Reuters, although unconfirmed thus far, the pair might have had to swallow a loss when pushing the speakers out to the consumer. Some investors might question why the tech giants are pursuing such an area so aggressively if the profits aren’t there, but these two are great at playing the long-game.

Amazon, for instance, has been famous for not turning a profit, instead continuously reinvesting, while Google is known for pumping cash into unprofitable platforms. YouTube and its Maps offering are two examples which took years to make an impact on the spreadsheets, and smart speakers could be another example. But what is the grand plan?

Firstly, you have to consider user acceptance and mass market penetration. If a product is not priced correctly, even underpriced to start with, consumers will find a reason not to buy one. The more people who have a product, the more it is accepted by the general public and the hype will build. Eventually economy of scale at manufacturing level will take over. This could reverse the loss in the long-run. Smart watches didn’t take this approach, and look how that product has progressed.

This could be one reason, but we have a different theory; Google and Amazon recognise the value of these speakers is in the ecosystem they enable, and the ways they can monetize third-party relationships once the OS is in the lives of enough users.

By underpricing the smart speakers, Google and Amazon can demonstrate there is an appetite from the general public, meaning more traditional hardware manufacturers can build products in confidence. These manufacturers don’t have to develop their own OS, but can give the option to the consumer on which OS to install, assuming there isn’t an exclusive partnership in place with the likes of Google or Amazon.

This is a win for Google and Amazon. To monetize third-party relationships to the greatest effect scale is needed; these internet advertising platforms need as many users as possible. Both are trying to disrupt the grocery industry with their virtual assistants and speakers, and it would be a smart bet to assume they will be getting a cut of the shopping bill. The same could be said for ordering a pizza over the speaker, those referrals will be monetized somehow.

Those who think the likes of Google and Amazon are targeting fortunes in the hardware space probably need to look at bit further ahead. Any profits will certainly be welcomed, but these are internet giants who are best at creating a walled garden around the consumer and then charging brands to access them. We don’t think this is an area which is going to be any different.

One company which might struggle in this area is Apple. As a company which specialises in over-charging consumers, it’ll be interesting to see whether it is able to convince users its own speakers (rumoured to be north of $300) are worth the cost. Add into the equation that its own virtual assistant, Siri, is not in the same league as Google’s or Amazon’s, it will test the iCultists loyalty to the max.