It’s no surprise that Amazon has lost billions on its devices

The WSJ got hold of some of Amazon’s accounts and they paint a pretty grim picture of the company’s many bets on devices. The $5 billion per year loss rate presumably applies to just the hardware, such as ‘Fire’ branded devices or the Alexa smart speaker range. The piece goes on at great length to describe the commercial strategy that Amazon uses to justify such an apparently profligate approach.

It refers to Gillette, which sells razor bodies at a loss but charges a premium for the blade heads. A similar approach it taken by much of the printer business and the practice of selling hardware as a loss-leader with the aim of generating a captive market for over-priced consumables is well-established.

Amazon never seems to have adequately identified what the consumables are in its version of this cunning plan, however. Its strategy has been more speculative in a ‘build it and they will come’ sort of way that is more typical of internet platform companies. So, in this case, the platform is the hardware and the hope is that its users can then be steered towards buying even more tat on Amazon than they already do.

Apparently that hasn't happened. Devices like the Echo smart speakers seem to have been mostly used for simple tasks such as setting alarms, with one former Amazon senior employee telling the WSJ “We worried we’ve hired 10,000 people and we’ve built a smart timer.” In the case of the smart speakers, Amazon made a bet on the use of voice UI that hasn’t paid off. Perhaps it assumed people would stop wanting to see what something looks like before they buy it.

To be fair, some Amazon devices have done well. The original and best is the Kindle, through which millions of e-books have been sold. The Ring doorbell also seems to be paying off, thanks to the need to pay a subscription to have your snooping video clips saved to the cloud. But devices with a more speculative loss-leader strategy seem to have flopped.

A decade ago we reported that Amazon’s new Fire smartphone was doomed to fail as it was too expensive. If the idea was to manufacture as large a captive market as possible, why launch a premium-tier product? But it seems even cheaper devices such as the Fire tablets have failed to deliver significant returns, presumably because their use in no way compels any other commercial, let alone profitable, activity. And don’t even get us started on the Alexa telly.

“Hundreds of millions of Amazon devices are used by customers around the world, and to us, there is no greater measure of success,” an Amazon spokeswoman told the WSJ, adding that Amazon is closer than ever to building the world’s best personal assistant and that the opportunity is greater than what would appear on a balance sheet.

They declined to elaborate on the nature of that opportunity but the inference is that Amazon is happy to keep building an audience, even while it has no coherent strategy on how to monetize it. Amazon is thus stuck between two of its biggest competitors: Apple, which makes a profit both from devices and its resulting captive market, and Google, which has cornered the digital advertising market.

The temptation is to assume that the success of the Kindle led to a decade of hubristic device speculation from which Amazon is still struggling to extract itself. The sunk cost fallacy must be resisted and non-performing categories – especially anything ‘Fire branded – should be abandoned ASAP. The ‘fail-fast’ window has closed but it’s never too late to cut your losses.