Great works of science fiction have an uncanny ability to predict the future. Here’s a fun example: Three decades ago, David Hasselhoff—playing Michael Knight on the TV show Knight Rider, fought crime with his trusty sidekick, KITT, an artificially intelligent, self-aware and nearly indestructible car.
KITT, voiced by the actor William Daniels, would take verbal commands from Knight, and execute on them—whether that was using deflective laser shields against an enemy, or accelerate the car to get out of a bad situation just in the nick of time. In 2018, we don’t yet have crime-fighting voice-controlled cars—but we’re getting closer.
In the 1980’s, modern computing took the form of bulky, non-interconnected mainframe computers. The 1990’s ushered in smaller, Internet-connected desktops and laptop devices. The 2000’s gave us more portable, Wi-Fi-enabled tablets, and the most recent era of computing comes in the form of slick, Internet-connected smartphones with fancy touch-screens.
But here, we’re at a turning point. The next phase of computing is a complete paradigm shift in how humans interact with technology: It’s dropping the screen and integrating AI-driven voice technology. If you’re an investor, this is an incredibly exciting moment—these opportunities do not happen often, and the market has yet to grasp this disruption’s consequences.
It’s our belief that voice technology AI is more than just a helpful feature: It’s the platform on which functions will be executed. In that sense, voice technology is the new smartphone; it is the new operating system. Gartner, the research firm, has predicted that 30 percent of all human interactions with technology will be facilitated through conversations with smart machines. That’s the short-term prediction, too. Long-term, it’s even higher.
Here’s how The Economist put it recently:
“This is a huge shift. Simple though it may seem, voice has the power to transform computing, by providing a natural means of interaction. Windows, icons and menus, and then touchscreens, were welcomed as more intuitive ways to deal with computers than entering complex keyboard commands. But being able to talk to computers abolishes the need for the abstraction of a “user interface” at all. Just as mobile phones were more than existing phones without wires, and cars were more than carriages without horses, so computers without screens and keyboards have the potential to be more useful, powerful and ubiquitous than people can imagine today.”
Naturally, where there is a paradigm shift in computing, there is an enormous opportunity for investors.
As of 2018, smartphones create about $120 billion in revenue every quarter (yes, quarter). It’s hard to fathom right now, but the explosion of voice-integrated AI will enable huge new markets, and will further compound brick-and-mortar retail disruption. It’s no surprise, then, Apple, Amazon, and Google are devoting enormous amounts of capital and research to voice. Behind the scenes, there is a veritable “space race” of voice AI.
The question becomes, then: Who will win? Which firm will build the best voice platform and capture the most market share? Over the last decade, we’ve observed how Google has become the kingmaker of search technology. And Apple has been crowned itself the reigning champ of smartphone design. But it’s our belief that Amazon is best positioned to win voice with Alexa. (Full disclosure: Worm Capital is long Amazon.)
There’s a myriad reasons we’ve tracked, but ultimately it comes down to timing and investment: While Apple’s Siri technically launched first, it made a bad first impression as a voice assistant. The product itself was buggy, which aggravated consumers, and Apple didn’t open-source the system to allow developers to build on top of it.
Amazon, by contrast, launched its Echo product in 2014, well before either Google or Apple had a dedicated home voice AI system, and invited third-party engineers to develop on top of it. So Amazon had a first-mover advantage. But it also has another key advantage that neither Apple nor Google have: It’s the operating system on which customers can actually buy products. This is an enormous distinction from Apple, particularly, where the HomePod functions primarily as a speaker for music, and Google’s home optimizes for search. Alexa, on the other hand, can both play music and search, but she can also help people shop. (She can do much more, too. Amazon’s EVP, Brian Olsavsky, says Alexa now integrates with 4,000 smart-home devices and over 1,200 unique brands.)
“It all starts with that tiny speaker,” Wired noted in 2017. “The Alexa-enabled Echo is a true unicorn, one of those rare products that arrives every few years and fundamentally changes the way we live. Practically speaking, Alexa has the potential to become the operating system for your home: Using Alexa, you can start your dishwasher, buy new cleaning products, order an Uber, or make a phone call. It can also be used on any compatible device, whether it’s a phone or tablet.
From a retail perspective, Alexa removes the “last-mile” of shopping friction by eliminating the need entirely for a screen or smartphone from the customer’s workflow. Removing friction increases revenue for Amazon.
This pays off. As RetailDive reported recently, “Owners of the Amazon Echo spent around 10% more on Amazon in the six months after they bought the voice-controlled speaker than before they had the device, with purchase frequency also growing 6%.” Amazon is secretive about how many Echo units have been sold, but one analyst firm, Voicebot, “estimates that Echo sales to date have totaled 19.5 – 21.5 million units, while non-Echo smart speakers with Alexa built-in were in the 1 million unit range through Q3 2017.” And according to Amazon, its Echo Dot smart-home device was the top-selling item onAmazon.com during the holiday shopping season.
Here’s Brian Olsavsky on Amazon’s most recent earnings call from earlier this year: “We are very happy with the results of Alexa. It’s a very positive surprise for us… we had record device sales with very high levels of customer engagement, including increased levels of voice shopping, growth in functionality, growth in our partner, partners we work with, skills that we’ve increased rapidly, we’re over 30,000 skills for Alexa. We’ve got 4,000 plus smarthome devices from 1,200 unique brands. So the relationships we’re having with external companies are actually helping to accelerate the adoption of Alexa with customers. So really strong usage of Alexa with our devices. Obviously, Echo, Echo Show and the Echo family all directly tied to Alexa, but also Fire TV and tablets and we’re seeing more and more engagement. Alexa usage on Fire TV is up 9x year-over- year. Alexa now has over 30,000 skills, meaning it’s getting smarter and smarter.”
Alexa might not be KITT-levels of AI genius just yet, but it’s getting there.