A guide to smart speakers and virtual assistants

Consumers are rapidly adopting smart speakers powered by voice-assisted virtual assistants to act as the central hub of their home. But can Amazon and Google keep their slice of the market after emerging as early leaders?

Joshua Warner @JoshWarner_IG
Analyst, London

Publication date : 2018-04-18T16:29:42+0100

Source: Bloomberg

‘Started out, J.A.R.V.I.S. was just a natural language UI. Now … he runs more of the business than anyone besides Pepper,’ ― Tony Stark to Bruce Banner, better known as Iron Man and the Hulk.

We may have a long way to go before we can all have a virtual assistant as capable as Jarvis, but the world is in a hurry to get there. Alexa, Siri, Cortana and the others already sit in all of our pockets, but now they are taking their place in the middle of our homes as smart speakers continue to grow in popularity.

Smart speakers are now the fastest growing technology among consumers worldwide, helped by cheap entry barriers and the collaborative approach big tech has adopted with developers and other companies that are producing interconnecting products to help fuel ever-growing opportunity within the market. We may not have Jarvis yet, but one day we will.

It may seem pre-emptive to compare the more capable virtual assistants we are used to seeing in sci-fi with small, retro-fitted speakers that can play music, turn on the lights and read out the news, but big tech has big plans that fold into their wider artificial intelligence (AI) programmes and, with the possibilities being truly endless, will be looking to evolve their smart speakers and particularly their virtual assistants as quickly as possible.

What is a smart speaker?

In a nutshell, a speaker capable of anything beyond playing audio could be classed as a smart speaker. A smart speaker can also be called a voice-assisted speaker and generally refers to the likes of the Amazon Echo or Google Home.

While the array of smart speakers on the market do lean on different strengths and look to cater to different customers, the common characteristics remain the same. They are all wireless, the majority of them have an integrated virtual assistant which respond to user’s voice commands to complete tasks such as playing music or looking up when your next train leaves. Some have introduced screens, seeking the best of both worlds by combining visual and audio to assist its customers.

Interconnectivity is very important for smart speakers, and their ability to interact with other digital applications and hardware is integral. They are not magic. The speaker must have access to a music service to play songs that the user requests and a user must ensure they have compatible lightbulbs installed if they wish to control them using the speaker, for example.

Smart speakers have the potential to digitise the control of everything and become a sort of ultimate remote control for our homes. We already have miniature versions in our pockets as we continue to find new and innovative ways to use smartphones in our lives, and smart speakers will be a rather large extension of that.

Smart speakers are proving to be the fastest-growing consumer tech

‘2018 will be the defining year for smart speaker adoption. Smart speaker uptake has grown faster than any other consumer technology we’ve recently encountered, such as augmented reality, virtual reality or even wearables,’ – Canalys research analyst Lucio Chen.

Smart speaker sales are forecast to jump 70% in 2018, to over 56 million units from the estimated 33 million sold last year, according to technology market analyst firm Canalys. Amazon is the biggest player, and is thought to control about two-thirds of the market, followed by Alphabet's Google at about 27%. However, the pair are set to face more competition as new rivals emerge.

The US is by far the biggest market for smart speakers. Almost seven out of every ten smart speakers will be sold in the US this year, according to forecasts. Although sales will continue to surge in 2018, Amazon and Google will be increasingly focused on reaping the reward from the existing speakers out in the market, following the rapid adoption of the technology last year, by paying more attention to software.

Canalys states the possibilities for these companies to begin monetising smart speakers ‘are endless’, and include discreet advertising, content subscription bundles, premium services or enterprise solutions.

Amazon, Google and its peers will continue to grow sales elsewhere such as in the European Union (EU), but will struggle to break into the likes of China, where equivalent players like Alibaba, Baidu, and Xiaomi are likely to dominate. While China is the second biggest market for smart speakers behind the US, the amount it trails its western counterpart presents a chasm – Americans bought almost ten times as many smart speakers than the Chinese last year.

Virtual assistants give big tech an edge in smart speaker market

The number of companies producing smart speakers will grow as the market moves to mass-adoption, but big tech has already locked in its edge. Amazon, Google, Apple, Microsoft and Samsung boast the best-known virtual assistants, and any speaker manufacturer that doesn’t have its own assistant therefore has to look at integrating one of the assistants developed by big tech.

This has led to collaboration between those with expertise in the audio and speaker market, and those who have developed virtual assistants. For example, Panasonic's smart speaker utilises Google Assistant, whilst Sonos has installed Amazon’s Alexa.

Companies are trying to leverage their strengths to differentiate their speaker in what could become a fairly crowded market. The likes of Sony, JBL, and Sonos are all leaning on premium audio quality and focusing on the music aspect of smart speakers. Currently, the two main reasons people are purchasing smart speakers are to listen to music or for the ability to ask questions.

What smart speakers and virtual assistants are there to choose from?

There is already a diverse range of smart speakers available on the market. Notably, Apple has only just released the HomePod and Samsung, while it already offers ‘smart speakers’, is not expected to release a Bixby-powered equivalent one until later this year. Microsoft’s flagship speaker has been made by a third party.

Company	Virtual assistant	Range of own-brand speakers
Amazon	Alexa	Echo Dot, Echo, Echo Plus, Echo Spot, Echo Show
Alphabet	Google Assistant	Google Home, Home Mini, Home Max (in 2018)
Apple	Siri	HomePod
Microsoft	Cortana	Invoke (built by Harman Kardon)
Samsung	Bixby	Range of smart speakers, but Bixby-powered speaker not expected until later in 2018

Companies are currently leveraging their capabilities to make their speaker stand out. The main message behind Apple’s HomePod is based around audio quality and linking it to Apple Music, whereas Google Home prides itself on the quality of its search engine. Amazon has the most to gain from users ordering products through their virtual assistants, by sending through to its ecommerce platform and is also placing Amazon Prime at the centre of its offering. Meanwhile, Samsung has said it will be targeting the premium end of the market, when it does release its speaker.

A comparison of smart speaker strategies

The market is still in its infant stages and the more services and products that spawn off a speaker the more successful it will be. This has already been demonstrated by the two market leaders, which have leveraged their other capabilities to earn an early lead.

The Amazon Echo: an early leader

‘Our 2017 projections for Alexa were very optimistic, and we far exceeded them. We don’t see positive surprises of this magnitude very often — expect us to double down,’ – Amazon founder and chief executive Jeff Bezos.

Amazon is stretching its legs and entering several new markets, but they all come under one cohesive strategy, and the company’s subscription service that provides members with free delivery and access to media content is at the heart of it all. As well as providing speakers at various price points in the market, it has been able to provide a more complete service by linking it to its ecommerce and content arms, including the likes of its audiobook arm Audible.

Amazon does well to encourage users to buy-in to the additional Prime subscription which leads people to use other Amazon services. A report released by National Public Media and Edison Research showed that 82% of smart speaker owners subscribed to Prime, compared to just 44% of non-owners.

The company has arguably come up with the best model to maximise the value out of consumers, and also boasts a market-leading cloud-computing business to manage its speakers. The firm will have to try to maintain as much of the advantage it gained from its two-year headstart on its closest rival Google, having opened up to outside developers back in 2015.

Releasing Amazon’s latest results, founder and chief executive Jeff Bezos focused solely on the success of Alexa. The cheapest in the speaker range, the Echo Dot (along with the Fire TV Stick) were the best selling products across Amazon in 2017. However, Amazon is pushing Alexa into other devices like computers (HP, Acer, ASUS, and Lenovo) and even vehicles under a deal with Toyota, and is also making its way in the business world.

Google Home: leaning on Android and search engine capabilities

Alphabet’s expertise lies in information, and therefore the company will be concerned about losing market share to Alexa in the wider virtual assistant space, as Amazon looks to install Alexa in more third-party devices where the likes of Alphabet and Microsoft have previously dominated.

Alphabet recently folded Nest into its Google Home unit after buying the firm, which builds the kind of smart home products that interact with smart speakers, for about $3.2 billion four years ago. That provides some firepower in the hardware sector to complement the edge Alphabet will have over Amazon on the technological front.

The missing ingredient for Google that Amazon can happily wave in its face is the lack of a shopping platform. Google Assistant will continue to prove effective competition when users need a virtual assistant to use software or source digital information, but any purchasing-driven demands will be dominated by Alexa. This means whilst your laptop and android smartphone could run off Google Assistant, your smart fridge and Dash buttons will all link to Amazon and Alexa.

This was demonstrated last year when it was revealed that Alexa and Cortana would be able to speak to one another, meaning users can use both assistants to allow Cortana users to gain access to ecommerce services through Alexa, and Alexa user’s access to Cortana’s unique features based around emails and scheduling, for example.

How much do smart speakers cost?

The price has been a big driver behind the rapid early adoption amongst users. The speakers released by the big players above are currently priced within a range of £40 to £320. Amazon’s range is priced from the low-end of the market up to £200, allowing it to offer a product for different budgets. Google has a similar but also simpler offering, with the Home Mini priced at the low-end of the market, while the Home charges closer to £130. Apple has so-far proven to be the costly option for consumers, with prices at the very top-end of the price range.

Many of the other notable companies producing smart speakers hold some form of expertise in traditional speakers and audio equipment, such as Panasonic, Sonos, Bose, Sony and Bush, the last of which is owned by J Sainsbury's after the UK supermarket purchased Argos. All of these have integrated virtual assistants developed by the big five above into their speakers.

Are Amazon, Google or Apple making money from selling smart speakers?

A report from International Data Corp earlier this year suggested that both Amazon and Google severely discounted the smallest and cheapest versions of their speakers in order to gain market share, and has said revenue from selling the speakers will be nominal compared to the revenue they hope to generate from the likes of add-on subscriptions.

However, some analysis has shown that the pair do have a profit margin on its more expensive speakers. An analysis carried out by TechInsights after the Apple HomePod was launched estimated the iPhone maker was making a gross profit margin on its speaker of about 38%, compared the Google Home at 66% and the Amazon Echo at 56%.

According to the IDC, worldwide smart speaker sales totalled $4.4 billion last year, suggesting both Amazon and Google are generating substantial amounts of revenue from the products, but the contribution to bottom-line profit (if any), is thought to be minimal at this stage. However, the pair’s attempts to lock-in market share early-on will help them to capture the exponential growth anticipated over the near future, with the IDC forecasting market sales will grow, and a compound annual growth rate of 32% over the next five years to $17.4 billion in 2022.

Are smart speakers beneficial for the share prices of Amazon or Google?

The impact smart speakers have had on share prices is hard to tell, with both companies tight-lipped on both the financial and operational performance of their speaker ranges. However, there is some evidence that smart speakers have been beneficial for share prices. When Amazon announced it was launching the second generation of the Echo Plus last September, shares closed the day up 1.3%, and Bezos was particularly keen to highlight the success of its speakers and Alexa in its third and fourth quarter results, both of which sent shares higher.

Meanwhile, Alphabet shares climbed higher in the week after it unveiled the Google Home Mini last October, and a report last year from the University of Michigan-Flint concluded that ‘the release of the Google Home has helped contribute to the company’s stock value increase’, although admitted it was hard to quantify the contribution.

What’s smarter: phones or speakers?

Any digital information a smart speaker relays is taken from another piece of software, such as news from the BBC News application, a song from Spotify, or your schedule from whatever calendar app you use. The same is true for hardware. The product must be ‘smart’ and compatible with whatever speaker you have, whether that be a lightbulb, thermostat, television or coffee maker.

A smart speaker and the virtual assistant have a primary job of acting as the middleman between you, your software and your hardware – so why not use your smartphone to do that? Many of the applications people use on their smart speaker are also on their smartphone, and people can already use their phones to control hardware, to adjust the lights or turn up the heating on their way home from work. In truth, there is evidence that those who own a smart speaker are spending less time on their smartphones, and that users tend to interact more with the virtual assistant living in the speaker than the one in their phone.

This could be partly explained by two matters. Firstly, although smart speakers can require a lot of set-up to ensure it is connected to everything, the device is seen as a much easier device to use, particularly for those not so handy with a mobile phone. Secondly, the cost of adoption is low and the cheaper offerings from the likes of Amazon and Google are proving to be good value for money.

In this context it is also worth noting that while Amazon and Google are the two biggest players to have carved out a significant share of smart speaker market, neither of them have a significant presence in the smartphone hardware market, and not through a lack of trying. While Google has utilised Google Assistant to make it one of the most widely used assistants on android phones, Amazon’s development of Alexa has been more based around its market-leading speaker. Meanwhile, the two smartphone giants, Samsung and Apple, have been slow in their attempts to gain a foothold in the speaker market. However, in the knowledge that consumers often choose to stay loyal to one brand, Apple will be betting that iPhone users opt for the HomePod and Samsung will have a similar goal later this year.

Speakers don’t threaten the need for smartphones, but they are questioning the role of the smartphone in the home, and challenging its position as the central hub of home entertainment. That also raises interesting questions for how the rise of speakers will impact the gaming arms of Microsoft and Sony, who have long competed to make the Xbox and PlayStation the main entertainment centre in people’s homes.

There is the possibility that Samsung and Apple, equipped with their own virtual assistants, may look to rival speakers by improving the virtual assistants within their respective smartphones should their own speakers not take-off.

Smart speakers provide the infrastructure for new markets

Smart speakers represent technological collaboration at its best. They signify the infrastructure that developers and product innovators need to create new software applications and connected products, which in turn will find new purposes for speakers as the market evolves. Consumer adoption has been rapid because development has.

This could also go a long way in explaining why Amazon has pulled so much further ahead in the race than Google. According to their respective websites, Google Home works with ‘over 1000’ smart home devices compared to ‘over 4000’ for Amazon’s speakers.

For this reason, investors should take note of the companies developing these products and services that interact with smart speakers, with big and small firms catering to the sector. Philips Hue, part of Philips Lighting, has positioned itself as a leader in providing colour-changing LED lamps that can connect to most speakers on the market, while smaller players like LightwaveRF have produced a range of products that can be used across the likes of Google, Amazon and Apple speakers.

While the big tech players take a different approach to collaboration, with Apple more introverted than Google (for example), it seems all of them have recognised that they need to work with those companies, fuelling growth by developing new products and services without restricting them through exclusive contracts. There will be a correlation between how open and universal the approach to development is, and how fast the market adopts smart speakers.

Privacy and data will become a growing issue for smart speakers

One of the biggest problems that will only grow in size for smart speakers is privacy and data security. Amid the heightened concerns over how data is managed, following the Facebook-Cambridge Analytica scandal, it would be fair for users to have concerns about installing a listening post in their home that has access to everything they own.

Conclusion: focus on the software and virtual assistants

Smart speakers have fuelled a new market for interconnected and smart-home products, as well as new software development, but all of this falls under a wider ambition related to big tech’s artificial intelligence plans. The real battle will be between the success of virtual assistants and their penetration of devices outside of smart speakers, like computers, cars and even the smart products designed to connect to the speakers.

The idea of having a virtual assistant as capable and futuristic as the likes of sci-fi’s Jarvis was once nothing more than a dream. Now, it looks almost certain. The question now is will it be Alexa, Google Assistant, or Cortana that will end up becoming the world’s virtual assistant?