Amazon's Clever AI Innovations Can Strengthen Its E-Commerce Moat

Summary

• Amazon introduced ‘Customers ask Alexa’, which enables Amazon sellers to answer customer FAQs through Alexa and facilitate purchase decisions.
• This feature allows Amazon to better understand customers’ shopping journeys and preferences, and subsequently help it personalize and further improve the shopping experience, making the Amazon ecosystem stickier among shoppers.
• It also enables merchants to learn more about their customers and discover new audiences for their products through conversational queries, enhancing the value proposition of selling through the Amazon marketplace.
• Alexa can only assist with purchasing prime-eligible products, encouraging more merchants to join the prime network, which consequently boosts third-party seller services revenue.
• As Amazon sellers strive to improve their product rankings in the interest of inducing Alexa to recommend their products, they will spend more on advertising, bolstering Amazon’s advertising revenue.

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Amid the hype around AI accelerating lately thanks to the launch of ChatGPT and other natural language innovations, investors shouldn’t overlook Amazon’s (NASDAQ:AMZN) AI advancements to augment the shopping experience. AI innovations are changing the way people interact with technology, and that includes transforming the way people shop. To stay competitive in this evolving space, Amazon has been making advancements to its own voice-based assistant, Alexa, making shopping a more seamless experience and allowing the tech giant to gain deeper insights into its customers.

Shopping with Alexa

Alexa is an AI-enabled voice assistant which powers Amazon’s Echo products, its line of smart home devices. An important point to clarify right off the bat is that Amazon’s Echo/Alexa business division is perceived to be a loss-leader for the company. According to a report from Business Insider, the division is expected to have lost $10 billion in 2022.

Amazon does not sell Alexa-powered hardware devices for the purpose of generating a profit. Instead, the e-commerce giant seeks to generate income through the use of the Echo device itself, deeply embedding it into people’s daily routines. Thereby making the Amazon ecosystem stickier, and enabling the tech giant learn more about consumer behavior.

In the second half of 2022, Amazon introduced ‘Customers ask Alexa’, which “enables brands and selling partners to answer common customer questions through Alexa and better inform purchase decisions”.

This feature enhances the shopping experience for customers, allowing them to learn information about products more seamlessly. It would also allow Alexa/ Amazon to learn more about customers’ shopping journeys and preferences, and subsequently help it personalize and further improve the shopping experience, making the Amazon ecosystem stickier among shoppers.

Moreover, it also enables merchants to learn more about their customers and discover new audiences for their products through conversational queries. Furthermore, merchants would also prefer to be the ones answering shoppers’ queries to try and improve their conversion rates, as opposed to customers seeking for answers in the reviews section, where there is the risk of customers finding negative reviews that hinder sales conversions.

Therefore, this fosters the appeal of selling through the Amazon marketplace over other competing channels, as merchants are always eager to learn more about customer preferences to inform their own R&D efforts, as well as gain better control over their customers’ purchase journeys.

Additionally, more use of and engagement with ‘Customers ask Alexa’ among shoppers would induce more sellers to participate in this Alexa shopping feature to avoid losing out on the sales channel. This in turn would encourage even greater engagement among shoppers as Alexa becomes increasingly better at answering shopping queries, thereby creating a self-reinforcing network effect, potentially improving both Alexa-powered hardware sales and the value proposition of the Amazon ecosystem for both shoppers and sellers.

Furthermore, Alexa can only assist with purchasing prime-eligible products. This encourages more merchants to join the prime network, which consequently increases the use of Amazon’s fulfilment services to become prime eligible, boosting third-party seller services revenue. Furthermore, more products available through Prime encourages more shoppers to become Prime members, conducive to a self-reinforcing network effect.

Alexa can also recommend products to users. Recommendations are not just based on users’ purchase history, but it is also programmed to recommend ‘Amazon’s choice’ products and high-ranking Prime products in response to users’ queries. Note that while users can add Alexa-recommended products to carts to review later, they also have the option to complete the order straight away.

Hence, if a particular Amazon seller’s product becomes the item recommended by Alexa, it could be spared from the risk of visible product comparisons with similar items from competing brands, if the customer indeed decides to proceed with ordering the Alexa-recommended product. As a result, this encourages Amazon sellers to ensure their items become high-ranking, Prime-eligible products, in order to improve their chances of selling through Alexa without too much competitive product comparisons.

The e-commerce industry is becoming increasingly competitive amid the rise of alternative sales channels, such as social media platforms striving to transform into e-commerce platforms. Amazon undoubtedly prefers products being exclusively available on its own marketplace, and strives to ensure that merchants offer the best deals (such as lowest price) on the Amazon marketplace over other marketplaces, in the interest of Amazon.com remaining the preferred e-commerce destination among online shoppers.

If Alexa indeed becomes an increasingly prevalent avenue through which shopping activities are conducted, then this will encourage merchants to allocate more time and resources towards ensuring their products become/remain high-ranking and prime-eligible, as opposed to other competing marketplaces. Therefore, continuous advancements in Alexa shopping features can help Amazon fend of competitive threats and uphold the prominence of the Amazon marketplace.

Alexa advancements can help boost advertising revenue

Amazon’s advertising revenue has been flourishing, growing 19% in Q4 2022, as the recurrence of high-intent shoppers to the Amazon website make the company’s advertising solutions more appealing than alternatives.

As consumers increasingly use Alexa to ask about products, it grants Amazon greater insights into users’ shopping journeys and preferences, which can feed into the company’s targeted advertising efforts. The ability to display more relevant product ads to users when they visit the Amazon website can help drive conversion rates higher for Amazon sellers/ advertisers. Hence, this would augment the appeal of Amazon’s advertising solutions and the Amazon marketplace overall among sellers, and subsequently help drive advertising revenue higher.

Furthermore, as merchants strive to improve the ranking of their products in the interest of inducing Alexa to recommend their products to users, Amazon sellers will be inclined to increase advertising spend, subsequently bolstering Amazon’s advertising revenue.

Counteractive factors

Transparency of Alexa Insights: Amazon is known to use third-party data to benefit its own private label brands, at the expense of third-party sellers. Amazon closely monitors how shoppers interact with product detail pages on its website to better understand customer preferences, which is then used to enhance Amazon’s own line of products.

The growing popularity of Alexa to conduct shopping activities will give the e-commerce giant even greater insight into the customer journey, and it is unclear how willing Amazon is to pass on these insights to third-party sellers, as there is always a looming threat that Amazon decides to use the data to its own advantage instead, given its history of business practices. Consequently, despite the benefits Alexa can provide in terms of sales conversions and deeper customer insights, the risk of Amazon using the data to its own advantage may undermine the extent to which Alexa advancement can help attract more merchants to the Amazon marketplace and into the Prime network.

Amazon will need to transparently pass on data insights from Alexa to third-party sellers and truly help them grow sales through Alexa in order to effectively encourage participation in Prime/ Alexa shopping features, and successfully sustain a network effect around the Amazon ecosystem.

Competing voice assistants: Other tech giants like Google (GOOG) (GOOGL) and Apple (AAPL) also have their own voice assistants, which can compete with Amazon in the e-commerce space. For instance, the Google assistant comes pre-installed on devices that are Android-based, the largest mobile operating system in the world with a 71.8% market share in Q4 2022. The broad accessibility of the Google assistant without needing to buy a Nest device (Google’s line of smart home devices) is an advantage the search giant can use to encourage consumers to start their shopping journeys through Google.

In fact, Google has already partnered with large retailers like Walmart (WMT) and Costco (COST) to facilitate voice-based shopping activity through the Google assistant. As Google (and other competitors) continue to enhance their own voice-based assistants to better facilitate e-commerce activity, it may undermine the extent to which Alexa enhancements can induce a self-reinforcing network effect for the Amazon ecosystem.

That being said, Amazon has its own strengths to leverage. More specifically, Alexa has been integrated into the popular Amazon Shopping app, which broadens accessibility of its own voice assistant through both Android and iOS devices. Continuous advancements like ‘Customers ask Alexa’ are indeed a step in the right direction to stay competitive in the voice-assistant market and protect its e-commerce moat. Nevertheless, while such AI enhancements have the potential to improve e-commerce activity, the mounting losses incurred by the Echo/Alexa division puts pressure on the company to show material financial gains from its investments.

Summary

The ‘Customers ask Alexa’ feature enables Amazon sellers to answer customer FAQs through Alexa and facilitate purchase decisions. This feature allows Amazon to better understand customers’ shopping journeys and preferences, and subsequently help it personalize and further improve the shopping experience, making the Amazon ecosystem stickier among shoppers.

It also enables merchants to learn more about their customers and discover new audiences for their products through conversational queries, enhancing the value proposition of selling through the Amazon marketplace. Alexa can only assist with purchasing prime-eligible products, encouraging more merchants to join the prime network, which consequently boosts third-party seller services revenue. As Amazon sellers strive to improve their product- rankings in the interest of inducing Alexa to recommend their products, they will spend more on advertising, bolstering Amazon’s advertising revenue as well.

While these AI advancements have the potential to augment the appeal of the Amazon ecosystem for both shoppers and sellers, Amazon will need to deliver material returns on investments to satisfy shareholders, given the mounting losses incurred by the Echo/Alexa division.

Any investment decisions in Amazon stock should take into consideration all business divisions in aggregation. Given that this article particularly focuses on Amazon’s Alexa advancements to improve e-commerce activity, a neutral ‘hold’ rating will be assigned to the stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.