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What it’ll take for Alexa to become the next $46 Billion App Store

The relationship between inventors and consumers has always been a touchy one. The zipper didn’t get any respect for 30 years before it became a cultural phenomenon. The creators of RFID technology are probably sitting around wondering why consumers never started using their technology in droves.

Innovators and consumers cannot exist without one another. It’s a symbiotic relationship that turns the wheels of the economy and evolution. This is why it can be so lucrative to create a neutral ground where innovators can tinker and consumers can shop around. Steve Jobs figured out this special dichotomy with the App Store, which has turned into a $46 Billion annual economy that benefits the innovators and the consumers.

Smart speakers are in the vicinity of creating a truly self-sustaining economy where developers are compensated and incentivized to come up with the next best thing, and consumers get useful experiences. We’re clearly well on our way to getting enough devices out there to make this a reality.

An estimated 86.2 million smart speaker devices were shipped to consumers just this past year.

[Furthermore] smart speakers and smart displays were once again the most sought-after tech products this past holiday season and we estimate that more than 60 million households worldwide now own at least one device.

David Watkins, Director at Strategy Analytics

We’ve got all of these smart speakers in the wild, however, they’re having an existential crisis. The sad fact is that there are three ways in which the majority of smart speaker owners report using their smart speakers: playing music, asking about the weather, or searching Google.

Even though overall smart speaker usage is going up, with 76% of smart speaker owners citing they’ve increased their usage, we’re going to reach a plateau if we don’t figure out a way to incentivize developers (with money) to continue making net new experiences for smart speakers.

Right now, the novelty of creating voice applications is enough to entice developers to make 20 Questions or NPR News Briefs. But, the novelty only lasts so long. To turn the smart speaker platforms into self-sustaining economies, you must figure out a way for the creators to get paid from their own labor. And it’s not going to be through ads.

Amazon asked Sony to come up with ideas for voice-powered games on the Alexa platform shortly after the Alexa-powered Echo speaker was released in late 2014. Sony decided that the Jeopardy game would be a fit, and it released the Jeopardy skill for Alexa in January 2016. The Jeopardy skill quickly became the most popular game on the Alexa Skills Store, reaching around 80,000 monthly users in mid-2017.

Kevin McLaughlin, The Information

However, when Sony tried to monetize this skill (and recoup the money they spent building Jeopardy) by running ads during the game, Amazon told them to stop. Google feels the same way about ads:

Google experienced a backlash last May when it ran a promotion for the movie Beauty and the Beast on its voice-activated speaker Google Home, as was reported at the time on Reddit. A Google spokeswoman said the Beauty and the Beast clip wasn’t intended to be an ad but was meant to highlight a coming event. As for Google’s general policy about running ads on Google Assistant, she said: “our initial goal is to provide users with a great Google Assistant experience.”

Kevin McLaughlin, The Information

To be frank, I’m glad to hear that both Google and Amazon are turning developers away from monetization through ads. This seems to be the easy way out and, honestly, Amazon would suffer from this business model. Overwhelming audio ads on every single Alexa interaction would ruin the experience.

I think advertising makes sense for a very small percentage of the voice applications we’ll use. For instance, long-form audio content such as music (think of freemium Spotify and Pandora) or podcasts (like Serial and This Modern Life) have done just fine with ads – without ultimately sacrificing the user experience. Most likely, this is because the ad to content ratio is fairly small.

I could even see my theory on monetizing through live events working for some of the brands we know and love, such as BuzzFeed’s Tasty brand.

But, for the mass majority of the audio experiences we’re going to have with smart speakers, ads just don’t make sense. Realistically, we need loads of innovators thinking about how to monetize this audio experience in a way that doesn’t disrupt the user because it simply doesn’t exist right now.

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We’re in this limbo territory where Amazon and Google want developers to create voice skills, however, without any clear shot to making money. Amazon has tested $1.99 subscription apps and even upgradeable content experiences (like getting more questions in Jeopardy), but it’s unclear how that’s being shared with developers.

Interestingly, smart speakers are experiencing the opposite economic situation than the iPhone did with their App Store. By 2009, the App Store had around 50,000 available apps (comparable to the 56,750 skills that Amazon Alexa offers today) and there was a clear economic benefit to building apps. Every developer with spare time was making apps and this is when you probably recall your friends and family constantly responding to ideas with “Oooh, that could be an app”. From the moment Apple launched SDK in 2008 allowing third-party developers to create apps, the app gold rush took off.

Apps and games you could manipulate with your fingers were a novelty that drove large numbers of early downloads. One was Super Monkey Ball, a well-known game from Sega made initially for the Nintendo GameCube console. Super Monkey Ball debuted at $9.99, a low price compared to most console games and one that seemed to set a psychological price ceiling among developers when the App Store opened its doors.

Many of the early apps such as iBeer, which made it look like you were drinking a pint of beer from your iPhone, felt like demos and novelties, but in some instances, frivolous apps like a $0.99 app that simulated popping bubble wrap served as a launching point to fund more ambitious projects – in this case the hit game Doodle Jump, which went on to sell over 100 million copies.

Jon Voorhees, MacStories

Eventually, these novelty apps faded away. Ultimately, as the supply of apps increased, it became apparent that the app gold rush would be short-lived. With most games switching to a freemium model and offering In-App Purchases (debuting in 2009), this put enormous pricing pressure on everyone else.

In 2011, 63 percent of apps were paid downloads, selling for an average of $3.64 apiece. By last year [2015], a mere 27 percent of downloads were paid, and the average price had fallen to $1.27.

Casey Newton, The Verge

There’s a huge tectonic shift where everyone expects apps to be free and they’ll only pay for apps on a rare occasion (which is a sentiment that goes for smart speakers too). So how does the App Store survive, keep developers incentivized, and maintain their prolific economic standing?

Over time, the number of business models that are possible on the App Store has expanded, which holds the promise of opening new avenues for developers to build businesses.

Jon Voorhees, MacStories

One of the contributing factors to this, I would say, was when Kleiner Perkins, one of the foremost venture capitalist groups, announced their $100 million iFund. The story goes that Steve Jobs jumpstarted Kleiner Perkins to launch this fund. This was the fund’s mission:

KPCB’s iFund is a $100M investment initiative that will fund market-changing ideas and products that extend the revolutionary new iPhone and iPod touch platform. The iFund is agnostic to size and stage of investment and will invest in companies building applications, services, and components. Focus areas include location-based services, social networking, mCommerce (including advertising and payments), communication, and entertainment. The iFund will back innovators pursuing transformative, high-impact ideas with an eye towards building independent durable companies atop the iPhone  / iPod touch platform.

Of the five companies the iFund invested in, two were acquired (ngmoco and Apteligent), one is influencing all e-commerce that isn’t Amazon (Shopkick), and two have shut down (Path and Booyah). Pretty impressive for a few apps.

I would argue that the App Store, which is projected to top $60 Billion in annual revenue by 2021, wouldn’t be what it is today without iFund. The iFund was a total commitment to getting tinkerers to create mobile-first experiences. Kleiner Perkins’s involvement validated a mindset shift that the App Store was a place where full-fledged, venture-backed businesses could thrive – and that it wasn’t just a place for us to spend $0.99 on a bubble wrap app.

Alexa and Google Assistant is in this period where we’re just taking everything from the web and mobile apps and turning them into voice apps. Smart speakers need this type of big player commitment on par of Kleiner Perkins’s iFund to get audio out of this awkward period.

Ultimately, developers work best when they don’t need to worry about getting money to survive, but also can see a pot of gold in the near distance. Neither of these realities exists in the Alexa or Google Assistant developer ecosystem. And if we want smart speakers to be one of the pieces of technology that changes how we live, for the better, then it must become a self-sustaining economy of innovation and user benefits.

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