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Amazon Is Winning the Battle for the Connected Household

There are several ways a company can achieve an economic moat. One way is to become a leading platform or ecosystem, such as Apple's (NASDAQ: AAPL) app store. Application developers usually write for iOS first, since that is where the most financially well-off customers are. The more apps on the iOS app store, the more likely people are to buy an iPhone, in a virtuous circle. 

Another great advantage is to have a leading subscription business. A yearly subscription or membership causes customers to engage more and provides a business with either upfront or recurring funds, which the company can reinvest to drive more memberships. Think Costco's warehouse membership, or Netflix's leading streaming subscription, which the company utilizes to aggressively grow content, thereby driving more subscriptions. 

Turning to Amazon's (NASDAQ: AMZN) recent blowout quarter, one thing that stuck out was not only the growth in Prime subscriptions (Subscription Services, which includes Prime, grew 59% year over year) but also how the Prime-Alexa combination is becoming the leading platform/ecosystem for the connected household.

Alexa

Reading the company's press release, it's clear CEO Jeff Bezos has a huge crush on someone --- and her name is Alexa.

 In the last month alone, we've launched five new Alexa-enabled devices, introduced Alexa in India, announced integration with BMW, surpassed 25,000 skills, integrated Alexa with Sonos speakers, taught Alexa to distinguish between two voices, and more... and active customers are up more than 5x since the same time last year. With thousands of developers and hardware makers building new Alexa skills and devices, the Alexa experience will continue to get even better.

As my colleague Evan Niu pointed out, Alexa has far and away the most skills of any smart-speaker, as Amazon opened up its ecosystem to developers earlier than rivals. In fact, Microsoft threw in the towel last quarter, allowing Alexa to integrate with Microsoft's Cortana personal assistant. The integration will allow Alexa users to interact with Cortana, which is more workplace-oriented. 

Alexa will be able to talk to Cortana, and Cortana will be able to talk to Alexa. Alexa customers will be able to access Cortana's unique features like accessing work calendars, booking a meeting, reminding you to pick up flowers on your way home, or reading your work email -- all using just your voice. Similarly, Cortana customers can ask Alexa to control their smart home devices, shop on Amazon.com, interact with many of the skills built by third-party developers, and much more.

The more skills, functions, and third-party integrations Alexa obtains, the more it will become the leading voice-enabled smart-speaker. Why is this important? Because when you order batteries using your voice-enabled home speaker, you probably don't say, "buy Duracell." You might say "buy batteries," and Alexa will then direct you to the best deal -- which is likely to be an Amazon private-label brand.

Amazon's Cloud Cam. Image source: Amazon.

The third parent?

Amazon is also using the Alexa-Prime combo to fight package theft from doorsteps by introducing Amazon Key, an exclusive service for Prime members. Key works in conjunction with Amazon's Cloud Cam, the company's first-ever home security camera, to let guests (like Amazon delivery men) enter your home. Cloud Cam also lets you see into the home while this is happening, you could also use it to check on your kids, and it has a two-way radio, so you can even tell your dog to stop barking.  

Platform for the connected home

Not only will the Key/Cloud Cam offering remove another barrier to ordering from Amazon, but Alexa/Prime is opening up more and more interesting services for consumers. One example is a new parental-control feature, whereby parents can allow their teenage children to spend autonomously on Amazon, but within a pre-set spending limit.

The consistent rollout of new applications like these will continue to drive engagement on the Prime/Alexa platform. And while other big tech companies are rolling out their own smart speakers, Amazon's ability to integrate Alexa with Prime and automate more household tasks puts it in pole position to capture a huge amount of household spending. That's why Google recently teamed up with Wal-mart to try to catch up with Amazon in this all-important race.

However, given the terrific results Amazon just reported, it seems as though Google and Wal-mart -- as powerful as they are -- have their work cut out for them.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Billy Duberstein owns shares of Alphabet (C shares), Amazon, Apple, Microsoft, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.