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When Tom Slater met Jeff Bezos in Seattle recently, the Amazon CEO explained how little he cared about daily market news. Better, he said, to spend his time "living in the future a wonderful place".
In their discussions, Bezos touched on a number of business areas: cloud, media, grocery and other projects that he thinks will shape what that future will look like. Following on from that conversation, Tom Slater shares some thoughts on the topics that excite Bezos and Scottish Mortgage managers, starting with Amazon's ubiquitous voice-activated assistant.
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The Amazon Echo speaker and Alexa, its integrated voice-activated assistant, are already everywhere. Cursory analysis might suggest that the smart speaker market is therefore maturing and the fastest revenue growth phase is behind us. According to this view, Alexa will be another contributor to a slowing top line at Amazon over the coming years.
It is exactly this narrow kind of thinking that has led Wall Street to underestimate Amazon for the past two decades. We would not disagree that the smart speaker market is no longer of much interest. But far more importantly Amazon has laid the foundations of a new era of computing.
Alexa's success has created an expectation that we ought to be able to speak to our devices. The monitor, the keyboard and the mouse are too cumbersome to fit with our mobile lifestyles and consumers are embracing their alternative. With 28,000 Alexa-compatible smart home devices from more than 4,500 brands, Alexa is coming to your microwave, to your television, to your car, and even your bicycle. "Ambient computing" is becoming a reality.
The rise of this computing-on-the-go, where devices work in concert with our everyday activities, has been predicted for decades. Voice as the primary computing interface could reduce friction in communicating, searching, and most important to Amazon, buying stuff.
Some readers may remember paging through a multi-volume encyclopaedia or even asking someone more informed to fill in knowledge gaps. Search engines made this task less laborious, although initially they were far from reliable. We needed to choose the right keyword, then navigate pages of search results hoping that the information sought would surface. Voice computing, on the other hand, requires and demands a more straightforward approach - the correct answer first time.
As the pace of change in the computing era accelerates, we see new business models appearing, each with the ability to disrupt conventional methods. Voice has the potential to do that with search whether seeking a piece of information or actively making a purchase.
Tough questions are asked of advertisers as the intersection of computing and human language continues. The real estate' available to them reduces in a voice-driven economy and naturally, what remains becomes more valuable. As Alexa improves and the product becomes more widespread, advertisers will increasingly shift their attention to voice over text search. We may be seeing this already. Growth in ad revenues from Amazon's e-commerce business show this area becoming a lucrative income stream for the company. Product advertisers already realise the importance of being one of Alexa's coveted answers.
Very few other companies have the infrastructure to create a product like Alexa. Amazon has over 100 million Alexa-enabled devices in circulation which means it is collecting data faster than rivals. Its competitive edge is increasing. Data matters because of how inadequate Alexa currently is relative to our expectations. We want to interact with "her" like a person, whereas in reality "she" is a four-year-old algorithm. Those managing the business see themselves as a four-year-old start-up. The things they need to improve are predominantly engineering problems within their control. They need to improve their natural language processing and in "contextualised search": the ability to give results based on user preferences and circumstances. According to results published in January, Alexa already boasts 80,000 skills. Amazon needs to connect Alexa to more devices, and to strike more partnership deals. As the future-dwelling Bezos knows, these priorities have nothing to do with current market vagaries.
Think of the potential: if this technology becomes our default household assistant and the means by which we organise our households, then Amazon has just taken an important step closer to influencing the way we decide to spend our money. And crucially, it can monetise this role by selling shoes, not just advertising shoes. This is a business model edge that no others can match. No wonder Jeff was so excited.
Tom Slater
Tom joined Baillie Gifford in 2000 and became a Partner of the firm in 2012. After serving as Deputy Manager for five years, Tom was appointed Joint Manager of Scottish Mortgage Investment Trust in 2015. Tom's investment interest is focused on high growth companies both in listed equity markets and as an investor in private companies. He graduated BSc in Computer Science with Mathematics from the University of Edinburgh in 2000.
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority.
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