Network Effects and Alexa Calling

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I was lucky yesterday to attend a lecture by Prof. Ajay Agarwal that discussed Network Effects and the concept of Increasing Returns. CliffsNotes Version: Increasing Returns are essentially where the more you invest, the higher the return (marketing dollars, research work, etc). Even if the initial increases are small, if they’re perceivable, then it’s an opportunity you should run after. For Network Effects, it’s the idea that the more people participate in the network, the higher the value of the network. This can also be expressed through Metcalfe’s Law. From Wikipedia: “Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n^2).”

This made me think about Amazon’s rollout of Alexa Calling now vs. at product launch. While one could argue that two years ago, Amazon might not have had the infrastructure ready to deploy voice calling, that’s not likely the true reason. The ability to make calls to other Echo users would have been minimal as there were maybe only half a million devices shipped in the first year. Today, however, with 10M+ devices shipped, connecting them together creates a valuable network.

This might also be the reason why Amazon is limiting the calling to Echos only (for now). First, it’s to control quality of the conversation and the user experience. Are we more likely to allow other people with Echos to call our Echo vs those with phones? Amazon would be able to reliably control the quality of the voice interaction this way. It nows the hardware and network on which the calls are being placed. It also knows that the devices are used exclusively as speakerphones in homes.

The other reason to limit calling to Echo-only consumers is that it actually creates a network through the exclusivity. Otherwise, the Echo would be a BT paired speakerphone or just a SIP endpoint (for Internet calling). Now, prospective Echo buyers will think, “hmm… my mother has an Echo, so maybe I should get one rather than a Google Home so I could call her” (OK, maybe that’s a bad example). This is the same rationale that Apple builds into FaceTime on iOS and MacOS devices.

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