Brief:

• Amazon is developing earbuds that work with its voice-powered virtual assistant Alexa, as the e-commerce giant seeks to take on Apple's popular AirPods in the mobile wearables market. The Alexa earbuds will be available as early as the second half of this year, unnamed sources told Bloomberg.
• The cordless headphones will look like AirPods, but Amazon's engineers want to provide better audio quality. The earbuds are a significant priority for Amazon's Lab126 hardware division, which also is working on an Alexa-powered home robot for consumers code-named Vesta, per Bloomberg.
• Amazon's earbuds will let wearers use voice commands to order goods, request music and get information from thousands of Alexa skills, as apps for the virtual assistant are called. The earbuds also will offer physical gesture controls, like tapping to pick up and end calls or shuffling songs, per Bloomberg.

Insight:

Amazon has had its hits and misses in the hardware market over the years, and its earbuds indicate that the e-commerce giant seeks to get its Alexa virtual assistant into another category of devices, which could help developers drive engagement for their Alexa interfaces. Amazon's dominance in smart speakers has enabled it to attract a number of developers, with skills on the platform numbering more than 70,000. This week, the first HIPAA-compliant skills were introduced to help users book health appointments and manage prescriptions with their voice.

While the Fire smartphone was a flop in 2015, its Echo brand of smart speakers has the biggest market share in a rapidly growing market for voice-powered connected devices. Rivals like Google and Apple have had to play catchup to Amazon in the market for smart speakers that act as a central hub in a connected home.

The lack of a popular smartphone is the biggest challenge for Amazon in expanding Alexa usage outside the home. The voice-powered Google Assistant can operate on 1 billion devices, or 10 times the number of Alexa-powered gadgets. Apple has 1.4 billion active devices, including 900 million iPhones, most of which have its Siri voice assistant installed.

Amazon's earbuds will be dependent on mobile devices to operate because they won't have cellular connectivity. The dependency on Apple and Google is a source of weakness for Amazon, although its Alexa apps work on iOS and Android devices. Amazon will need to price its earbuds aggressively to expand the wearables market to new users and to take market share from Apple, which charges $159 to $199 for AirPods. But Amazon is no stranger to undercutting competitors with lower prices, particularly in hardware. The company practically sells Echo smart speakers as a loss leader to get Alexa into more homes and support its e-commerce platform.

The earbuds market is growing rapidly, but it's also getting more crowded. Device makers sold 12.5 million pairs of earbuds in Q4 2018, according to Counterpoint Research data cited by Bloomberg. Samsung last month started selling its Galaxy Buds that work like AirPods and Amazon's planned device. Google introduced Pixel Buds last year, while Apple's Beats business, Jabra and Sony also market wireless earbuds.