Transforma Insights recently published a report ‘AV Equipment: Television, Home Video, Home Audio, and Smart Speakers contributing to 6.4 billion AV devices in 2035’. Smart speakers, such as Amazon Echo and Apple HomePod, remain a key segment of this fragmented market, contributing 15% to the total number of connected AV Equipment devices. But their growth has slowed compared to the rapid expansion seen in the early years.
Prior to 2021, smart speakers recorded strong annual growth, reflecting rapid early-stage market expansion. This early surge in smart speaker adoption was fuelled by their novelty, convenience, and promise they served to become a centralised smart home interface. Growth rates declined thereafter, due to market saturation, greater availability of substitute products, and continued privacy concerns. In this blog post, we examine key market factors that are challenging the position of smart speakers, as well as the strategies vendors are employing in response.
Device substitution has become one of the significant threats to the smart speaker market. At their inception, smart speakers allowed new ways to interact with existing media and services and used to be the only way to access virtual assistants. Today, however, many other devices, including smartphones, are equipped with similar capabilities. This greater integration reduces the need for dedicated devices, while the growing ubiquity of virtual assistants is making smart speakers harder to sell. In response, some devices now feature more advanced hardware or have become significantly cheaper to maintain their place in the market.
Another persistent challenge is the lack of obvious monetisation opportunities. Efforts to monetise through voice shopping and advertising have largely fallen short. Amazon’s Alexa division, for example, has struggled to achieve profitability for years, reporting losses of USD25 billion between 2017 and 2021, and USD5 billion in 2022 alone. Many smart speakers have been sold at cost in order to get users into vendor ecosystems, further highlighting the difficulties in turning these devices into sustainable revenue generators.
To address these challenges, vendors are increasingly turning to AI, particularly large language models (LLMs). Amazon hopes its AI-enhanced Alexa, capable of handling more complex tasks, will create recurring revenue opportunities. However, with numerous competitive assistants available for free, these advanced features must offer a particularly compelling value proposition to attract and retain customers. The need to integrate LLMs into smart speaker environments is the inevitable conclusion, but it introduces its own challenges, including latency, reliability, and cost. Historically, users have experienced a limited, but accurate and instantaneous response from virtual assistants. However, cloud LLMs can introduce a delay in responses and are prone to hallucinations, which users may find unacceptable when controlling smart home functions.
The ecosystem is also seeing the emergence of innovative similar solutions like AI pins. Last month, Apple announced it is working on developing an AI pin of size of an AirTag and equipped with cameras and speaker. These pocket-sized, AI-powered personal assistant devices like Rabbit R1 and Humane AI Pin, aim to simplify tasks such as booking services, controlling applications, and sending messages with voice. So far, they have failed to attract many users, but further iterations are still being developed. The lack of traction from buyers has been attributed to redundancy, as smartphones are already becoming AI-based voice assistants with integration of personal AI assistants from Google, Apple, and Meta. Moreover, the price points of these devices – USD199 for the Rabbit R1 and USD699 for the Humane AI Pin, are steep, making users think about the value they are adding. Nonetheless, AI pins represent a new frontier for personal assistant technology and may complement or even partially replace traditional smart speakers in the future.
The smart speaker market faces clear challenges, from devices becoming easily substitutable to limited monetisation opportunities, which have made profitability elusive. Integration of advanced AI and LLMs offers a partial solution, adding new functionality and potential revenue streams. Meanwhile, innovations like AI pins are pushing the boundaries of smart speaker capabilities, even if adoption is still limited. Overall, the market remains highly competitive and fragmented, with success increasingly depending on differentiation, enhanced user experiences, and creative monetisation strategies.
