By Greg Bensinger

SAN FRANCISCO (Reuters) - Amazon's revamped Alexa due for release in October ahead of the U.S. holiday season will be powered primarily by Anthropic's Claude artificial intelligence models, rather than its own AI, five people familiar with the matter told Reuters.

Amazon plans to charge $5 to $10 a month for its new "Remarkable" version of Alexa as it will use powerful generative AI to answer complex queries, while still offering the "Classic" voice assistant for free, Reuters reported in June.

But initial versions of the new Alexa using in-house software simply struggled for words, sometimes taking six or seven seconds to acknowledge a prompt and reply, one of the people said.

That's why Amazon turned to Claude, an AI chatbot developed by startup Anthropic, as it performed better than the online retail giant's own AI models, the people said.

Reuters based this story upon interviews with five people with direct knowledge of the Alexa strategy. All declined to be named as they are not authorized to discuss non-public matters.

Alexa, accessed mainly through Amazon televisions and Echo devices, can set timers, play music, act as a central hub for smart home controls and answer one-off questions.

But Amazon's attempts to convince users to shop through Alexa to generate more revenue have been mostly unsuccessful and the division remains unprofitable.

As a result, senior management has stressed that 2024 is a critical year for Alexa to finally demonstrate it can generate meaningful sales - and the revamped paid version is seen as a way both to do that and keep pace with rivals.

"Amazon uses many different technologies to power Alexa," a company spokeswoman said in a statement in response to detailed Reuters questions for this story.

"When it comes to machine learning models, we start with those built by Amazon, but we have used, and will continue to use, a variety of different models - including (Amazon AI model) Titan and future Amazon models, as well as those from partners - to build the best experience for customers," the spokeswoman said.

Anthropic, in which Amazon owns a minority stake, declined to comment for this story.

AI PARTNERSHIPS

Amazon has typically eschewed relying on technology it hasn't developed in-house so it can ensure it has full control of the user experience, data collection and direct relationships with customers.

But it would not be alone in turning to a partner to improve AI products. Microsoft and Apple, for example, have both struck partnerships with OpenAI to use its ChatGPT to power some of their products.

The release of the Remarkable Alexa, as it is known internally, is expected in October, with a preview of the new service coming during Amazon's annual devices and services event typically held in September, the people said.

Amazon has not yet said, however, when it plans to hold its showcase event, which will be the first major public appearance of its new devices chief, Panos Panay, who was hired last year to replace long-time executive David Limp.

The wide release in late 2022 of ChatGPT, which gives full-sentence answers almost instantaneously to complicated queries, set off a frenzy of investing and corporate maneuvering to develop better AI software for a variety of functions, including image, video and voice services.

By comparison, Amazon's decade-old Alexa appeared outmoded, Amazon workers have told Reuters.

While Amazon has a mantra of "working backwards from the customer" to come up with new services, some of the people said that within the Alexa group, the emphasis since last year has instead been on keeping up with competitors in the AI race.

Amazon workers also have expressed skepticism that customers would be willing to pay $60 to $120 per year for a service that's free today - on top of the $139 many already pay for their Prime memberships.

ALEXA UPGRADES

As envisioned, the paid version of Alexa would carry on conversations with a user that build on prior questions and answers, the people with knowledge of the Alexa strategy said.

The upgraded Alexa is designed to allow users to seek shopping advice such as which clothes to buy for a vacation and to aggregate news stories, the people said. And it is meant to carry out more complicated requests, such as ordering food or drafting emails all from a single prompt.

Amazon hopes the new Alexa will also be a supercharged home automation hub, remembering customer preferences so that, say, morning alarms are set, or the television knows to record favorite shows even when a user forgets to, they said.

The company's plans for Alexa, however, could be delayed or altered if the technology fails to meet certain internal benchmarks, the people said, without giving further details.

Bank of America analyst Justin Post estimated in June that there are roughly 100 million active Alexa users and that about 10% of those might opt for the paid version of Alexa. Assuming the low end of the monthly price range, that would bring in at least $600 million in annual sales.

Amazon says it has sold 500 million Alexa-enabled devices but does not disclose how many active users there are.

Announcing a deal to invest $4 billion in Anthropic in September last year, Amazon said its customers would gain early access to its technology. Reuters could not determine if Amazon would have to pay Anthropic additionally for the use of Claude in Alexa.

Amazon declined to discuss the details of its agreements with the startup. Alphabet's Google has also invested at least $2 billion in Anthropic.

The retailer, along with Google, is facing a formal probe from the UK's antitrust regulator over the Anthropic deal and its impact on competition. It announced an initial investigation in August and said it has 40 working days to decide whether to move it to a more heightened stage of scrutiny.

The Washington Post earlier reported the October time frame for release of the new Alexa.

(Reporting by Greg Bensinger; Editing by Kenneth Li and David Clarke)