Will AWS Be Spun Off Into a Separate Company? (businessinsider.com) 84
Ammalgam writes from a report via Business Insider: A credible business school professor who correctly predicted that Amazon would buy Whole Foods now says an AWS spinoff is inevitable. Marketing guru Scott Galloway said Monday at Business Insider's IGNITION conference. The move will also help the company placate regulators who are starting to scrutinize its anticompetitive practices, said Scott Galloway, a professor at New York University's Stern School of Business. After the e-commerce giant spins it off, Amazon Web Services (AWS) "will be one of 10 most valuable companies in the world," he said. "The question then becomes, what happens to the old retail-side of Amazon," Galloway added.
Amazon will decide to split off AWS, because it makes a lot of sense and market forces will dictate it, Galloway said. Cloud computing is one of the most important trends taking place in the technology industry, but there's no simple way for investors to profit off it. The three biggest cloud services -- AWS, Microsoft Azure, and Google Cloud -- are all part of much bigger companies whose results only partially reflect their cloud businesses. As the biggest of the bunch, AWS would be a natural to become its own standalone business, he said. And it could be a huge windfall for Amazon shareholders. Depending on how it would be valued and the multiple to earnings that the market would assign to it, AWS by itself could be see a valuation of anywhere from $70 billion to $600 billion, he said. What do you think? Is this possible?
Amazon will decide to split off AWS, because it makes a lot of sense and market forces will dictate it, Galloway said. Cloud computing is one of the most important trends taking place in the technology industry, but there's no simple way for investors to profit off it. The three biggest cloud services -- AWS, Microsoft Azure, and Google Cloud -- are all part of much bigger companies whose results only partially reflect their cloud businesses. As the biggest of the bunch, AWS would be a natural to become its own standalone business, he said. And it could be a huge windfall for Amazon shareholders. Depending on how it would be valued and the multiple to earnings that the market would assign to it, AWS by itself could be see a valuation of anywhere from $70 billion to $600 billion, he said. What do you think? Is this possible?
'huge windfall for Amazon shareholder' (Score:5, Insightful)
Only an investment banker would think like that. If you take the same technological infrastructure, pull it out of one company and shove it into another while distributing the new shareholding pro-rata, why exactly is there an expectation that suddenly this 'huge windfall' of new value has been created?
No new value has been created. If anything there will be higher costs from duplicated overheads. The fact that despite this the claim is probably correct and shareholders will get a big bump if this happens (just like when a company does a share split) is testament to how screwed up the economy's idea of 'value' is right now.
I mean, what a mockery this makes of all the work the engineering teams have to put in to add new capacity and services. Why don't we retrain all our engineers as financial innovators. Then our society can become really rich right?
Re:'huge windfall for Amazon shareholder' (Score:5, Insightful)
It allows for independent valuation of assets which reduces uncertainty and can increase investment value.
Amazon's retail business is a low margin and high fixed cost monster. Amazon faces stiff competition from newcomers as well as old school brick and mortar companies (e.g., Walmart) willing to burn money to compete in the e-commerce space. While not on the verge of bankruptcy, it will never be a cash generating machine in the current competitive environment.
AWS is a high margin monster with limited competition and a high degree of lock-in and network effects. These tend to be sustainable sources of value/returns.
As of right now, anyone investing in AWS has to take the risk that AWS profits will be funneled off to cover losses in Amazon's retail business (this is what happens today). With AWS spun off, it eliminates that risk. Reducing risk raises valuation.
It is not uncommon for conglomerates to be worth more separate than together.
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We're not talking in general, Potsy, we're talking about a specific case with known facts!
We know that the Amazon Retail business is subsidized by the Amazon Cloud business. Cloud is the revenue generator. Take that away or more to the point, separate the financials, and now people see how Amazon Retail business is a drag on Amazon. Suddenly their market cap takes a hit.
So while there may be untapped growth potential for Amazon Clou
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Misunderstanding Amazon (Score:2)
While not on the verge of bankruptcy, it will never be a cash generating machine in the current competitive environment.
That is not true at all [hbr.org]. Amazon retail generates HUGE cash flow. Amazon's operating cash flow is enormous. Amazon also has a negative cash conversion cycle, meaning they pay their suppliers WEEKS later than they get paid. Very few companies achieve this happy state of affairs and none of their major competitors (including Walmart) can match them on this.
Don't confuse operating cash flow with profit. Amazon generates excellent operating cash flow but then they plow it back into the company to grow so th
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I tried putting a ten and a five in my left pocket then I moved the five to my right. And lo and behold, the ten turned into a twenty!
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It works on the couch cushions too, but like pants pockets you didn't check in awhile, it doesn't really scale.
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Did someone mention 'HQ2' ?
Sounds like a split has already been underway.
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AWS also has a problem where large retailers like Target and Walmart will not use their products because they would be essentially be funding their retail competition by doing so. Spinning them off might help to drum up some additional customers.
Re:'huge windfall for Amazon shareholder' (Score:5, Insightful)
Only an investment banker would think like that./p>
When it comes to share prices- they're the only ones that matter. A share's value has more to do with how much investment bankers think a business is worth (or will be worth) than it has to do with what that company is actually worth on paper.
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Only if they have voting shares, otherwise they can fuck off.
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The summary didn't say value will be created necessarily, just that it'll be a windfall for shareholders, which speaks more to equity market sentiment. Which is different unless you believe in efficient market theory.
Not to say you're wrong btw, this is clearly i-banker thought process.
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No new value has been created. If anything there will be higher costs from duplicated overheads. The fact that despite this the claim is probably correct and shareholders will get a big bump if this happens (just like when a company does a share split) is testament to how screwed up the economy's idea of 'value' is right now.
Shareholders don't just get a bump from splitting off a company in terms of the parent company going up in value. They often get shares in the new company in some formula like 2 shares of new company X for every 4 shares of old company Y you own, for example. These new shares can be valuable. And until you sell them and have to pay taxes, they sort of are like free money, especially if the former parent company maintains its value or goes up after the spin off.
I don't see Bezos as a guy who would wa
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GE doesn't make stoves anymore. They sold their appliance division to Haier a couple years ago.
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Only an investment banker would think like that.
Have you ever talked with somebody who manages a large pension fund? You might be surprised how they see valuations.
Shareholders care about stock price, not value. Very few are looking at PE's when deciding what to buy. That is all about market demand, not intrinsic value, if such a thing could even be determined.
All valuations of future earnings are subjective guesses, and almost nobody believes companies are only worth the liquidation value of their har
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There is actually an increase in enterprise value— as separate companies, entities that compete with one portion but not the other are discouraged from working with both components. There are also the soft issues of disliking the practices of the retail component, and using that as motivation to not work with the AWS component.
It might only be a 10% delta, but that is a number with a lot of zeros. I imagine the AWS component would take on a big chunk of debt to keep the remainder healthy, but it shou
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Only an investment banker would think like that. If you take the same technological infrastructure, pull it out of one company and shove it into another while distributing the new shareholding pro-rata, why exactly is there an expectation that suddenly this 'huge windfall' of new value has been created?
No new value has been created. If anything there will be higher costs from duplicated overheads. The fact that despite this the claim is probably correct and shareholders will get a big bump if this happens (just like when a company does a share split) is testament to how screwed up the economy's idea of 'value' is right now.
You aren't nearly hard enough on the idea. AWS was born out of the tech needs of amazon.com. So, yes, AWS could spin out and be a successful company, but amazon.com still requires AWS to operate. This kind of thing would be like AMD spinning out its chip-making facilities - it didn't do that by choice, it was forced to because it could no longer keep up. The only way this really makes sense is if someday AWS spins out amazon.com because amazon.com has become a distraction.
IMHO, the only cloud provider w
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I use to do some consulting work for a company that made one type of product, their business was cyclical so they rented their workforce and machinery to an other company that made a different product all together. This company was still known for their product that they sold, but made a lot of money renting its services to others companies that had a different cycle.
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Right -- I thought the whole history of AWS was that Amazon built a good infrastructure with lots of built-in redundancy. The rest of us are just living off their fumes. It would be as if the ground beef bin at the butcher went into their own business -- hamburgers come from the extra bits of the choice cuts.
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Amazon.com is a trivial part of AWS. “Every day, AWS adds enough new server capacity to support all of Amazon’s global infrastructure when it was a $7 billion annual revenue enterprise,” said James Hamilton, Distinguished Engineer at Amazon, who described the AWS infrastructure at the Re:Invent conference in 2015.
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What a silly statement. The Amazon of 2004 is nothing like the Amazon of today.
Amazon of today has makes around $170 billion in revenue and has over 600,000 employees. Back in 2004 it made less than $7 billion and had less than 10,000 employees.
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Ok, so maybe every 90 days AWS adds enough capacity to run Amazon.com. Either way, the amount of computing capacity that Amazon.com uses is a trivial part of AWS.
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You're assuming the proportions of wage earners in that employee base have been constant, when they haven't.
Originally, most of Amazon's employees were high-paid technical folks. The incredible majority of Amazon employees today are warehouse workers who earn relatively low wages. Don't get me wrong, there are still a lot of highly-paid technical folks working at Amazon, but it is probably 10,000 out of the total.
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Amazon.com is a trivial part of AWS. “Every day, AWS adds enough new server capacity to support all of Amazon’s global infrastructure when it was a $7 billion annual revenue enterprise,” said James Hamilton, Distinguished Engineer at Amazon, who described the AWS infrastructure at the Re:Invent conference in 2015.
Amazon.com may be a trivial part of AWS - but AWS is a crucial part of Amazon.com. I think it's plausible that AWS could handle the hit of losing amazon.com as a customer, but amazon.com would take a huge hit to margins if it had to buy infrastructure on the open market.
That said ... as others, I doubt amazon.com is a trivial part of AWS.
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Well, that's really why it makes more sense to spin off AWS. Imagine that you own a building in Manhattan that you use to operate a small storefront. That business is not economically feasible if you had to pay market rentâ"in other words, the business is being subsidized by the building. So from an economics standpoint, you should just close the business and rent out the storefront at a market rent.
Same concept here. If Amazon cannot make money without being subsidized by free or at-cost pricing from
AWS has been around for a long time (Score:2)
Re:AWS has been around for a long time (Score:5, Funny)
If it made sense to spin it off, it would have been done by now.
Two economists are walking down the street. One says "Hey look, there is a $20 bill lying on the ground!" The other says, "No, that is impossible because if there was really money lying on the ground, somebody else would have already picked it up."
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If it made sense to spin it off, it would have been done by now. Spinning off AWS is nothing more than an investment banker's wet dream.
There is only one Amazon that owns one AWS. That company is only run by one CEO.
All it takes is for him to be skeptical or hesitant, or just plain risk averse. It might make sense to a myriad of economists and upper management, but if Jeff Bozos were hesitant, it wouldn't happen until he were convinced.
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If it made sense to spin it off, it would have been done by now. Spinning off AWS is nothing more than an investment banker's wet dream.
Perhaps they're waiting for the new AWS headquarters to be ready and moved into.
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Propping up Retail Side (Score:5, Insightful)
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Amazon makes a lot more money on the retail side than from just selling stuff. They make a lot of money when they sell stuff for other people. I looked into how it works in Canada but it's probably similar for other countries.
When someone buys an item from a third party seller but it's fulfilled by Amazon then Amazon gets a cut of the transaction and charges the seller for shipping (even if the customer pays too). While the seller has stock in the warehouse Amazon is charging the seller rent (I forget the e
The only money making part of Amazon (Score:5, Interesting)
Since Amazon retail competes with so many sectors and has announced it is going to get into banking, pharmacy, etc, many other companies loathe to use AWS. They are worried AWS would be able to hack in and peek into their data. Even if the data is really secure and secret, they hate giving money to a competitor. So if it is spun off, it might gain more customers and become even more profitable. But rest of Amazon has great brand name and loyalty, but very small profit potential. Its main appeal is low cost. So it can't raise prices all that easily.
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Amazon's retail division is also making money (Score:3)
That's probably the rationale behind thinking AWS will be spun off. Normally you stick a money-making division together with a money-losing division. That allows you to take the money from the money-making division, and invest it into improving the money-losing division. That reduces you
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Market conditions will not force the split, as AWS is not in the same industrial space as online retail sales.
There are already some signs of retailers leaving AWS because they see Amazon as a competitor and don't want to send them money. If this continues, it is another good reason to split up Amazon's retail and web service divisions into separate companies.
They have to or else USG will break them up (Score:1)
Amazon is in gross violation of 100 year old Anti-Trust. The only business they have that makes any money is AWS and they have been engaging in illegal subsidizing schemes to sell below cost of goods to drive out the competition in the other business lines.
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We're in a world where that's the standard MO. Google does it with its ad business. Startups do it with VC funding. Etc.
I mean, Amazon does it to as larger extent, but that's it.
FB is far worse, being allowed to buy up its competitors in the social networking space.
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Amazon is in gross violation of 100 year old Anti-Trust. The only business they have that makes any money is AWS and they have been engaging in illegal subsidizing schemes to sell below cost of goods to drive out the competition in the other business lines.
Do you have any proof to cite?
Not anytime soon (Score:5, Insightful)
Bezos has never done things to be "a huge windfall for Amazon shareholders". He's been running the whole company at almost zero retained profit, dumping cash into expansion at every opportunity. He's never really cared about shareholders like that. Why would he suddenly change now?
Investing in Amazon is like investing in a startup. You know all the cash is going to grow, and you hope it becomes super-profitable later. Which is kinda cool that he's been able to maintain that for decades.
Re:Not anytime soon (Score:4, Informative)
Amazon made $1,600,000,000 profit in the first quarter of this year, $2,500,000,000 profit in the second quarter, $2,800,000,000 profit in the third quarter. I'd hardly call that almost zero retained profit.
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Really? In 2017, their sales went up 37% to $178 billion. Their operating income went down by 2% to $4.1 billion, and their net income was $3 billion. Which means their net operating profit, as a percent, is ~1.5%. Which is pretty damn close to zero. WalMart's is twice that at ~3%. Apples is 13x that at ~20%.
Also, I think you're looking at operating profit, not net profit. But, I could be wrong.
Not any time soon (Score:4, Insightful)
A credible business school professor who correctly predicted that Amazon would buy Whole Foods now says an AWS spinoff is inevitable.
Just because he guessed right once doesn't mean he'll guess right again. And I don't think Bezos gives a shit what short term windfall shareholders might want.
While a spinoff is certainly a possibility, I don't think it will happen any time soon. Part of the reason Amazon was able to make that business work is because it makes use of excess capacity on servers they already had to buy for other purposes. There also is something of a dog-fooding [wikipedia.org] component to the business where Amazon learns what works and what doesn't on their own business which has some obvious utility. Now AWS has become kind of its own thing rather than a way to just use excess servers but there still is a lot of benefit to them to have both under the same roof.
I do think that AWS will be a huge business and possibly eventually much bigger than their retail operations. But for the near future I think there is much too much synergy between them to justify a spinoff.