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Does Amazon minus Amazon Web Services make sense?

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Should Amazon(s amzn), the massive online retailer, spin off Amazon Web Services? That question was the topic of a barroom conversation at AWS: Reinvent in November. A technology analyst posited that for financial and other reasons, it would make sense for Amazon to emulate what EMC(s emc) has done with VMware (s vmw) — spin it off as a public company but retain control (EMC owns about 80 percent of VMware).

Werner Vogels and Jeff Bezos AWS: ReinventIn theory that arrangement would let Amazon focus on what it does best — sell physical and digital goods on the cheap — and let AWS to do what it does best — create and maintain efficient rentable IT infrastructure, which, by the way, runs most of Amazon’s retail operations.

A Seeking Alpha blog post resurfaced the topic earlier this week. In it, Andre Fernon, a former private equity guy, argued that Amazon has to sell off AWS, which he characterized as Amazon’s “runaway success and crown jewel in an otherwise highly competitive, low margin business.” It should be stressed here that by his own statement, Fernon is short Amazon stock, so keep that in mind.

In his view, Amazon will sell off AWS the same way insurance giant AIG sold off its huge Asian business to survive the financial meltdown.

He wrote:

 “In 2010, AIA, the jewel in AIG’s Asian crown, was floated on the Hong Kong Stock Exchange, raising much needed funds to help stabilise the parent company. AIG maintained a minority interest in the AIA but, in 2012, that too was sold to pay off outstanding debts … While Amazon will clearly “spin” this as another great success story, the reality is that Amazon has no choice and is essentially a distressed seller of an excellent business, just as AIG was forced reluctantly to dispose of AIA. The further tragedy is that any sales proceeds from an AWS spin out are likely to be reinvested in a loss making retail business that it less efficient than most people fully appreciate.”

Judging from the reaction, Fernon is in the minority. One Seeking Alpha commenter wrote:

“Now I have heard them all…..hmmm, lets sell our future at the wrong time. Have you ever studied [Amazon CEO Jeff] Bezos long term approach to this company? You shorts will try anything won’t you, but this one is so far fetched it’s laughable. I’ll be looking for that big announcement in three weeks……and a four leaf clover. Thanks for the scoop.”

Just how strategic is AWS to Amazon?

It is worth noting that Bezos, who introduced AWS at MIT in 2006, hasn’t talked much about it since. But he did attend the inaugural AWS: Reinvent show in Las Vegas where he talked about AWS’ ability to scale as a key advantage. Bezos was, as usual, unapologetic about his goal of delivering huge volumes of low-margin goods to customers — a stance that irks Wall Street types that put shareholder value above customer satisfaction.

One AWS partner said he sees utility in an AWS spinoff. “I wouldn’t be surprised  if [Amazon] kept majority ownership but spun AWS off to generate lots of cash for their own balance sheet — but not for a couple of years — the secrecy is worth too much now.”

Move would force a disclosure-averse company to disclose

Indeed, secrecy is Amazon’s byword, especially when it comes to AWS revenue and profit. As we’ve stressed repeatedly, Amazon lumps AWS revenue under “other” with revenue from other activities.  That “other” revenue amounted to about $2.2 billion over the past 12 months. Bezos seems to enjoy that no one really knows whether AWS is a profitable enterprise on its own (which I suspect) or a loss leader.

Jeff  Matthews, founder of hedge fund Ram Partners — and who is a fan of Bezos  — said a spin-off is possible in theory but not likely. “Then everyone would know how profitable [AWS] is and all kinds of stuff about it they can only guess at now. Bezos is so secretive I think he’d prefer it this way. eBay(s ebay) isn’t under pressure to go spinning off PayPal so why would AMZN need to do this?”

For the record, Amazon said it does not comment on speculation. But that shouldn’t stop us — GigaOM readers, let’s hear your take in comments: Would Amazon be made lesser or greater if it spun out AWS?

10 Responses to “Does Amazon minus Amazon Web Services make sense?”

  1. dotpeople

    I don’t think the people who think there may be a spin-off pay very close attention to the overall character of Amazon. Financial analysts like to put things into neat little buckets like quarterly earnings estimates, analyze a very focused business that is as easy as possible for them to understand. Such impulses are fine, but they ignore the Bezos message: he really doesn’t care to make things easier for analysts and Bezos perceives his focus on low margin business, and his long timeline for achieving profitability as competitive advantage. And there’s some good sense in what Bezos argues: a long timeline makes problems that seem impossible to solve possible. At re:invent he framed the question of how to solve the problem of world hunger in both a ten and one hundred year term, and in the hundred year term, somehow the mind unlocks and can begin to engage in how to solve the problem. In a ten year timeline, the mind cannot engage. Similarly, Amazon as a whole business has much to gain from AWS as AWS disrupts existing datacenter technology, will likely disrupt enterprise hardware vendors and reshape that industry around the kinds of inputs needs to keep growing its vast ecommerce business. And even if this were not the plan, by keep the numbers murkiy, Amazon can lure other firms into the Cloud business, or at least significantly obscure the AWS business strategy for a while longer. If analysts are already aggravated, while investors in Amazon understand they are in for the long haul, Amazon has already created enough value to reward those patient enough to listen and let the business grow according to plan. By growing a low margin business that makes money on value Bezos creates a very dry, hot valley for any firms that seek to catch up with AWS.

  2. Vinod Shintre

    branding is very important & i think AWS jells well with crowd. Don’t think Jeff will take the risk & other complexities involved. Milk the cow while its a cow ;-)

  3. So, if Amazon sells AWS, does that mean they’d need to start paying hosting fees for the infrastructure needed to run Yeah, that’s going to happen…

  4. uǝǝpɐʎnɓ sıuǝp

    I doubt they Amazon will spin off AWS. By hiding the revenue stream under ‘other’ if gives them a competitive advantage.. It is also tightly coupled to the ‘Kindle’ platform..

  5. As far as I am concerned, all the folks in the peanut gallery should find something else to occupy their time because Amazon has done more to gain and retain my business than every other retailer on the planet…combined…and it was sheer genius to monetize the massive infrastructure needed to accomplish that task.

    As to Fernon…well…he shorted Amazon…kind of shows the level of his expertise.