Amazon Web Services is, depending on who’s talking,
the bedrock and revenue-generating engine for
Amazon, or it’s a thin-margin sideline for the giant
retailer. Either way, does it make sense for Amazon
to spin it off a la EMC and VMware? ttweet this photo: Barb Darrow Should Amazon, 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 has done with
VMware — spin it off as a public company but retain
control (EMC owns about 80 percent of VMware). In 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.” ttweet this 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.” ttweet this 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
volume of low-volume 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 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

Does Amazon minus Amazon Web Services make sense?