Amazon Web Services (AWS)
Will It or
Won’t It..?
Ever since After Edge Consulting, a leading investment research firm with a good
track record in calling corporate breakups, predicted in late 2014 that Amazon
would spin off its Amazon Web Services (AWS) business, talk and rumours have
intensified about when, or indeed if, it would happen.
I
n December 2014, London-based The Edge Consulting
Group, a firm that specialises in corporate breakups,
stated that an AWS spinoff could raise the fortunes of
Amazon’s shareholders while sparking a bidding war for
the world’s largest public cloud.
An independent AWS it stated, would be a prime acquisition
target for cloud-centric companies such as Salesforce.com
or VMware.
The statements certainly made investors sit up and take
notice, and led to increased speculation as to the validity of
such claims.
With investors regularly getting exasperated by Amazon’s
quarterly losses and low-margin retail business, Edge Consulting posited that spinning off AWS would attract lots of
investor interest and trigger a re-rating of Amazon’s overall
business at a more favourable valuation - some $38 billion.
This would generate plenty of cash for Amazon and raise its
total valuation to a potential $195 billion, it stated.
Pro-spinoff analysts argue that although they have shared
infrastructure, Amazon’s core retail business and its Web
Services division don’t have much in the way of similar
business interests. As two separate companies, they could
focus more on their respective markets instead of balancing
out growth between the two.
However, speaking to CNBC, AWS chief Andy Jassy said
that CEO Jeff Bezos had no plans to spin off the unit, since
he believed that the two business complement each other.
“One of our largest customers is Amazon, the retailer. They
use all of our services in a very substantial way,”
Jassy said.
zon’s Kindles, Prime streaming video and a host of commerce services for the retail giant and its sellers.
Forrester Research analyst Jeffrey Hammond also told
CNBC that a spinoff wouldn’t make sense, since many
synergies between AWS and Amazon’s core business are
just being realised.
“As Amazon rolls out new services, they need the capability to instantly scale. Why risk having to do it on someone
else’s infrastructure?” said Hammond. “In the future Amazon may have fleets of delivery drones or millions of Alexa
devices directly taking orders from customers. They need
infrastructure to enable this.”
AWS is also surprisingly profitable according to
industry analysts.
Amazon said its web services business generated sales of
$1.57bn in the first quarter of 2015, confirming that Amazon’s cloud business is the biggest of its kind in terms
of revenue.
Founder Jeff Bezos said in a statement that “Amazon Web
Services is a $5bn business and still growing fast.”
Put these two factors together (Amazon’s need for AWS infrastructure, and AWS’ high growth and profitable margins)
and it becomes difficult to see why Amazon would spin-off
its subsidiary.
Perhaps analyst Jeffrey Hammond summed it up best in his
comment to CNBC:
“Why sell off the goose capable of laying golden eggs?”
AWS provides the back end infrastructure powering AmaSources:
http://www.bbc.com/news/business-32442268
http://www.crn.com/news/cloud/300075145/investment-firm-amazon-will-spin-off-aws-in-2015.htm
http://www.fool.com/investing/general/2015/10/22/should-amazon-inc-spin-off-amazon-web-services-aws.aspx
http://www.cnbc.com/2015/10/07/this-is-why-amazon-wont-spin-off-amazon-web-services.html
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