Amazon should strongly consider spinning off its cloud business ahead of the 2020 U.S. presidential election. | Image: REUTERS / Ivan Alvarado / File Photo
- Amazon’s profit growth is highly dependent on its cloud business.
- A spin-off would not only unlock shareholder value but potentially expand cloud market share.
- If a Democrat beats President Trump in November, a breakup might no longer be an option but a necessity. Why wait?
Amazon’s (NASDAQ:AMZN) fourth quarter results sent its market cap soaring above $1 trillion on Friday. This was on the back of earnings that smashed expectations.
One thing that couldn’t be overlooked was the disproportionate contribution that the company’s cloud unit had on overall growth. Amazon Web Services (AWS) generated only 12.5% of company profits but was responsible for 63.3% of its operating income [Amazon].
AWS now generates nearly two-thirds of Amazon’s operating income. | Source: Amazon
Why Amazon Web Services should be spun off
With AWS generating the bulk of Amazon’s operating profits, its true value is no doubt being held back by the rest of the company.
Besides unlocking shareholder value, here are three reasons why a spin-off would be a good idea.
Public cloud service revenues are expected to hit over $331 billion globally in 2022 [Gartner]. With AWS having a market share of nearly 50% but only generating $35 billion in revenues, it means there is extensive room for growth.
The full potential will not be reached with the baggage of the online retailer though. With the online retailer now competing in multiple sectors, some businesses won’t use its cloud services over worries of supporting their competitor.
Phil Thompson, AWS’ tech leader, recently disclosed that some firms “won’t work with us because we’re Amazon” [Dallas News].
A case in point is Walmart. Three years ago the big box retailer threatened to deny some tech firms its business if they didn’t quit running their related applications on AWS [The Wall Street Journal].
As a standalone firm, AWS would not be seen as having conflicts of interest that would jeopardize potential business opportunities.
Act of self-preservation
The massive growth of U.S. tech giants over the past decade has been terrifying. At the turn of the century the four largest U.S. corporations by value were Citigroup (NYSE:C), Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE) and Pfizer (NYSE:PFE) [The Times U.K.]. Now it is Amazon, Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT). Individually, they all boast a market cap of around $1 trillion or more.
This has led to calls for their breakup, with some Democratic presidential candidates like Elizabeth Warren vowing to hold tech giants “accountable.”
By spinning off Amazon Web Services, the online retailer could potentially preempt any antitrust action that may be started against it. Rather than wait to be broken up, Amazon would be better off doing so on its own terms in the form of a voluntary spin-off. If a Democrat wins the White House in November, it might become more of a necessity than a choice.
Currently, AWS is operating in the shadow of its parent company. With a spin-off, it will have greater flexibility and sharper focus in the public cloud market as competition from Microsoft Azure and Google Cloud heats up.
If AWS needs evidence of how potentially successful a spin-off could be, it only needs to look at PayPal (NASDAQ:PYPL). Untethered from eBay (NASDAQ:EBAY), PayPal has in five years been able to expand its market share in the payments business through acquisitions and strategic partnerships. This would not have been possible as part of eBay. Now PayPal boasts a market cap of $134 billion versus eBay’s $27 billion [Nasdaq].
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.