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Should Amazon Spin Off AWS?

Is this a prime time for Amazon to let go of AWS? Opinions vary on whether the cloud service provider should become an independent business.

Amazon representatives have stated repeatedly over the past several months that the company has no intention of spinning off its Amazon Web Services (AWS) cloud unit. Still, while a spinoff isn't likely to occur anytime soon, speculation continues that AWS will one day become an independent entity.

There's been a significant amount of conjecture about whether Amazon should spin off its AWS business, says independent business advisor and consultant Berry Moise. “Some argue that AWS is growing too quickly, and threatens Amazon's core retail business,” he notes. “Others say that AWS is the most profitable and fastest-growing part of Amazon, and that it would be foolish to spin it off.”

Sunder Kekre, a professor of operations management at Carnegie Mellon University's Tepper School of Business, believes that an independent AWS would likely flourish. “It opens a sea of opportunity for AWS to expand as a separate entity without any strings attached to the mothership,” he states.

A Competitive Advantage

Jonathan Merry, a director at alternate currency information aggregator Bankless Times, observes that having an in-house cloud service gives Amazon a decisive advantage over competing merchants who must seek an external cloud provider. Yet this apparent benefit may also be a double-edged sword. “Many large brick-and-mortar stores choose to use Google Cloud or Microsoft's Azure rather than promoting the expansion of Amazon's primary source of revenue.”

An AWS spinoff would give increased focus and clarity to Amazon's core businesses, Moise says. “This could result in faster innovation and more agile decision-making within those businesses,” he notes. It could also lead to greater competition in the cloud computing market. “A standalone AWS would have more freedom to compete aggressively with other players in the cloud computing market.”

Divestiture would give AWS more independence, allowing it to operate without the pressure of being tied to Amazon's profitability. “It would also make AWS more attractive as an acquisition target for other companies and could help increase its value as a standalone business,” Moise says. “It could [also] make AWS a more viable option for investors who are hesitant to invest in Amazon because of its high valuation.”

Breaking Up Is Hard to Do

Regardless of how it would be approached, spinning off AWS would be a challenging and complex process. “Transition has to be orchestrated without customers being adversely affected, and synergies with the rest of Amazon may be weakened,” Kekre says.

An AWS spinoff would also have to pass muster with both US and global regulators. Due to its e-commerce marketplace dominance, antitrust authorities in the US and other countries are constantly pressuring Amazon, Merry says. Regulators are specifically likely to closely examine AWS, which technology market research firm Canalys says controls 31% of the worldwide cloud infrastructure market. “If more merchants raise concerns about the profit-generating similarities between Amazon's retail market and AWS, it may be subject to investigations,” he notes.

Another potential drawback is that it could be more difficult for Amazon to integrate AWS into its overall business if the cloud unit were to become a separate entity. “This could lead to AWS operating more independently and not being as responsive to changes or innovations within Amazon,” Moise says. “Finally, there's always the possibility that the spin-off could be unsuccessful, which would be bad for both Amazon and AWS.”

Customer Impact

An AWS spinoff could help the cloud business and its customers in terms of lower cost and better service with higher scale of operations, Kekre says.

On the other hand, spinning AWS into a separate entity might lead to reduced market competition and higher customer prices. “AWS customers would also likely experience a decrease in innovation and service enhancements from AWS,” Moise claims. “This is because Amazon would no longer have as much incentive to invest in AWS since it would be a separate entity.”

In a worst-case scenario, a spun-off AWS could emerge as a less reliable and competitive service. “This is because Amazon would no longer have as much control over AWS and could lose focus on providing high-quality services to its customers,” Moise explains.

Room to Grow?

AWS is currently a major contributor to Amazon's overall profitability. Nevertheless, many Amazon observers believe that the retail division limits AWS's ability to grow to its full potential. “By separating from Amazon, AWS would be free to invest in its expansion instead of having to maintain Amazon's lower-margin markets and stores,” Merry says. A split would be analogous to PayPal's 2015 spin-off from eBay. “Each stakeholder of eBay received one additional share of PayPal as part of that divestiture,” he says.

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