Amazon cloud spin-off 'inevitable,' says Oppenheimer
You've got to segregate to accumulate – or do you?
Analysis Amazon Web Services must be spun-off from its mothership to prevent it losing out on cloud customers, one analyst has argued – but a break-up could render AWS toothless, says The Reg.
The spin-off was recommended by Oppenheimer analyst Tim Horan in a report published on Monday.
"In our view, we believe an ultimate spin-off of AWS is inevitable due to its channel conflicts and the need to gain scale," Horan wrote. "We see the business as extremely valuable on a standalone basis, possibly even operating as a REIT," the insider's acronym for a real estate investment trust
Amazon's quandary, according to Horan, is that as the company expands into new areas – streaming films, e-books, devices – it bumps up against competitors who have put their infrastructure on its cloud, such as procrastination-enabler Netflix which battles Amazon in streaming media.
A paranoid company might worry that Amazon would give preferential treatment to its own products and services above those of its competitors. (Amazon, cognizant of this, has filled its site with documentation insisting that this can never happen. Unfortunately for Amazon, paranoia doesn't need to have a basis in reality.)
By splitting Amazon Web Services away from the e-retail mothership, both companies could expand without unnerving their customers, or so Horan's logic goes. They would also make oodles and oodles of cash – Horan reckons AWS could be worth $20bn in 2013, rising to $101bn by 2018 – and have a more predictable commercial existence in the long-term.
Spin-off could cause tech tailspin
The crack in this bout of crystal-ball gazing is that Oppenheimer is an investment firm that by nature likes predictable cash above everything else, and Amazon's leader Jeff Bezos is a mercurial, ambitious figure who has demonstrated time and time again a love for risky, long-term projects*.
This Reg hack believes the Oppenheimer spin-off analysis misses the temple for the gold fixtures: keeping Amazon Web Services yoked to Amazon holds a slew of major advantages, many of which could be critical in the battle for dominance of the cloud, but they will all take time to play out and are not a sure thing.
For Amazon, a spin-off would break its close links with its only major technology supplier and could lead to unpredictable rises in its own costs – a nasty proposition when the company has a penchant for running at 1 or 2 per cent margins.
Getting rid of AWS would shut Amazon off from a source of secret, high-performance tech; it's an open-secret in the industry that Amazon tests out many of AWS's in-development products, before other major customers and eventually Joe Public get a look-in.
To top it all off, although Amazon insists it is just another customer of AWS, the relationship is probably colored by the fact Amazon CEO Bezos can influence the hirings and firings within the latter organisation. Life would be more difficult for Bezos if he had no control here.
For Amazon Web Services, the spin-off would remove the valuable proving ground that is the Amazon e-retail site. Losing the ability to test and develop products for an understanding customer would be a major blow and could almost certainly lead to a higher cost of R&D – unappetizing for a business competing in an industry whose destiny is utility-like lowest-common-denominator pricing.
It's hard to find a compelling reason for Amazon to split Web Services off into another entity.
In cloud computing, controlling both the infrastructure and the software layer allows you to operate with the lowest possible costs – right now, Amazon can do both; if spun-off, it could do only one. As long as Bezos is in charge, why would it possibly do that? ®
For examples of Bezos's farsightedness, see the ups and downs of his secretive Blue Origin space startup; his pivotal role in the 10,000-year-clock project via the Long Now Foundation; and indeed the formation of Amazon Web Services in the pre-YouTube early 2000s – a time when few people could imagine there to be a massive market for fungible compute power.
Analysts - anyone can play
rising to $101bn by 2018
I love it! Sales won't be going up to just a paltry $100 billion. Oh no! My calculations are so precise that I can predict them to 1% accuracy over 5 years! I'm just that awesome!
I guess I can see his argument. But as El Reg points out, he seems to have forgotten the advantages to Amazon and their own cloud service of being one company.
I really must quit my job, and get me a job as an analyst. Does anyone want to pay me for my predictions on the sales of Apple iDevices in the future? Apple should split off the iPad division as a separate company, as it's causing the letter 'i' to fall off their typewriters, and thus threatening the sales of their most lucrative product, the iPhone. In 2018 Apple will sell 127,357,207 iPhones.
"an ultimate spin-off of AWS is inevitable due to its channel conflicts and the need to gain scale"
Psshttt, nonsense. This is all.
I really don't see where they get this stuff from - Amazon probably doesn't actually give a damn, and the fact that it's linked to a site like Amazon probably gets them 10x more customers than web shops they lose.
el reg said it best
"Amazon's EC2 was likely the brainchild of a mid-level ops director who overbought for a data center and had to come up with a way to save his own ass. Use a free, open source project like Xen for virtualization, give it a sunshine-up-the-ass name like Elastic Compute Cloud, and start pulling in all those venture capital dollars like Cisco and Sun did during the first dotcom catastrophe. Fuck me, give that man a raise."
it makes sense to me, given that they had to build for peak capacity in Q4, which was probably 3-10x+ what they needed for the rest of the year.
From my talks with people who claim to be at ground zero of the birth of EC2 they dispute this theory, but I don't know if I believe them.