Photo: Getty Images/Michael Vi
Should Amazon be broken up?
Billionaire activist investor Daniel Loeb, CEO of Third Point, last week shared with investors his belief that the market is not recognizing the respective full value of Amazon.com’s e-commerce and Amazon Web Services (AWS) businesses, rekindling discussion into a potential break up.
In June, a bipartisan group of House lawmakers proposed antitrust legislation against the major tech platforms (Apple, Google, Facebook and Amazon) that some speculated could lead to the splitting of Amazon into two websites — one for third-party sellers and another for first-party — and forcing the company to divest its own products. Amazon has been accused of unfairly competing against marketplace sellers and stealing third-party seller ideas in developing its own private label products.
Joe Lonsdale, general partner at venture-capital firm 8VC, also charged in a recent Wall Street Journal editorial, “AWS subsidizes Prime, harming consumers in the long run.”
Third Point, known for launching activist campaigns against corporate boards, had already been holding discussions with other hedge funds about a possible AWS spinoff, according to the WSJ.
In an investor call last week, Mr. Loeb assessed AWS’s enterprise value at over $1.5 trillion and Amazon’s retail operations at $1 trillion for a combined $2.5 trillion — nearly $1 trillion more than the company’s current market valuation.
Beyond retail and AWS, Amazon’s businesses include logistics, advertising and media (Prime Video, Prime Music, book publishing, Fire TV and Twitch).
In a subsequent shareholder letter, Mr. Loeb shared that Third Point had “significantly increased” its Amazon holdings as he believes new management led by Andy Jassy is considering a long-term strategic plan that “may include several bold initiatives that are the subject of wide market speculation at the proverbial investor water cooler.”
The letter said investors should also benefit from Amazon’s recent return to repurchasing shares and its move to provide greater disclosure into operations, including advertising revenues.
“It’s not often that you get to buy shares in a high-quality company at the low end of its valuation range ahead of a meaningful reacceleration in growth at a 30%-40% discount to its present intrinsic value with an almost unlimited runway of potential to compound in value,” wrote Mr. Loeb.
- Activist Investor Daniel Loeb Sees Roughly $1 Trillion of Untapped Value in Amazon – The Wall Street Journal
- House Bills Seek to Break Up Amazon and Other Big Tech Companies – The Wall Street Journal
- Amazon is everywhere. Here’s how the US could break it up – CNN
- The Case for Splitting Amazon in Two – The Wall Street Journal
- Fourth Quarter 2021 Investor Letter – Third Point
- Break Up Amazon, Make More Money – NASDAQ
- Former Walmart U.S. CEO raises prospect of breaking up Amazon – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you see a benefit to breaking up Amazon? Which parties would benefit most from a breakup and which would be negatively affected?
Poll
Loading …BrainTrust
DeAnn Campbell
Head of Retail Insights, AAG Consulting Group
Ryan Mathews
Founder, CEO, Black Monk Consulting
I’ve always found it amusing that we pretend to be capitalists right up to the point where an enterprise becomes overly successful – then we want to back off and pretend we’re appalled at their success. Amazon does not present a barrier to entry – ask Walmart, for example. Ask UPS (logistics). Ask Spotify. So no, I don’t see a benefit to a forced breakup of Amazon. Could it have shareholder benefits? Possibly, but I doubt it, and couldn’t tell without a degree in accounting and a crystal ball.
Amazon’s business units are so intertwined that it will be harder than anyone anticipates to separate. AWS profits are significantly fed by data earned through customer behavior on the retail side. If AWS had to pay market value for that data their profits would look very different. It’s clear the scale and proprietary power of Amazon is impacting the entire retail industry, and especially hurtful to small community businesses trying to keep their store afloat. But if Amazon is broken up, then a hard look should also be given to other multi-platform businesses like Walmart and Target. And keep in mind that China-owned Alibaba has just launched global sales with delivery anywhere in the world for $3, and would be more than happy to step into any gap left by Amazon.
*Checks notes.* Billionaire activist investor is upset that his ability to maximize his potential yield is being held back, so break them up. Moving on…
Whether driven by investor desires to extract more value or by antitrust concerns, Amazon should not be broken up. Dealing first with antitrust, Amazon is not a monopoly. It is nowhere near a monopoly. It does not harm consumers. It does not harm other businesses by duplicitous means. It competes fairly and squarely. If it outperforms other retailers and takes share, it is because it is better at what it does in terms of thinking, innovating and executing than those players. That deserves applause, not censure. As we have seen from other strong retailers, like Target and Walmart and Kroger, the possibility of competing and winning against Amazon is still possible. As for investors, it is perfectly possible to extract value by playing financial games through splitting up companies and their divisions. This is the same story pushed with those wanting players like Macy’s to break off e-commerce. But this often misunderstands the integrated nature of businesses, including Amazon’s flywheel approach. Short term gains come at the expense of long term success! So, that’s a hard no from me!
Amazon isn’t the only retailer with a history of knocking off other brands and products, they’re just the biggest so there is definitely some scapegoating going on. One can argue that there’s nothing new under the sun, however the retail industry has an incurable case of FOMO. Whether that’s from modeling brands after competitors or replicating tested products in their own stores.
Amazon however does offer an option to launch with an exclusive feature where brands can be marketed as Amazon private brands, and should they be successful they will purchase from the vendor — somewhat similar to Wayfair white-labeling tactics. Other mass merchants offer up endcap or drop-in test as a dangled carrot with little to no guarantee of a long-term return or loyalty on a potential rollout.
Of course it should be broken up. Let its retail business stand on its own.
I mean, PayPal and eBay were broken up. Why should Amazon continue this way?
No, no, no. Ignorant investors and business people who know nothing about the retail market, the full cradle to grave implementation of creating a product and bringing it to market, the entire logistics cycle required to do this in an omnichannel environment, and the extreme financial and human resources required to do this, just try to break it down into smaller pieces that destroy the value of the whole. In this case the sum is greater than the value of the parts.
Oh yeah, Amazon creates its own house branded products, only after it has the data to determine if doing all of this is worthwhile, to successfully compete against major national brands. Walmart, Target, Costco, Kroger, Safeway, and every other major retailer has been making house brands the exact same way, using the same information, for over 60 years. Why should Amazon be penalized?
Without initiating a complex debate on antitrust, bundling, etc. the fundamental question regarding anti-competitive legislation is whether one aspect of the business receives a subsidy that allows them to sell their services below their cost and which creates an unfair advantage to competitors. While there are many dimensions of Amazon’s behavior which demonstrate outsized negotiating leverage, with many documented instances of abuse, the only part of the Amazon empire that seems to fit the subsidy description is AWS, which is reputed to provide most of Amazon’s profits. Is there a reason why this couldn’t be spun-off as a separate business, eliminating the subsidy effect? I can’t think of one.
While retail rivals may fantasize about Amazon’s breakup, U.S. and global retail momentum would regress without a united Amazon. That’s because, as a whole entity, Amazon uses its scale and influence to modernize the global retail infrastructure.
How keeping Amazon intact can (and does) benefit stakeholders:
A united Amazon can be a powerful force for good for diverse stakeholders — even rivals.
As I’ve said before, Amazon’s logistics arm as an independent entity would act as a needed counterbalance against the UPS-FedEx duopoly and its ever-increasing rate hikes. DHL tried and failed in the U.S. market because they couldn’t reach critical mass – but a spin-off would have that critical mass from Day One. Merchants who would rightly balk at letting Amazon see their transaction activity would be much more likely to use an untethered service with such a wide range of competencies, from warehousing and fulfillment to air freight to last-mile delivery.
The thinking that supports an Amazon breakup became outdated at the dawn of the Information Age. We need to quit applying Industrial Age Band-Aids to Digital Age issues. Way back in the 20th Century it might have made some sense to keep markets from monopolizing because of the long-term impact on competition and the consumer. But in the Digital Age, some problems – say last-mile delivery – require scale to address. Additionally, Amazon’s businesses are so intertwined, teasing out certain pieces may have profound unintended consequences. Who would benefit from an Amazon breakup? Large branders and the competition. Who would be negatively affected? My money is on the consumer.
This is a really interesting way of looking at this issue. Respectfully, as it relates to the “intertwined” notion – would you see peeling Amazon’s Web Services from its retail operations as having a major effect, apart from creating two very successful businesses from where there is currently just one? From where I sit, they appear to be two very different companies (and products, and models, etc.) — and could carry on quite nicely as separate entities.
Consumers would be impacted by any division within Amazon. Right now they benefit from bundled services — Prime Video with Prime membership. Yes, Amazon is getting so dominant that they present a threat to market fairness, but shame on other businesses that have not embraced innovation soon enough. The successful arms of Amazon allow for them to continue to invest in other developments. If any area should be extracted, I would vote on the prescription/medical aspects. They already have prescription services and are eyeing Peloton — I would be concerned with that much access and potential abuse of consumer data.
Honestly, it seems like the activism here isn’t about protecting consumers at all, but using the public’s hostility towards corporate monopolies as a cudgel to boost Third Point’s ability to scoop up a bigger stake in Amazon. The title of this post should more accurately be, “Should Amazon be broken up so billionaire-led hedge funds can 10x their profits?” Merchants and retail consumers have no advocate in this conversation — and they need one.
However much (some) people may dislike Amazon, a proposal to dismember it has to proceed from some specific claim, not just how people “feel” about it. And what, exactly, is that claim? It doesn’t seem to be articulated here, which admittedly seems to focus on the idle thoughts of some Activist Investor … a term for which I have little regard.
It’s interesting that most BrainTrust comments don’t mention the potential valuations of the separate businesses. That I suspect is as much the driver here, as opposed to forcing any change from the outside. This story reminds me of others predicting e-comm spin offs among legacy retailers to capture greater value, grow faster, etc.
I think breaking up Amazon might turn out to be a nightmare for the company. The success of Amazon relies on high-quality tech combined with superior retail practices. They unify the customer needs and retailing through in-built tech infrastructure. Breaking Amazon will result in two silos: Amazon tech and Amazon retail. While Amazon tech can still survive, Amazon retail, on the other hand, would be badly hurt due to the absence of internally trusted tech innovations and infrastructure. And taking away tech from retail would mean that Amazon will move 5 years backward.
If it splits, Amazon itself would be highly negatively impacted compared to any other company. On the contrary, legacy retailers and the ones who are still digitally naive would benefit the most since they won’t have to fight with Amazon’s robust fulfillment capabilities and retail initiatives like Amazon Go & Amazon fashion stores anymore.