Opinion
Amazon is under attack – there may only be one solution
By Matthew Lynn
It might be this week. It might wait until the middle of August. It might even drag on until the start of September. But in the United States the Federal Trade Commission is expected to launch its blockbuster legal action against Amazon very soon.
Coming at the same time as British and European Union regulators are targeting the internet giant, the forced break-up of one the world’s most powerful businesses is getting more likely all the time. And the stage is set for an epic series of legal battles as Amazon tries to keep its corporate empire together.
Amazon executive chariman Jeff Bezos has some big decisions to make.Credit: AP
But hold on. There is a smarter strategy. Amazon could simply save all the lawyers a lot of trouble and break itself up. In fact, it can be divided neatly into three businesses; retailing, streaming services, and cloud computing.
Sure, it would lose some of the synergies between each one. Against that, each unit would be a lot more focused, and easier to manage. In reality, instead of spending years fighting the regulators through the courts, it would be better for the company and its shareholders to take control of its own fate – and split itself up before it is forced to.
It already looks set to be one of the great regulatory battles of all time. Over the next couple of weeks, the FTC is expected to launch a legal assault on Amazon.
It will focus in particular on its Prime unit, which cleverly locks customers into its vast range of products, as well as its advertising unit, and the way it encourages vendors to advertise on its system, potentially rigging what should be an open market in its favour.
It remains to be seen whether the action is successful or not. But the FTC’s endgame is already becoming clear. With some justification, it views Amazon as the Standard Oil of the 21st century and has started the process of forcing its break up.
It does not stop there. The British regulators are now looking at it again, and in Brussels there has been a constant series of investigations aimed at curbing its overwhelming power. Across the world, regulators have it in their sites.
In fairness, much of the criticism of Amazon is unreasonable. True, it is very, very big, and its use of customer data is, to put it mildly, not exactly transparent.
Even so, it has generated huge amounts of wealth, offered an open platform to millions of small businesses, and driven prices down for consumers while offering amazing levels of service.
Overall, it is not a bad record. And yet, there is no question that the trust busters are now on its case, and for the next few years it will be tied up in endless legal battles to keep its empire intact. Unless, that is, it decides to do something genuinely radical – and break itself up instead.
In fact Amazon falls neatly into three different businesses. There is its logistics and shopping unit, with its network of warehouses, and the vast range of goods sold from its website, shipping 7.7 billion packages globally every year (and remarkably losing hardly any of them), as well as a handful of physical retail outlets.
Next, there are streaming and digital services, such as its Prime video service, Amazon music, and the Kindle e-book store. Finally, there is the cloud computing unit which rents out huge quantities of server space to other businesses, and which controls 32 per cent of the web services industry, and has revenues on its own of $US80 billion. All three of them are huge businesses in their own right.
Does it make sense to break them up? True, there are synergies between them, which is partly why the FTC is taking action. The Prime unit cross subsidises the shopping unit, and vice-versa. There is little doubt that it swaps data across its own platforms, and often in ways that are to its own advantage. After a split, a lot of those advantages would be lost.
In reality, a break-up would be the best thing Amazon could do for its shareholders right now and for its own future – it just needs Bezos to press the button and make it happen.
Against that, however, there would be some big pluses. It would create three more focussed companies. Jeff Bezos may have been able to keep track of such a sprawling giant, but not many people have his levels of ability, and his successors are clearly struggling to run a company with more than $US500 billion in annual revenues.
Next, it would allow each unit to do more deals, without provoking the fury of the antitrust regulators.
Its streaming unit might well make a natural home for Spotify, for example, and perhaps even for Netflix, or ITV come to think of it, or its retail unit might well buy a grocery chain in the US or Europe. But it would be very hard to make that happen while it is so big.
Finally, and perhaps most importantly of all it would allow it to take control of the process instead of leaving it to the regulators. The most important thing for any company is surely to be in control of its own fate, and to shape what happens to it, rather than being at the mercy of a handful of judges.
Indeed, some investors are already starting to think about who they should be rooting for when the FTC case goes to court. The Wall Street stock guru Jim Cramer argued last week that a break-up might well be better for shareholders than keeping the empire in one piece.
He may well be right. A break-up, with shareholders receiving one share in each of the three units for each existing share, would be an audacious move.
It would take a lot of legal and managerial work to separate everything out neatly. Even so, it would knock out any move against it by the regulators. In reality, a break-up would be the best thing Amazon could do for its shareholders right now and for its own future – it just needs Bezos to press the button and make it happen.
Telegraph, London
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