Breaking Analysis: Break up Amazon? Survey Suggests it May Not be Necessary

Despite the posture that big tech generally and Amazo.com Inc.specifically should be regulated and/or broken apart, recent survey research suggests that Amazon faces many disruption challenges, independent of any government intervention. Specifically, respondents to our survey believe that history will repeat itself in that there’s a 60% probability that Amazon will be disrupted by market forces, including self-inflicted wounds. Amazon faces at least seven significant disruption scenarios of varying likelihood and impact, perhaps leading to the conclusion that the government should let the market adjudicate Amazon’s ultimate destiny. 

In this Breaking Analysis, and ahead of AWS re:Invent, we share the results of our survey designed to asses what, if anything, could disrupt Amazon. We’ll also show you some data from ETR that indicates the strong momentum of AWS is likely to continue, which could be a factor in any government intervention. 

Survey: What Could Disrupt Amazon? 

Recently, in a collaboration with author David Moschella, theCUBE initiated a community research project to understand: 1) What scenarios could disrupt Amazon and 2) What’s the likelihood that each scenario would occur. We developed the scenarios, tested them in small samples, refined the questions and launched the survey. 

Key Findings

The survey asked respondents to rate the likelihood of each scenario disrupting Amazon on a scale of 1-10 as shown below.

We have inferred that the ratings are a proxy for probability of disruption. In the interest of simplicity, we chose to not have respondents evaluate the impact of the disruption at this time. Here’s the ranking by order of likelihood for each scenario. 

Here are the notable takeaways:

• On average, across all scenarios, respondents indicate there’s a 60% probability that Amazon will be disrupted. 
• By a meaningful margin, respondents felt that complacency – i.e. self-inflicted wounds, would be the most likely disruption scenario for Amazon. History in the industry would support this scenario as leadership in the tech business has proven to be transitory. 
• The likelihood of a technological disruption was rated the lowest at 5.5; although some of the open-ended responses suggest that new models of computing could emerge. In the mainframe days, sharing resources in a timeshare model was popular and gave way to a model of dedicated centralized infrastructure. The prevailing model then became distributed computing, which has ceded momentum back to a more centralized cloud. It’s not inconceivable that, with edge computing, the pendulum could swing back. 
• On balance the remaining scenarios hovered around 60% likelihood individually. Taken together, the combination of these factors, it could be argued, present a multitude of challenges to Amazon. 

Assessing the Seven Scenarios

By looking at the distribution of responses you can see further evidence of potential disruption to Amazon. Below are the distribution of results for each scenario in the order the questions were presented :

Forty-seven percent of respondents believe there’s a 70% or better chance of the government disrupting Amazon. 

Do it yourself cloud was not as prominent but still, 42% of respondents gave this a 70% chance or better. Think the Walmart cloud here. 

Environmental policy intervention showed a similar profile with a somewhat fewer respondents (42%) indicating the likelihood was in the 70%+ range.

Pricing wars, trade wars, China had a similar profile for high likelihood– 43% of respondents gave this scenario a 70% or better chance. We think this scenario could be even more disruptive to Amazon. For instance, what if you go on the web to order an item and Amazon doesn’t have it. But Alibaba does. Maybe not such a huge factor in the US – although it could be – but certainly outside of the united states it could be a scenario that disrupts Amazon. 

Tech disruptions ranked the lowest in terms of the distribution of respondents – 36% gave this a 70% or better chance. Presumably because AWS is seen as on the cutting edge technically. But as the pendulum swings back to distributed computing it could pressure AWS’ dominant model. 

This is perhaps one of the more interesting scenarios. Imagine if Google creates software that upon a search you can order the item and have it shipped directly to you…like an airline ticket except the concept now applies to physical goods. 

This direct model would disrupt Amazon’s warehouse approach but as you can see it didn’t strike the respondents as likely as some of the other scenarios. We think it’s actually one of the more plausible scenarios and is certainly being put to the test by Alibaba, which doesn’t rely on a massive warehouse infrastructure. 

By far the most likely scenario as rated by the respondents is this one below:

More than half the respondents (52%) indicated that there’s a better than 70% chance that Amazon would shoot itself in the foot over time. Again, history would suggest this is consistent and the most likely pattern, especially when new executives are appointed. You saw this with famous companies at the time like Wang, Digital, IBM eventually, Intel going through some challenges, Microsoft under Ballmer. Whereas you see founder-led companies like Dell and Oracle continuing to thrive. 

But it could be that today’s executives and systems are more tuned to longevity. Andy Jassy is a long-time Amazonian. Adam Selipsky boomeranged back to AWS and has a deep understanding of the company. 

So it’s by no means assured that Amazon will trip up. 

Government Intervention in Tech Generally has Failed

Taken together these factors suggest that government intervention may not be necessary. Indeed the history of government breakups and pressure on big tech has been mixed and arguably futile. AT&T, IBM and Microsoft all came under close government scrutiny and in the case of AT&T the company was broken up. Generally these actions led to the U.S. being less competitive – certainly that was the case with AT&T as international telecommunications companies came to dominate the market. 

And in the case of IBM and Microsoft – antitrust actions by the government, while a distraction, were less a factor in the challenge to these firms’ leadership than were market disruptions. IBM unwittingly and famously handed its monopoly power to Intel and Microsoft in the PC era. And Microsoft under Ballmer hugged onto its Windows past and became much less relevant until Satya Nadella initiated Microsoft’s current hugely successful strategy on top of the Azure cloud. 

The point is despite the saber rattling of governments, history would suggest that market forces will be much more successful in moderating the power of giants like AWS. 

AWS Remains the Mainspring of Amazon’s Innovation Engine

We’ll leave you with one last thought. 

At a $64B run rate and a 39% growth rate last quarter, AWS is the profit engine of Amazon. AWS accounted for over 100% of Amazon’s overall operating profit in the quarter. So it was surprising to us when the stock dropped after Amazon announced earnings. Its retail business underperformed but AWS blew away expectations. The stock rebounded and many investors saw it as a buying opportunity but the point is AWS is the most critical part of Amazon in our opinion. 

It helps fund Amazon’s massive CAPEX investments and gives Amazon a platform in other industries like payments, content, groceries etc. 

If you look at the ETR data across AWS’ vast portfolio the picture is very solid:

This chart shows Net Score or spending momentum for AWS in its businesses comparing three survey snapshots – Oct 2020, July 2021 and Oct 2021 in the yellow bar. Note the comments from ETR – in every sector – AWS spending velocity is up relative to last year and we’ve certainly seen this trend in AWS’ recent results. Accelerating growth with a much larger revenue base. Across the board in infrastructure, AI, data, analytics, core cloud…everything is up – even Chime, which is just amazing because Chime is horrible compared to other tools. But other than that weak spot – AWS is hitting on all cylinders. 

What do you think? Should the government put the shackles on Amazon or should it just let market forces do their thing? 

By the way we asked respondents “what else could disrupt Amazon other than these 7 scenarios and we received some interesting open ended responses that are viewable in this shared Google Sheet. Including one of our favorites…”God.” 

Thanks to  David Moschella for his excellent work on these scenarios.