The idea that Amazon should spin out its massively profitable cloud business keeps coming up. Here's how that might work - and why it's very unlikely

• Calls to break up Big Tech have renewed speculation Amazon will spin off its multibillion-dollar cloud business Amazon Web Services into a separate company.
• That idea has come up every so often for at least the last six years, but Amazon Web Services CEO Andy Jassy has repeatedly dismissed such a move as unnecessary.
• The business case for a spinout largely hinges on the notion that some customers are reluctant to sign on with Amazon's cloud, given that they compete with the company in markets like retail.
• AWS already runs largely independently, and has its own CEO and chief financial officer.
• But a spinout would introduce new logistical and operational headaches as it had to staff up in fields like accounting and hire a new board of directors. That's not to mention that Amazon.com itself is hosted on Amazon Web Services, making the two difficult to separate.
• Most experts say that the headaches aren't worth the upside, and that despite the rhetoric of antitrust crusaders like Sen. Elizabeth Warren (D-MA), Amazon and CEO Jeff Bezos aren't likely to give into political pressure.
• NYU Professor Scott Galloway, who correctly predicted that Amazon would buy Whole Foods, takes the stance that a spinout is coming: "I predict by 2025, the most valuable company in the world will be AWS."
• Amazon is slated to report earnings on Thursday after the bell. Wall Street is expecting the company to post revenues of $68.8 billion on earnings per share of $4.6, which would be a nearly 22 percent increase over the same period of 2018.
• Click here for more BI Prime stories

For years, Amazon has been asked the same question - will the retail giant spin off Amazon Web Services, its market-dominating cloud computing subsidiary, into a separate business?

First, the calls came from Wall Street, as many analysts and investors believed the growing cloud computing business would be worth more on its own than it is as a smaller piece of the Amazon empire.

Now, as Amazon faces heightened antitrust scrutiny and calls to break up Big Tech, the question has been raised again - and could be an issue this week, as Amazon reports earnings.

The company is slated to report quarterly earnings on Thursday after the bell. Wall Street is expecting Amazon to post earnings per share of $4.60 on revenues of $68.8 billion, which would be a nearly 22 percent increase over the same period of 2018.

AWS is typically a big profit driver for Amazon, but analysts at Bank of America say that Amazon Web Services revenue will likely see some kind of slowdown, in a note to clients cited by MarketWatch.

Most recently, a writer for The Atlantic who recently profiled Amazon CEO Jeff Bezos said last week he believes the forward-looking executive will spin off AWS to preempt the rising tide of antitrust rhetoric coming from Washington, DC, and especially from Senator Elizabeth Warren (D-MA) amid her bid for the Democratic presidential nomination.

"Bezos, who is seeing around corners, is going to break up his own company," Franklin Foer told CNBC's Squawk Box. "AWS exists as its own fantastically profitable business. There's no reason that it needs to be connected to Amazon the e-retailer."

Scott Galloway, the NYU professor who predicted Amazon would buy Whole Foods, in December said he expects Amazon will make AWS a separate business to placate regulators and achieve hundreds of millions of dollars more in market value.

AWS is important for Amazon. Research firm Morningstar recently estimated AWS is worth more than $550 billion on its own - more than half of Amazon's $873 billion market cap, at the time of writing. AWS is also the most profitable part of Amazon's business.

At the same time, however, those expecting a spinoff shouldn't hold their breath. While Amazon Web Services is better poised than most other Amazon subsidiaries to stand on its own, both financially and operationally, most experts say that the company may just not have enough incentive to make such a dramatic move. Indeed, AWS CEO Andy Jassy has repeatedly said over the years that he doesn't see any advantages to splitting off from the Amazon mothership.

Amazon Web Services declined to comment for this story.

Antitrust scrutiny

The antitrust scrutiny of Amazon to date mainly revolves around the company's e-commerce business, where it is both a seller and a marketplace. The big question is whether Amazon unfairly uses data it collects from third-party sellers as a marketplace to gain an advantage as a seller that then competes with those sellers.

Spinning off AWS wouldn't directly address that concern, but it may help to relieve concerns about Amazon's size.

Senator Warren has promised that, if elected president, she would break up big technology companies including Amazon - but hasn't specifically singled AWS out as a target. Warren's campaign has not responded to a request about whether any of her plans include AWS.

Warren in March revealed a plan which would require Amazon to spin out its private label brand from the rest of the company. She also pledged to appoint regulators to reverse mergers, including Amazon's Whole Foods buy, Facebook's acquisition of Instagram and the sale of Waze to Google.

The potential use of AWS data in other parts of Amazon's business is the subject of scrutiny. The House Judiciary committee on Sept. 13 sent Amazon a letter requesting information including on the use of AWS data by non-AWS teams or divisions, and whether Amazon has or plans any policies about how those teams and divisions can use AWS data.

Still, Amazon doesn't typically make business decisions based on political pressure, said Matt McIlwain, managing director at Madrona Venture Group, the Seattle-based venture firm founded by early Amazon investor and longtime board member Tom Alberg. McIlwain has worked closely with AWS over the years and meets regularly with the division's CEO Andy Jassy.

"Jeff has said for many years they are comfortable being misunderstood," McIlwain said. "My sense of the culture is that's not how Amazon makes decisions."

How a spin-off would work

Amazon Web Services already practically runs on its own. It's answerable to Amazon execs like CEO Jeff Bezos and CFO Brian Olsavsky, to be sure - but AWS has its own CEO, in the form of Jassy, and its own CFO, Sean Boyle.

That eliminates some, but not nearly all, of the operational hurdles that would come with creating an independent AWS. This hypothetical company would have to hire its own board of directors, not to mention that it would likely have to staff up in fields like accounting and legal, where it could previously lean on Amazon.

It's also unclear how many of Amazon's 650,000 employees (as of the end of 2018) work specifically for AWS, and how much office space the subsidiary takes up on its own. For a ballpark figure, over 45,000 LinkedIn users list AWS as their current employer, though those profiles aren't always accurate.

In America, AWS has dedicated offices in Seattle, San Francisco, New York and the Washington, DC area, according to the company's website, but it has workers elsewhere and in other Amazon offices, too.

The biggest challenge in such a split could be creating an operating agreement for Amazon to continue using AWS services, Morningstar analyst R.J. Hottovy said. The two sides of the business are more intertwined than people think because Amazon.com is actually hosted on AWS, he said, and making AWS an Amazon vendor would be tricky.

A spin-off is an unlikely event, Hottovy said, but "incrementally slightly more likely to happen now" as more people in government call for breaking up Amazon.

The business case for a spin-off

Spinning off AWS would be difficult, but not unheard of, Galloway - the NYU professor and marketing expert who famously predicted Amazon's Whole Foods acquisition - said. PayPal used to be the main payments provider for eBay and the companies figured out how to make it work when they split in 2015, he said.

"No doubt it would be a complex undertaking, but when the upside is tens or hundreds of millions of dollars, the incentive is present," Galloway said. "I predict by 2025, the most valuable company in the world will be AWS."

A major business case for such a spinout would be the elimination of perceived conflicts of interest between AWS and its customers, both current and future. A common refrain in the tech industry is that retailers, and anybody else who competes with Amazon, are reticent to sign on with AWS, given that the two are otherwise rivals.

Those concerns have proved a boon to competitors: Walmart in 2018, for example, signed a major cloud deal with Microsoft after reportedly telling technology vendors not to use AWS services if they want to partner with Walmart. Microsoft CEO Satya Nadella at the time of the tie-up said the companies' rivalry with Amazon was "absolutely core to" their partnership.

Time is a flat circle

The idea of spinning off AWS has come up often throughout the years. Oppenheimer analyst Jason Helfstein may have been among the first when, in 2013, he said an AWS spin-off was "inevitable" because potential AWS customers might compete with Amazon and not want to use the company's cloud service.

Helfstein has a different view now.

Back then, he said he felt AWS was more valuable than the market was giving it credit for, but Amazon has since helped solve that by changing the way it reports earnings. He also thought the potential customer conflicts would become too significant, but said, as of now, that doesn't seem to be the case.

Given the subsidiary's success, Helfstein said it's hard to say whether things would be any different if AWS spun out years ago, but that doing so would have put pressure on Amazon's balance sheet to find new funding sources for other parts of its business.

While AWS has struggled to pick up retailer clients because a lot of clients feel they're giving enough information to Amazon as it is, Hottovy, the Morningstar analyst, said, that dynamic is unlikely to change just because AWS officially splits from the retail side. He expects retailers would still be reluctant to work with AWS, even though a name change would be likely.

"Culturally, it would run against the core principles Amazon has," McIlwain, the Seattle-based VC, said. "They are much more focused on trying to do three things: consistently delivering great products at a good price in a convenient way. It's going to be really hard to make the case they are harming the consumer."