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Should Amazon spin-off AWS? — August 26, 2019

Should Amazon spin-off AWS?

A breakdown of why some people think Amazon should spin-off AWS — and why some say it shouldn’t.

Amazon is two companies. The first is the one we all know about. It is the marketplace, the place to go to buy and sell on the internet. Buying a Prime membership gives you access to a lot; free shipping, exclusive savings, deals, and streaming video and music services.

The last of these, the streaming services, gives us a glimpse at the other business that makes up Amazon. It takes advantage of Amazon’s logistics expertise. This is one of Amazon’s main competitive advantages, as noted even by its leadership.

Amazon uses a lot of bandwidth. But it doesn’t use it all the time. It was better and cheaper for Amazon to build data centres. So, what could it do with that infrastructure when it was not being used?

The answer was simple; make money by renting it out. This was the beginning of Amazon Web Services (AWS). It began in 2006, and since then it has exploded. It is now the largest cloud computing provider in the world.

AWS provides the backbone for some of the biggest online firms in the world. It lets you binge-watch terrible movies and engrossing series on Netflix. It enables you to watch as streamers play games on Twitch. AWS helps you book your next holiday on Airbnb. That focus on selling to enterprises, rather than consumers, is one of the significant differences between AWS and Amazon.

Another came in 2015. It began reporting its financial results separately from the rest of Amazon. That gave us a glimpse at how much Amazon relies on AWS.

During the second quarter of 2019, AWS took in $8.38bn. That only represents an eighth of Amazon’s revenue of $62.4bn during the same period. But its operating income of $2.1bn was over two-thirds of Amazon’s $3.1bn.

Amazon without AWS wouldn’t be as big or valuable as it is today. That has led many to ask: shouldn’t AWS be its own company?

Some influential people in the industry think that Amazon should spin off AWS into its own firm. Number one among them is Scott Galloway, a professor at NYU and a tech industry analyst. Another is Mark May at Citi Research.

There are plenty of good reasons why it is a good idea.

Regulators are looking at Amazon. Right now, there are three significant investigations in the US looking at the tech industry giants. One was launched by the Federal Trade Commission, another by the Department of Justice and a final one by attorneys-general of around twenty US states.

Spinning off AWS might take the heat off Amazon. It wouldn’t have as much power in the market. It wouldn’t be the dominant player in two massive sectors, e-commerce and cloud computing. It could save Amazon billions of dollars in fines or restructuring costs. It might be forced to do it anyway, so why not do it now?

AWS dominates cloud computing. The other two big players in the industry are Microsoft’s Azure platform and Google Cloud. None are separate companies. Investors have nowhere to put their money if they want to bet on only cloud computing.

If you don’t think digital advertising, e-commerce or operating systems will grow as much as cloud computing, tough luck; you’re saddled to an investment you only half believe it.

If AWS goes its own way, it will hoover up all those investors who believe in cloud computing above everything else. This would boost the value of AWS beyond the hit Amazon would take by losing it. An AWS unshackled from Amazon could focus on cloud computing and dominate the market to an even greater extent.

AWS, right now, subsidises the rest of Amazon. It could use that money instead to invest in itself or pay dividends to shareholders. AWS’s operating margins, how much money is leftover from a sale after the costs of goods sold and operating expenses, since 2013 is 23%. For the rest of Amazon it’s 1.5%.

Amazon uses that reliable money sitting in the bank to fund research. Between 2001 and 2009, covering a period when AWS wasn’t even a thing, Amazon’s research budget grew by around 19% each year. From 2010 to 2018, that figure was 42%.

New products, some of them failures, are continually emerging. The Kindle, Fire phone, Alexa and others are, in effect, paid for by AWS. If they fail, it is no big deal. Unlock that money and AWS would be one of the ten biggest companies in the world.

That’s what Scott Galloway believes. He has form when it comes to predicting what Amazon will do. He called them buying Whole Foods, and he predicted where their new headquarters would be. Scott knows Amazon.

But others aren’t as convinced.

All those subsidises leaving Amazon would hit it hard. Those small margins from its retail business would stop Amazon doing what it wants to do: investing cash flow into growth rather than giving back money to investors as dividends.

A recession will hit Amazon, as a consumer-facing business, hard. If people have less money, then they have less money to buy on non-essentials which they shop on Amazon. Enterprise customers, which rely on AWS as the backbone of its product, can’t stop buying from AWS. Their costs are for essentials. Keeping AWS will limit Amazon’s exposure to any volatility in the market.

AWS also enjoys the cheap money Amazon can generate. Setting up a modern server farm is expensive. In the second quarter of 2019, AWS had a capital expenditure of $3.31bn. Amazon issued a 3-year bond in 2017, which yields 2.53%. China’s 3-year government bond has a yield of 2.8%.

When you can borrow money cheaper than China, you’re a business in a good place. AWS wouldn’t be able to raise capital at such a cheap rate. That would make its large capital expenditures a lot more expensive. This handbrake on growth would limit its chances at dominating the sector.

There are good arguments on both sides. But what will happen? What is the hot take?

The answer lies in Jeff Bezos’s philosophy.

He has set up Amazon to chase long-term growth rather than short term profitability. If he wanted a quick buck, then AWS might well be spun off. But that isn’t the case. For the foreseeable future, AWS will remain part of Amazon.

When Bezos wants to cash out and rake in the piles of dollars that are waiting for him, AWS will become its own firm. It won’t happen before that. When it does happen, buying things on Amazon, then, will become a lot more expensive.

Sheaffer 300: Fountain Pen Review — August 23, 2019

Sheaffer 300: Fountain Pen Review

Pens, especially fountain pens, mean so much more than their function. Take the Shaeffer 300 for example. Or, more precisely, my Shaeffer 300. I could give you a product breakdown, my trying-to-be-objective thoughts but then that wouldn’t really be telling you about it.

This pen is my oldest one. My parents gave it to me when I finished school. It was the pen I used when I first discovered the joy of writing with fountain pens. I could tell you that compared to some of the others I have got in the meantime, the Lamys, the Pilots, the Kawecos, it is a solid but unspectacular writer. It has a smoothness to it which is only interrupted by a tiny scratchiness which actually works to give you some nice feedback. The stiff nib doesn’t give much – there is little variation in line width.

Sheaffer 300 Fountain Pen Review Capped

There are definitely some drawbacks to it though. The body is made out of smooth resin broken up by chrome finishings. It is a classic cigar shape, cut at both ends as if you were to smoke it. The grip tapers toward the nib but is smooth. It can be uncomfortable to grip it for a long time as you do have to pinch it. It is top heavy when posted, though the cap does some nice give to the clip. It feels like it was designed to actually sit in a pocket.

But it looks grown-up. I got it when I thought I was a grown-up, though I had a lot of growing up to do. Over the years I have had – now over a decade – I have changed and developed. I developed a love for stationery in general and fountain pens in particular. Coming into my own I found out it wasn’t the best pen you could buy. Even for the £38.50 (at the time of writing) you can get it on Amazon for right now it is beaten handily by a Pilot Metropolitan for looks and action. Even now I find myself reaching for a TWBSI Eco or Kaweco Sport.

Sheaffer 300 Fountain Pen Review Uncapped

But the love for fountain pens isn’t rational. I will write a piece about why fountain pens are great writing tools but I didn’t get into them because they were the best writers. A bic, at the end of the day, records the same thing on the same paper. The cristal doesn’t need to be cleaned, it can be easily carried on a plane. You don’t mess up your hands every time it runs out of it. But a bic is ugly, it is just a pen.

A fountain pen can be so much more. It lasts. From graduation to going to university, getting your first job and moving countries. I would not have carried the same bic with me as I did my Shaeffer.

Fountain pens are a connection to the past. In how they enhance beautiful handwritten notes in the age of typing and the word processor. In how they last and stay with you. In how they change and remain the same.

Having a passion for fountain pens isn’t rational. It is not cheap. It is not neat. But the joy you get from using beautiful tools can not be replicated. Rationality is overrated.

So, I give my Shaeffer 300 a 5/5 and would recommend you look at a different pen before you pick one up.

Vital statistics:

Nib: Medium

Price: £52.25 (Amazon)

Length: Capped: 140mm Uncapped: 120mm Posted: 154mm

Diameter: 13mm

Weight: Cap & Barrel: 46g Cap: 23g Barrel: 23g (full ink resevoir)

Materials: Black lacquered brass barrel with articulate pocket clip on cap

The box it came in was quite nice, I think, but I’ve lost it. 

Tested with Diamine Blue/Black ink on Clairefontaine Triomphe A4 paper

Reimagining the Western canon — August 21, 2019

Reimagining the Western canon

Do we even need a canon?

The great books are those ones that we must read. They form the foundation of your appreciation of what great literature is. In the Western world, we have inherited centuries, millennia even, of literature. Some of this makes the cut. Some of this outlasts fads and fashions. It transcends the boundaries of time. This is the Western canon. All that’s good, and great, and true.

An educated person must tick several boxes. One of these, the most important, is to have read the great books.

Shakespeare, Kafka, Eliot, Woolf, Milton, Joyce all find themselves on this list of worthy literature. I’ve read some of them — but not all.

Does that disqualify me from talking about literature? Does that stop me from being able to enjoy the books I do read?

There is a problem with the canon. It is unwieldy. Collections of the traditional canon, for this I’m using the Great Books of the Western World as a guide, run to dozens of volumes (there are others out there, such as Harold Bloom’s list). Hundreds of books and plays. Once we learn to read, to really read, this pile is dumped in our laps. It comes with a sign: read this or else.

Collections of the canon cost around £1,000 on Amazon. It is expensive, intimidating, and even though it stretches to what must hundreds of thousands of pages, it includes both too much and not enough.

The idea of a canon emerged in the Western world. That original canon was not one we would recognise today. Medieval students studied the ancient masters. Cicero, Aristotle, Euclid, Sophocles and Thucydides made up their education. The contemporary and vernacular was at best second rate if not dismissed entirely.

That began to change in England in the late 17th century. It was the beginning of English global power and the emergence of the idea of the nation-state. That idea spawned another.

National culture and cultural identity were becoming increasingly noticeable. The educated middle class was emerging and growing, though without as much Latin or Greek as previous generations. They wanted to read something worthy and English.

Photo by Alex Block on Unsplash

Great essayists, the forerunners of blogs, were making their mark. The most famous of these was Richard Steele, who wrote and published The Spectatorand The Tatler. In The Spectator, Steele compared Milton’s Paradise Lost to the ancient epics.

While he found some faults in the poem, he ranked it on the same level as Homer and Virgil. For a culture that had before appreciated only the venerable, the literature that had emerged from the enormous gap of time with its reputation still intact, to praise the (relatively) modern was a break. The fact that it was a Christian poem, as opposed to the paganism of the past, no doubt helped elevate it to forming the first part of the nascent English canon. Shakespeare, of course, was also added to this small list. The ancients still reigned but there was now the possibility of new entrants.

The canon grew over the centuries. More books were added. Names such as Pope, Swift, Sterne and Fielding joined the ancient Greeks and Romans, as well as a growing number of English speakers. Years past and the canon grew. It stretched beyond the British Isles to take in French, America, Russian and German writers.

Still, they all had something in common. They were all white men. In the more inclusive culture after the Second World War, that began to change. Slowly there were rebels, dissenting voices that said more voices should be added. Woolf, Murdoch, Walcott, McCullers, Baldwin, Naipaul, Tagore, Marquez got the recognition their writing deserved.

Photo by Giacomo Buzzao on Unsplash

After reading some of these masters, their voice and experience add new ways of understanding, thinking about and appreciating the whole breadth of human life. The canon is now more representative of the world we live in. That is a good thing. But it stretches and strains to try and cover every aspect of life. It has attempted to become an exhaustive list, rather than a core.

The list is huge. No one can read all of it. No one can take in all of it (except for Harold Bloom). It has become a checklist, one that can never be completed, and that size means it is failing to do its job.

Would it be better to abandon the idea of a canon? No. There are many benefits to having a recognised core of texts we should all be familiar with.

The Irish poet W. B. Yeats is definitely part of the canon. But it wasn’t until I had read some of his poems, most notably The Second Coming and Sailing to Byzantium, that I understood the influence he had. And what having a canon does for a culture.

I could see homages, little quotes, built into the titles and body of other works. Joan Didion’s collection of essays Slouching toward Bethlehem¸ steals its title from The Second Coming. Knowing that coloured my whole reading of that book.

Having a canon allows those books in it to act as the body language of literature. Not enough to be noticed all the time, but noticeable by its absence.

Slouching toward Bethlehem as a title told me enough to understand what Didion was trying to do with her work. It served as a three-word introduction to the collection. It was neat and elegant. It served its purpose perfectly.

The canon represents the critical and influential books of society. It provides the cultural foundation on which others can build. A canon is necessary, even just for university reading lists. Exploring the great works of the past allows people to build on it, enhances their reading of contemporary work, and allows people to talk with one another with a common understanding. A canon is needed.

The canon we have inherited is bloated. It tries to represent all our current culture rather than the main texts. To take even the field of literature and poetry, leaving alone film, music, and nonfiction, the time needed to get caught up, to even arrive at the conversation, is too much.

Photo by Eli Francis on Unsplash

There are two ways of building a canon. You can make a reading list out of books that can’t, under any circumstances, be left out or you can create one based on what could be included, what is worthy to sit beside the other titles. We have been building our canon using the second definition. We should keep that. These are the masterpieces. But we should also make one using the first.

I don’t have the background to put that together. No one person does. It involves a conversation. Nor do I want it to be a project that returns the canon to its old unrepresentative roots. If nothing else, it wouldn’t be doing its job of allowing us to have a conversation.

A lot of discourse today revolves around oppression and exploitation. To talk about these things properly, we need Baldwin and Morrison. We need Rushdie and Naipaul.

The first book, though, will have to be the Bible. Even in an increasingly secular world, the Bible has informed so much of the cultural output of the past, of the language we use and how we think about morality. It is a given.

Selected works of Shakespeare are added to the list too. Not all of him, I don’t think reading Cymbeline adds much, but the significant plays. Romeo and Juliet, Hamlet, Macbeth and A Midsummer Night’s Dream, should be enough to get people familiar with much of Shakespeare’s influence on our world.

Yeats, of course, would be part of it too. He allowed me to hear what Joan Didion was saying. Those three little words carried with the weight of allusion and influence. They spoke to me and made me listen with a true ear. That is the power of the canon.

Now it must regain that power. We must look at the canon we have constructed and see it is no longer fit for purpose. We must reduce it to something an inspired reader can get through. We must allow it to regain the power that it once had.

Thanks for reading, I’d love to hear what you think are the books that people have to read are, as well as if you disagree with any of my limited choices.

Why WeWork’s IPO will be a failure — August 19, 2019

Why WeWork’s IPO will be a failure

WeWork’s recently released IPO prospectus should have sent investors running. The office and hot desk rental company, after SoftBank pulled out of a $16bn investment, is looking to raise up to $3bn from the public market. It won’t be getting a dollar from me.
Photo by Shridhar Gupta on Unsplash

WeWork’s business model is simple. It leases property from landlords, does them up, and sells spaces to self-employed workers, start-ups and larger enterprises. It typically leases a location for 15 years and sells desk space on a monthly basis. It thinks that it should be worth $47bn.

It is, instead, likely to join the other big unicorns who launched their IPOs this year in stumbling to a much lower valuation. Think of Uber and Lyft.

Why won’t WeWorks model work?

They take on long-term obligations and only require short commitments from their members. They have $47bn in lease obligations, and that figure will only grow as they open more locations. They pump loads of money into their sites, making them fit for a hip, millennial freelancer or start-up. That’s where a lot of their losses come from, but that high up-front cost must be recouped over more than a decade. It would be risky in a stable, growing economy. Right now, we’re headed into the first recession for over a decade.

Will the coming recession hit WeWork hard?

The UK and Germany both announced that their economies were shrinking last week. The stock market took a considerable hit from the news. All around the globe, people are expecting a recession sooner rather than later. Trade wars, Brexit, and a mature business cycle all contribute to that feeling. Yield curves have inverted. Such an inversion has preceded every recession for the past fifty years. Only once have yields inverted without a recession happening.

The S&P 500 peaks within 3 to 22 months of a yield curve inversion. We could have two years before a downturn hits, but it may happen a lot quicker than that.

What is a yield curve inversion?

Government’s sell bonds to finance their running costs. These are very secure, not many countries default on their debt. But things are always more secure in the short term when we know more of the risks an economy might run into. This means that usually long-term bonds give better returns than short term ones as there is more risk involved. When a yield curve inverts, markets believe that short term risks are greater than the long-term ones and want to protect their money. In other words, bad times are coming sooner rather than later.

Recessions are bad for all parts of the economy, so why should you be more concerned about the effect one will have on WeWork in particular?

WeWork’s customers are mostly small teams, freelancers and the self-employed. Renting a hot desk in a WeWork location in London costs around £600 per month. When a recession hits, it hits those small businesses and freelancers hardest. An easy cost to cut is that hot desk. Someone is £600 richer and can just work from the kitchen table. Not as lovely as the kombucha, microbrew offerings of a WeWork, but you’ve got to save money. And it is a natural expense to get rid of. These memberships are done on a monthly rolling basis.

Photo by Dan Gold on Unsplash

WeWork recognises this problem and has been trying to attract more enterprise customers. In their IPO prospectus, however, they have redefined what enterprise customers are, from businesses with 1,000 employees down to those with 500. Even then, they only make up 29% of WeWork’s business.

When the next recession hits, there will be a lot of space in WeWork locations.

Is WeWork overvalued?

The company’s sky-high valuation, around twenty-six times revenue, is based on its reputation. It brands itself as a tech company, in the same field as Facebook, Google or Amazon. ‘Technology’ is mentioned 93 times in their prospectus. But it isn’t a tech company. It rents office space. It might rent the most beautiful office space on the market, but it is still renting office space.

The brand of WeWork is doing a lot of heavy lifting. It calls customers ‘members’, its mission is to ‘elevate the world’s consciousness’, and it opens its IPO prospectus with the lofty declaration that ‘[w]e dedicate this to the energy of we — greater than any one of us but inside each of us’. That is a whole lot of bullshit. It rents office space.

IWG, which rents office space out, has revenues of over $3.25bn, much more than WeWork’s. Yet it is only valued less than $5bn. It doesn’t have the explosive growth of WeWork, but that growth is risky in risky economic circumstances.

Are there any signs of optimism?

In 2018 WeWork brought in $1.54bn. That’s nearly double the $764m it did in 2017. That’s stupendous growth and would auger well for a lot of companies. The losses, though, are on a similar trajectory. In 2017 it lost $900m, in 2018 that was $1.9bn. It costs WeWork $2 to make $1.

That could change in the future. High up-front costs recouped over decades unless a recession hits, can be sustainable. But even WeWork doesn’t think this is likely:

“We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level… for the foreseeable future.”

Adam Neuman, CEO and founder of WeWork, doesn’t even believe in the company. He has sold $700m of his stock already, and the prospectus even says ‘there can be no assurance that Adam will continue to work for us or serve our interests in any capacity’.

WeWork is a lousy bet. Its fundamentals are lacking, it’s facing a tight market, and it will be found out. Can a successful business be built of its model? Yes, but IWG has already done it. It’s not sexy or hip. But it works. The problem is that it has a value less than a tenth of WeWork’s.

When WeWork IPOs, it will be the early investors and backers who make money. The rest of us will soon be held WeWork shares that are plunging in value. Its backers have pumped the company up; now they’re ready to dump the stock before it falls.

Originally published on Medium