One big disadvantage public companies have over private ones is that they are under a lot more scrutiny from shareholders, courtesy of the financial media. Maintaining a long-term focus is a challenging task for exchange-listed names when investors tend to freak out over one bad quarter.
So I have to give credit to Amazon (AMZN 1.53%) CEO Jeff Bezos for educating his shareholders on the meaning of long-term focus. The company was founded 21 years ago and the stock was listed 18 years ago, and in the entire intervening period, one thing that has stayed exactly the same is Bezo's focus on the consumer.
The journey from a $500 million to a $200 billion company is inspiring for every start-up. Amazon was one of the early movers to recognize the opportunity in both e-commerce and cloud computing infrastructure. Its superior technology infrastructure supported growth, and the company emerged as the market leader in both businesses.
However, complications multiply as a business grows, including keeping the entrepreneurial culture intact among employees, maintaining the product and service quality, removing operational inefficiency, and understanding a growing consumer base. Imagine the magnitude of those complications if a company has a variety of businesses, such as online retailing, cloud service, content production, and industrial supply, and a suite of dream projects. The target customers, capital structures, growth prospects, strategic plans, and physical infrastructures of these businesses have hardly anything in common.
Given the rising competition in each of these areas, with every other company now ready to do anything to win customers, Amazon's chances to become a half-trillion dollar company from here will be greater if it embraces specialization and breaks up its business into three sections: e-commerce, AWS, and an Alphabet (like Google's).
Value of specialization
Imagine a guy who wants to be an actor, a producer, a director, a writer, and an editor in one movie! What are the chances of that movie turning out successful?
Specialization is often the best path for a sustainable and productive business. Take the example of the credit card industry. We have three companies involved: an acquirer, an issuer, and a transaction network. The only reason all three co-exist is that each one is better off specializing in its own business. If there is a huge growth opportunity in a particular industry, nothing is more useful than playing a specialized role and attempting to build a competitive advantage. It leads to a better use of resources and higher returns on investment.
Moreover, even though each business segment seems isolated at the bottom level, as you move to the top of the management chain, the wall between them gets blurred. In the credit card example, how efficient can management be if it has to think about generating deposits, distributing card machines to businesses, selling credit cards to consumers, and processing transactions? And don't forget tackling security threats!
This concept is valid for mature companies as well. When they consolidate, they look for companies with strong synergies so that revenue and profits grow faster.
Coming back to Amazon, let's assume that the company has shareholders' backing and the internal capacity to be the best at everything. Then why not take a page from Google's book and spin-off its relatively developed businesses -- consumer e-commerce and AWS -- and create its own version of Alphabet in which it can put all of its still nascent (or not-so-successful) experiments, ranging from Amazon Business to content creation to hardware and other products manufacturing? The common technological infrastructure can be either shared as an IP or leased from one company to another. In the future, as each of those businesses matures, it can be spun-off to be a new Amazon ready to tell another inspiring story.
Finally, these businesses will attract a more appropriate shareholder base, who can stay committed to the management plan.