Amazon is pulling out of New York City, but analysts say that the most important part of the HQ2 strategy is proceeding as planned (AMZN)
- On Thursday, Amazon announced it will no longer build a second headquarters in Long Island City in New York.
- Amazon will still build HQ2 in Crystal City, Virginia, where it can focus on hiring talent there and amplifying its federal presence near Washington, DC.
- Analysts believe that building a headquarters near Washington, DC is also a strategic move to win a $10 billion cloud contract with the Pentagon called the Joint Enterprise Defense Infrastructure (JEDI) contract.
- Analysts say canceling its plans for a New York headquarters will not affect the near term or long term outlook on Amazon, nor will it impact its business strategy, especially since Amazon already has a presence in New York.
Amazon is pulling out of its plans to build its second major headquarters in New York, but an arguably more important piece of the HQ2 strategy remains intact, as it still plans on coming to the Washington DC area.
On Thursday, Amazon announced its decision not to move forward with building a headquarters in Long Island City, Queens, nor will it reopen a search for another headquarters. It does plan to continue building out a headquarters in Crystal City, Virginia, as well as another office in Nashville.
In moving to Virginia, Amazon will get better access to the federal government. That, some on Wall Street believe, is more important to the future of Amazon than a potential campus in New York City.
"They've doubled down on government and moving to Crystal City in the shadows of the Pentagon," Daniel Ives, managing director of equity research at Wedbush Securities, told Business Insider. "That's strategically the bigger headquarters move that investors are paying attention to rather than [New York]."
It's important to Amazon's business, say analysts, as it makes the company more competitive for large government contracts — particularly in the case of Amazon Web Services, the company's market-leading and very profitable cloud computing arm. But beyond dollars and cents, some believe it could give Amazon more of a voice in politics.
"From a strategic standpoint, if Amazon brings 25,000 to 50,000 jobs to the DC area, no one's going to want to regulate Jeff Bezos," Chris Cornillie, federal technology market analyst at Bloomberg Government, told Business Insider.
"It's going to be much more difficult from a policy perspective to reign in Amazon as a potential monopolist if he is to increase his Washington area presence," he says.
Helping Amazon's business
By building a headquarters for 25,000 employees in the Washington, DC area, Amazon Web Services is likely working to make itself a better candidate for the winner-take-all $10 billion JEDI cloud contract with the Pentagon, Ives previously told Business Insider. Amazon is seen as the frontrunner in that race, with Microsoft viewed as a strong second.
Ives' argument, first made back in November, is that opening a headquarters in vicinity of Capitol Hill is a way for Amazon to start undermining the 40-year relationship between Microsoft and the Department of Defense.
Neither Microsoft nor any other cloud provider has an office as big as Amazon's planned HQ2 site in the area. That could give the retail giant an edge in building relationships with the lawmakers and government officials who make and approve technology decisions for the whole country, Ives has argued.
And it's not just its cloud business that could benefit from having a larger presence in DC. Those relationships open the pathway for Amazon to sell retail products to agencies of the federal government, including basic office supplies like staplers and pens, says Bloomberg's Cornillie.
"In general, the idea that you're bringing a second headquarters and a knowledge base and experience base signals commitment to working in the federal market," Cornillie said. "...If the commercial pilots that are currently underway are successful, it could open tens of billions of dollars in new revenue to a company like Amazon."
And finally, the backtracking on plans to open in New York City could mean a windfall for the Crystal City and Nashville offices, as Amazon suddenly has more leeway in its hiring budget.
"I do think there's a possibility that both Nashville and Crystal City could be beneficiaries of even more hiring," Mark Hamrick, senior economic analyst at Bankrate.com, told Business Insider.