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Microsoft’s Pentagon Cloud Contract Controversy: Why It’s a Big Deal

By Donna Fuscaldo – Nov 22, 2019 at 10:19AM

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Microsoft just won a huge JEDI cloud contract from the Pentagon, but Amazon isn't bowing out quietly.

Microsoft (MSFT -0.42%) just won a huge cloud contract from the Pentagon, outbidding Amazon (AMZN -0.82%) and a handful of others. But the Pentagon contract, which is valued at $10 billion over 10 years, isn't a done deal.

Amazon, which was favored to win the contract, isn't going away quietly. The company has vowed to protest the decision, claiming bias on the part of the government and unfair intervention on the part of President Trump.

Ever since the Pentagon announced the Joint Enterprise Defense Infrastructure (JEDI) cloud contract, the leading cloud players had been pulling out all the stops to win it. JEDI is one component in the Pentagon's efforts to modernize. The initiative relies on artificial intelligence, Internet of Things devices, and data analytics to enable the Pentagon to be more agile.

Computers connected to a cloud.

Image source: Getty Images.

Pentagon contract mired in controversy from the start

Through JEDI, the Pentagon wants to be able to access data from the cloud, whether it's on the battlefield or in a remote corner of the world. As it stands, the Pentagon's systems are antiquated, making it hard to access and share data. Given the size and scope of the contract, it was expected that Amazon and Microsoft would go head to head to win it.

Bidding for the contract had been mired in controversy from the start. Some of the bidders -- including IBM (IBM 0.02%), Microsoft, and Oracle (ORCL -0.32%) -- did not like that the Pentagon wasn't splitting the contract across vendors. The Pentagon wanted a single vendor because it believes that it's the best approach to enhance security, improve data access, and make it easier to incorporate more cloud computing technology in the future. Microsoft argued that approach was the opposite of the one the cloud industry was taking but was all in with its bid nonetheless.

Oracle and IBM emerged as vocal critics of the process, crying foul over Amazon's unfair advantages. After all, Amazon Web Services (AWS) is the undisputed leader in the sector, even if Microsoft is chipping away at its dominance.

Despite all the pushback in August, it appeared Amazon would be the eventual winner. Then President Trump stepped in. According to media reports, the contract decision was placed on hold as the Trump White House began an examination of Amazon's bid. Trump was already a critic of Amazon CEO Jeff Bezos and told the press during a meeting with the prime minister of the Netherlands that his administration was receiving complaints about the bidding process. A few months later, the Pentagon decided to award the contract to Microsoft, sending its stock higher and prompting Amazon's warning that it will challenge the decision.

Amazon is not going away quietly

The Federal News Network obtained a video of Andy Jassy, the CEO of Amazon Web Services, in which he said the company has filed an official intention to protest the JEDI contract to the Pentagon. "I think when you have a sitting president who's willing to publicly show his disdain for a company and the leader of a company, it's very difficult for government agencies -- including the DoD -- to make an objective decision without fear of reprisal," Jassy said, according to the report. He said AWS wants to "shine a light" on what happened and argued that AWS's platform is more advanced than Microsoft's. "I think that if you do any thorough, apples-to-apples, objective comparison of AWS versus Microsoft, you don't come out deciding that they're comparable platforms. Most of our customers will tell us that we're about 24 months ahead of Microsoft in functionality and maturity," Jassy reportedly said.

Amazon's move will likely draw out the final awarding of the contract, which has already been delayed. And landing it would be important for both Amazon and Microsoft, which is why the e-commerce giant is willing to fight. Both companies are aiming to expand their cloud businesses by getting more government work. The JEDI contract will be a huge selling point when bidding on other government contracts. The military takes security seriously when working with vendors, and if one already has a proven track record, it's likely to get more business. It doesn't hurt that the federal government is reportedly gearing up to spend $40 billion on cloud computing initiatives in the coming years.

Losing the contract also hurts Amazon's reputation more than it would Microsoft's. AWS is the leader in the cloud market, having entered it earlier than its rivals. Sure, Microsoft has been slowly chipping away at AWS's dominance, but it still remains a distant second-place player. Amazon has also shown it is serious about winning government contracts, recently beginning to hire for its second headquarters, which will be located just across the Potomac River from Washington, D.C., and near the Pentagon.

While the saga of the JEDI deal won't end anytime soon, one thing is for sure: Winning the contract would be in the best interest of both cloud players and their investors now and in the years to come, especially as the government gears up to spend tons of money modernizing its vast computer systems.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Donna Fuscaldo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Microsoft. The Motley Fool is short shares of IBM and recommends the following options: long January 2020 $200 calls on IBM, short January 2020 $200 puts on IBM, long January 2021 $85 calls on Microsoft, and short January 2020 $155 calls on IBM. The Motley Fool has a disclosure policy.

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