On Jan. 23, Amazon.com (NASDAQ:AMZN) continued its fight to bring the Pentagon's $10 billion JEDI contract back to the negotiating table, petitioning the U.S. Court of Federal Claims to halt plans to award the contract to Microsoft (NASDAQ:MSFT) instead. Amazon is claiming that the Department of Defense allegedly allowed President Trump to exercise "improper influence" over the contract process, ultimately costing the company a historic 10-year cloud computing contract. But while the President may make an easy target, it might be possible that AWS just wasn't equipped for the job.
Learning the ways of the JEDI
JEDI, short for "Joint Enterprise Defense Infrastructure," is one of the strategies the U.S. government intends to use to streamline its crucial computer infrastructure. The project will cover 1,700 data centers and move 3.4 million end users and 4 million endpoint devices off private servers and into the cloud. The $10 billion contract will run through October 2029, enabling Microsoft to develop cloud infrastructure across the Defense Department.
JEDI will require advanced cloud computing that can support a large-scale modernization. Hybrid cloud is an ideal IT strategy that would ease the transition to the cloud for such a highly regulated and more cautious organization. Hybrid cloud systems allow data and applications to be shared between major public cloud providers, a private cloud, or on-premise equipment.
AWS has five times more deployed cloud infrastructure than its next 14 competitors combined, is already used by over 5,000 government agencies, and has a $600 million cloud computing contract with the CIA, but there is one area AWS hasn't yet outperformed; hybrid cloud computing.
Microsoft's Azure Stack, rolled out in January 2016, was specifically designed to meet hybrid cloud computing needs within large enterprise business. Although Amazon does offer a comparable hybrid cloud solution called Outposts, it does present limitations when it comes to private or third-party providers, where it has tended to be dismissive of the benefits of on-premise private clouds. Since AWS is a less open private cloud, it's an unpopular storage option for sensitive industries like government.
For the JEDI project, hybrid cloud computing will be an essential strategy for the security-conscious Department of Defense as it aims to modernize its entire system in the cloud for security reasons. A hybrid cloud approach would enable the Department of Defense to keep certain data off the public cloud and decrease unwanted exposure, while still taking advantage of the cloud for data that doesn't have the same kinds of risk associated with it.
Would JEDI's return give Amazon a new hope?
It's no secret that Amazon founder Jeff Bezos and President Trump aren't the best of friends. Many have called Amazon's case in the Court of Federal Claims an unprecedented attack directly aimed at the president himself over accusations of improper intervention and personal animus. In a court filing this past November, Amazon alleged that Trump engaged in "public and behind-the-scenes attacks" to steer the contract away from Amazon Web Services out of spite for his "perceived political enemy."
According to Amazon's filing, "The publicly available record of President Trump's statements and actions demonstrates that he repeatedly attacked and vilified his perceived political enemy — Mr. Bezos, the founder and CEO of AWS's parent company, Amazon, and who separately owns The Washington Post – and then intervened in this procurement process to thwart the fair administration of DoD's procurement of technology and services critical to the modernization of the U.S. military."
The Pentagon has insisted that the contract went to the more deserving company. Microsoft stands to see a 20% increase revenue in its Azure cloud computing division within the first year of the JEDI contract. On the other hand, if Amazon were victorious in overturning the Pentagon's decision, AWS revenue could grow by 6.5%. That's a sizable increase for either company, but undoubtedly more favorable toward Microsoft.
It's safe to say that Microsoft isn't too worried about losing the contract to Amazon since it's unlikely that they'll be able to prove the White House interfered in the Pentagon's decision to award JEDI to Microsoft. If Amazon successfully makes its case, investors might want to brace for at least a short-term decline in Microsoft shares. On the other hand, if Amazon loses the case, Microsoft investors can breathe a sigh of relief, because that outcome would suggest more business from the federal government is likely to come Microsoft's way.