Last October, the U.S. Department of Defense awarded Microsoft (NASDAQ:MSFT) its coveted Joint Enterprise Defense Infrastructure (JEDI) cloud contract. The deal, which will be worth up to $10 billion over the next 10 years, allows Microsoft to provide cloud infrastructure services for the Pentagon's business and mission operations.
The JEDI deal was a major victory for Microsoft and a significant setback for Amazon (NASDAQ:AMZN) Both companies entered the final bidding round after outbidding other competitors, including IBM and Oracle, in an earlier round.
Amazon had been widely considered the front-runner since its Amazon Web Services (AWS) platform already serves U.S. government agencies with its secure GovCloud regions. Microsoft's victory seemed to end the JEDI battle, but Amazon continued to challenge the validity of the deal. Amazon's complaints have caused delays, but is it running out of ways to stop Microsoft?
Why did Amazon challenge the DOD's decision?
Amazon claimed the DOD's decision was improperly influenced by President Donald Trump, who publicly clashed with both Amazon and CEO Jeff Bezos in the past. Amazon's complaints led to a temporary injunction on the JEDI contract as the DOD requested 120 additional days to review the reward process. Amazon also filed a lawsuit against the DOD to challenge the deal.
But in mid-April, the DOD declared the officials who rewarded the contract to Microsoft "were not pressured" by any senior leaders or the White House. However, a federal judge subsequently warned the DOD that Amazon's legal challenge could still be successful if it can prove the Pentagon made any errors in its evaluation process.
The DOD then declared it needed more time to "reconsider" some aspects of the JEDI deal, and asked the judge to postpone Amazon's lawsuit. The judge granted the request, despite Amazon's protests, and delayed the case until August.
Microsoft argues it won the bidding process fair and square, and the Pentagon's attorneys claim that Amazon is merely seeking a "do-over" of the deal. For now, any work between Microsoft and the Pentagon has been suspended by a temporary restraining order.
What is Amazon trying to accomplish?
AWS and Microsoft's Azure are the two largest cloud infrastructure platforms in the world. However, Azure is growing at a much faster rate than AWS: Amazon's AWS revenue rose 34% annually last quarter, but Microsoft's Azure revenue surged 62%.
Between the fourth quarters of 2018 and 2019, AWS's share of the global cloud platform market dipped from 33.4% to 32.4%, according to Canalys, while Azure's market share jumped from 14.9% to 17.6%.
Azure is growing faster for three main reasons: It's tightly tethered to Microsoft's other services, it's increasingly popular with retailers that have been burned by Amazon, and it's cheaper for Windows Server and SQL Server users, who are granted prices for "bundled" licenses instead of stand-alone services.
AWS generates most of Amazon's operating profits and supports the growth of its lower-margin marketplaces. If Azure keeps pulling customers away from AWS, Amazon's profit growth could decelerate -- which would leave it less room to expand its e-commerce ecosystem with loss-leading strategies.
AWS generated $35 billion in revenue, or 12% of Amazon's top line, in 2019. Assuming the JEDI contract pays out $1 billion annually over the next 10 years, it would only lift its AWS revenue by less than 3%.
However, losing the JEDI contract to Microsoft could also tarnish the AWS brand: If the Pentagon trusts Azure with its most sensitive data, other top enterprise and government customers could follow that lead and boost Microsoft's market share.
Is Amazon just delaying the inevitable?
Amazon likely realizes that Microsoft's JEDI victory could cause big problems for AWS. However, the DOD's recent moves indicate it isn't willing to budge on the issue, and it's doubtful Amazon will ever win the contract -- even if it pulls Microsoft back for a rematch.