The Pentagon has pulled the plug on a controversial $10 billion enterprise cloud contract awarded to Microsoft (MSFT 0.06%), ending a four-year-old effort that has been stuck in neutral because of legal challenges brought by (AMZN -0.22%).

The Joint Enterprise Defense Infrastructure (JEDI) contract was an ambitious attempt to bring thousands of Department of Defense systems under one umbrella and give U.S. warfighters a real-time data advantage on the battlefield. But it has been marred by controversy since its early days, and military officials eventually decided it was best to hit the "reset" button.

"JEDI was developed at a time when the Department's needs were different," John Sherman, acting Department of Defense chief information officer, said in a statement. "In light of new initiatives like JADC2 and AI and Data Acceleration (ADA), the evolution of the cloud ecosystem within DoD, and changes in user requirements to leverage multiple cloud environments to execute mission, our landscape has advanced and a new way-ahead is warranted to achieve dominance in both traditional and non-traditional warfighting domains."

Although JEDI is done, the battle is far from over. Expect Amazon, Microsoft, and a range of government IT and defence contractors specialists to cash in in the years to come.

Aerial view of the Pentagon.

Image source: Getty Images.

A clash of the titans

For tech giants like Microsoft and Amazon, a $10 billion contract spread out over 10 years hardly moves the needle. Amazon's cloud business alone generated $45.4 billion in sales last year. But JEDI was important to the software companies as much for the cachet as it was for the revenue. A move by the security-focused Department of Defense to the cloud would be a great endorsement for either company's offerings -- a seal of approval they could use when trying to sell to corporate clients.

Amazon was widely seen as the favorite, and the company cried foul not long after Microsoft won the deal in October 2019. Amazon argued that then-President Donald Trump's long-standing feud with the company and CEO Jeff Bezos caused Trump to steer the contract to Microsoft.

The Pentagon's inspector general could find no smoking gun to indicate problems with the award, but the courts saw enough that they refused to dismiss the charges. As a result, what had been a key Pentagon modernization priority was put on hold indefinitely, raising speculation that the military would instead rethink its plans.

Build from the ground up

Even prior to the award controversy, JEDI had lots of critics inside the Pentagon. While the idea of simplifying a lot of different systems under one contract is appealing, critics worried that the attempt to squeeze everything under one umbrella would diminish the effectiveness of a lot of the tech components and create potential vulnerabilities.

But this digitalization effort remains a pressing Pentagon priority. Warfighter cloud capability is seen as a key in coordinating the rising use of drones and other autonomous systems, as well as to allowing personnel to better communicate in real time.

The new, revamped effort is called the "Joint Warfighter Cloud Capability" (JWCC), and like JEDI, the Pentagon expects to spend billions, but this time in a more focused way, and it expects to use multiple vendors. The department said it intends to seek proposals from "a limited number of sources" -- namely, Microsoft and Amazon -- with both cloud giants expected to get at least a piece of the overall project.

The Pentagon's move could also be good news for other cloud vendors, including Alphabet (GOOG -1.91%) (GOOGL -1.80%), Oracle (ORCL 0.27%), and IBM (IBM 0.23%). Government IT specialists like Leidos Holdings (LDOS -0.02%) and Booz Allen Hamilton (BAH 0.53%) could also benefit because they will likely have roles in integrating the systems into the large companies' frameworks.

The new contract's unspecified total amount and time frame could actually open the door up for additional spending, though it would be split among more vendors.

JEDI or not, the money will flow

The Department of Defense plans to spend the summer building its requirements and reaching out to vendors, with direct awards expected by April 2022. Given the man hours already invested in JEDI discussions, I would expect Microsoft to take a big role in the new arrangement, but with plenty of other vendors involved.

With the benefit of hindsight, perhaps JEDI was a long shot from day one. The massive scale and complexity of the effort created problems from the start, and the controversy that surrounded the selection ultimately sealed its fate.

But for investors, the big takeaway should be that IT modernization is an urgent priority that the Pentagon will likely spend tens of billions on in the years to come. JEDI is dead, but the opportunities for government tech specialists remain as viable as ever.