The U.S. federal government has not embraced a multi-cloud approach as the private sector has. Microsoft (MSFT 2.63%) is taking steps to address the issue that could change the landscape for massive government cloud contracts. Here is what they're up to.
Embracing change
Each cloud provider has a unique set of software and analytical tools available to their cloud-hosting infrastructure customers. Most enterprise-level corporations have adopted a multi-cloud approach to take advantage of services from multiple cloud providers. As significant cloud customers, U.S. government agencies typically hire one cloud provider, which could hamper their ability to utilize all the cloud has to offer.
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To address the issue, Microsoft has approached some of the biggest cloud providers to form a consortium that would lobby Washington to use multi-cloud platforms within its several agencies. Noticeably missing from the group is Amazon (AMZN 3.53%).
In addition to holding the lead position in the global cloud market, Amazon has nearly half of the U.S. and Canadian public-sector cloud market. Most of the cloud business coming from the public sector is single cloud. For example, last year, the National Security Agency chose Amazon for a $10 billion its single-cloud contract.
In response, an Amazon spokesperson called Microsoft's efforts self-serving and said public sector customers should be free to choose their cloud providers. A Microsoft spokesperson said that the company consistently advocates for a multi-cloud platform as a commercial best practice and encourages the federal government to do the same. Cloud infrastructure and software provider Oracle chimed in with support for Microsoft.
Raising concerns over a single cloud provider has worked against Microsoft in the past. Last year the Pentagon awarded a hotly contested cloud contract to Microsoft after Amazon was considered the favorite. Controversy ensued after the award, and the Pentagon eventually reneged on the contract and went with a multi-cloud platform. The CIA has also moved from a single cloud provider to multiple cloud vendors. So, change may already be afoot.
What does it mean for investors?
Microsoft's new stance comes at an interesting time for the company. Its Azure cloud business segment was estimated to have grown 46% in the second quarter, up slightly from 45.6% estimated in the first quarter. Those growth numbers are impressive, but they're down from the 60% growth estimated in 2020. In addition, Alphabet reported that its first-quarter revenue growth rate for its Google Cloud segment fell slightly to 43.8% from 44.6% in the same quarter last year. These may be signs that competition in the cloud market might be getting heated.
To make things more interesting, Microsoft recently announced a partnership with Oracle to make technologies from both companies available to overlapping multi-cloud customers and reduce cloud hosting costs. The new partnership could be a compelling offering in a competitive market for new cloud customers, including massive federal government contracts.
If Microsoft has success impeding Amazon's public-sector market share and its partnership with Oracle helps it in the private sector, it will certainly help it to catch Amazon in the fast-growing cloud industry.
