Microsoft Won the $10bn Pentagon Contract and Amazon Got Nothing

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On the evening of Friday 25th October, the Defence Department announced Microsoft as the winner of its $10 billion cloud computing contract. Microsoft upset the cloud market leader Amazon and its Amazon Web Services, which was the front runner, to take the cloud crown. Microsoft’s shares closed Friday up 0.6% to US$140.73. Amazon won a money-spinning cloud contract with the Central Intelligence Agency in 2013 and was considered to have an upper hand in the latest competition but, unfortunately, politics got involved.

The much sought-after Joint Enterprise Defence Infrastructure (JEDI) valued at around US$10 billion over ten years. The terms of the contract were hotly contested by Oracle, another rival. Amazon is likely going to challenge Pentagon’s decision, according to a person who is familiar with the matter, because the President had a heavy hand in the bidding process. Jeff Bezos, the CEO of Amazon, has been at odds with Donald Trump for some time now and he owns the Washington Post which is claimed to have treated the president unfairly in its coverage.

Douglas Stone, an Amazon spokesman, said Amazon was surprised by Pentagon’s decision and said that the company is known to be a leader in cloud computing and when the offers are compared, a different conclusion can be drawn. He also said Amazon remains committed to innovation.

That politics entered the competition is not questionable. Earlier this year, Trump openly asked whether the contract was being bid competitively. Also, it is said that in the summer of 2018, Trump told the former secretary of Defense, Jim Mattis, to “screw Amazon” and exclude it from the bid. Mattis did not exclude Amazon, of course. However, although Amazon was believed to be leading until late in the competition, it lost the contract to Microsoft.

The JEDI contract signals a paradigm shift for Microsoft and a huge boost to its cloud business. As Daniel Ives, an analyst at Wedbush Securities who has a “buy” rating on Microsoft remarked, “It’s a landmark win that will change the cloud computing battle over the next decade. It’s a shocker to Amazon and Bezos to lose it. But for Microsoft it signals a new era of growth in cloud. This adds $10 to the stock in my opinion.”

Amazon Web Services has a wide lead in the cloud selling business with government and private sector customers. According to analysts, AWS’ sales were US$32.5-billion in the most recently reported 12 months and Microsoft’s sales were believed to be a fraction of that.

The decision to choose just one provider was not well received by Oracle and IBM who fiercely lobbied and waged a legal campaign against it. They were later eliminated from the competition. Oracle filed suit which was dismissed by the judge, a verdict which it appealed against. Google withdrew from the competition due to its ties to defense contracting.

The Pentagon said the contract was awarded fairly and that additional contracts are planned for cloud services and related migration and integration solutions.

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