Microsoft's $10 billion Pentagon cloud contract win is a clear sign it's in the same league as Amazon Web Services, but experts say the fight isn't finished yet (MSFT, AMZN)


Satya Nadella Microsoft Inspire 2018

  • Microsoft won a $10 billion contract to provide cloud computing services to the Pentagon.
  • The contract – known as the Joint Enterprise Defense Infrastructure, or JEDI, contract – is a $10 billion deal to move the Department of Defense’s sensitive data to the cloud.
  • The decision was a major upset to Amazon Web Services, considered the frontrunner for the contract because of its high security clearance and relationship with the CIA.
  • While AWS still has a market share that’s three times larger than that of Microsoft Azure, the contract signals to the market that Azure’s technology is on par with that of Amazon’s, some experts say.
  • That said, fulfilling the contract will require the company to make new investments, such as opening new data centers and practically “creating an enterprise product line,” as one analyst said.
  • Perhaps counterintuitively, one expert suggests that the slower the DoD moves to the cloud, the easier a time Microsoft will have keeping up with its demands.
  • AWS on Friday said it was “surprised by the conclusion” and a source familiar with the situation said AWS is exploring options. It’s unclear what those options may be, but they could include protesting the decision.
  • Click here to read more BI Prime stories

Microsoft scored a surprise victory over Amazon when the Pentagon late Friday evening announced the Redmond-based company as the winner of a controversial $10 billion cloud computing contract.

The contract – known as the Joint Enterprise Defense Infrastructure, or JEDI, contract – is a $10 billion deal to move the Department of Defense’s sensitive data to the cloud.

As the leader in the cloud market, Amazon Web Services was considered the frontrunner. But now, experts say the win puts Microsoft – generally regarded as the No. 2 cloud provider – in the same league as the dominant AWS, but the company has some work to do to really live up to the terms of the contract.

AWS on Friday said it was “surprised by the conclusion.” It has the highest security clearances of any cloud provider and a relationship with the government handling sensitive information. Also, AWS previously won a $600 million CIA contract in 2013 and has special service design for the CIA to handle classified information at the “Secret” level.

A source familiar with the situation said AWS is exploring its options. Those options could include filing a protest with the Government Accountability Office or a claim in the Court of Federal Claims.

As for Microsoft, experts say it’s a major win.

When it comes to technology, Microsoft’s JEDI contract win signals to the market that Azure has achieved parity with AWS in some respects, RBC Capital Markets Microsoft analyst Alan Zukin said. 

“It signals to the market Microsoft is no longer a runner-up and can be viewed as a leader in the category where they can surpass AWS in certain areas,” Zukin said.

And if Microsoft can pull this off and show the Pentagon, and the world, that it can handle JEDI, it could have major ramifications for the company in its fight with Amazon in the cloud.

“It’s a huge feather in the cap for Microsoft in terms of its presence in the cloud,” Wedbush Securities managing director Dan Ives told Business Insider. “In some ways, it signals a new age in terms of [Microsoft] starting to significantly close the gap versus Amazon from a market share perspective. The fact that the Pentagon and DOD are putting their infrastructure on Microsoft’s cloud, it speaks volumes. It’s a black eye for Bezos and Amazon.”

Is Microsoft ready?

Microsoft’s win didn’t come as a shock for Daniel Goure, senior vice president at the Lexington Institute. Just August, Microsoft scored a win with the $7.6 billion Defense Enterprise Office Solutions (DEOS) contract, which will see the Pentagon use Microsoft’s Office software.

This added to the company’s credibility in the public sector, Goure says — and now JEDI is another stamp of approval for Microsoft.

“Microsoft is a credible player in this area and met all of the basic requirements,” he said. “Microsoft is not as big or sophisticated as Amazon, but is a credible No. 2 and for that reason alone had a shot.”

Oppenheimer analysts in a research note said Microsoft helped make it case by improving securities and seeking out government business.

“[Microsoft] has worked hard to appeal to late adopting industries, such as government, healthcare, financial institutions. MSFT has been prudent in gaining compliance/governance certifications and improving security to win over these late adopters,” the analysts wrote. “We believe the Pentagon JEDI contract validates the security and compliance posture of Azure, important to winning future enterprise and government deals.”

Still, Microsoft’s ability to fulfill the contract will depend on how quickly the Department of Defense migrates to the cloud, says Goure. The faster it goes, the more difficulty Microsoft might have in keeping up.

“Typically, government participants enter (contracts) slowly and migrate, at the start, only certain functions and applications,” he said. “If the rate of this migration and adoption is reasonable, Microsoft will have no problem fulfilling it.”

A lot of work to do

Still, Microsoft can’t rest just yet.

Renee Murphy, a principal analyst at Forrester, said taking on the contract will mean practically building a new business for Microsoft. It has to take all the cloud tech it already offers, and make it up to the standards of an exacting customer like the DoD where it isn’t already. 

“If this is they’re way of saying, ‘We want to get into this business,’ they’re putting a lot of money into this. It takes a lot of money and effort to get it done,” Murphy said.

What’s more, Amazon is still the only cloud provider with certified at Impact Level 6, the highest level of security clearance, necessary for storing Top Secret information. Microsoft’s highest clearance is at Impact Level 5, at least so far. While this isn’t necessarily a showstopper for Microsoft — the JEDI contract only requires IL-5 — it will likely want to undergo the intensive certification process involved in achieving IL-6 if it wants to show parity with Amazon.

“They’re going to have to dedicate an awful lot of their time,” Murphy said. “This is almost like creating an enterprise product line. The data you’re generating on the logs is considered top secret and critical. What do you do for that? Are they physically ready for that kind of scrunity?”

Ultimately, Microsoft has “a lot of credibility in the space,” William Blair analyst Jason Ader said. It’s just a question of whether or not it has the right stuff to meet the needs of JEDI right this second.

“Do they have all the software and all the services? I don’t know the answer to that,” he said.

A ‘feather in Microsoft’s cap’ and a ‘black eye’ for Bezos and Amazon

AWS is still the cloud computing leader when it comes to market share. Recent estimates from analyst firm Gartner puts Amazon’s cloud market share at about 48 percent, more than three times the size of Microsoft Azure’s 15.5 percent.

The contract has the potential to create follow-on business for Microsoft and convince potential customers who once overlooked Azure to take a second look, experts said.

“Ultimately, it’s a crowning achievement for Nadella and Redmond to win what’s not just $10 billion [contract] over the next decade,” Ives said.  “There’s a multiplier where this could ultimately trigger another $10 [billion], $15 [billion], $20 [billion] in cloud deals that go Microsoft’s way.”

Microsoft was generally regarded as a long shot, partly because of AWS’ relationship with the CIA, but Microsoft US Regulated Industries President Toni Townes-Whitley in a statement pointed to the company’s 40-year history of working with the Department of Defense.

“We brought our best efforts to the rigorous JEDI evaluation process and appreciate that DoD has chosen Microsoft,” she said.

JMP analysts wrote in a research note that the contract will be a catalyst to help Microsoft build a public sector practice, much like the CIA contract helped AWS.

“The importance here is that much like AWS’s $600 million CIA contract in 2013 helped the company build out its Public Sector practice, Azure’s JEDI win is likely to do the same for Microsoft — and that’s the longer-term concern for AWS in our view,” the analysts wrote. “This comes at a time when multiple agencies — such as the CIA, where press reports suggest it is likely to significantly expand its use of cloud by 2021 — transition more fully to the cloud.” 

Politics played a role, but tech is key

Industry watchers have speculated politics played a role in the decsiion.

Previously, President Donald Trump reportedly wanted to “scuttle” the bidding process for JEDI. Experts previously speculated that Trump’s public feud with Amazon CEO Jeff Bezos — who also owns The Washington Post, which has published coverage critical of the president — might have worked against Amazon Web Services in the bidding process.

Microsoft, for its part, did “significant hand-holding with major players in the Pentagon and DOD” and Nadella spent considerable time on Capitol Hill to help Microsoft secure the deal, Ives said. The government would not select Microsoft if it didn’t have the best platform for the job, he said.

“It was a nasty K Street battle between Microsoft and Amazon,” Ives said, referring to the Washington, DC street known for playing host to lobbying firms. “Ultimately, technology is key.”

Join the conversation about this story »

NOW WATCH: We did a blind taste-test of KFC and Popeyes fried chicken — here’s the verdict