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Why Amazon Might Lose Its $10 Billion JEDI Contract

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Aug. 2 2019, Published 10:48 a.m. ET

The Pentagon’s stalling of its $10 billion contract with Amazon (AMZN) is great news for Microsoft (MSFT), IBM (IBM), and Oracle (ORCL). The multibillion-dollar JEDI (Joint Enterprise Defense Infrastructure) deal remains the focus of a bitter standoff among the tech giants. The dispute over who should walk away with the contract has already caught the attention of President Donald Trump. His appointment of new US Secretary of Defense Mark Esper has opened the door for a review of the controversial cloud-computing contract.

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The president has already indicated that he’s considering looking at the Pentagon contract after receiving numerous complaints. The strong opposition to the awarding of the contract to one player stems from what’s at stake. According to other cloud players, awarding Amazon or Microsoft would give them an unfair advantage in the cloud business. The stakes are high given that the public cloud market is growing at a compound annual growth rate of 17.5%.

Amazon Web Services’ cloud dominance

Amazon Web Services generated $25.7 billion in revenue in 2018, affirming its dominance in the industry. Likewise, Microsoft comes in a close second, with its cloud division having brought in $23 billion in 2018. IBM’s cloud revenue was up 12% to $19.2 billion in the second quarter of 2019.

Amazon has grown to become a heavyweight in cloud computing thanks to lucrative deals with the US Department of Defense. The company already has an agreement with the CIA. Consequently, the $10 billion cloud-computing contract could have cemented its position in the burgeoning sector.

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While Amazon was initially primed to walk away with the contract, things could change. Trump and Amazon’s CEO, Jeff Bezos, have never seen eye to eye. In 2018, Amazon stock lost more than $30 billion in market value amid reports that Trump was planning to go after the e-commerce giant. The president has always maintained that the company does great damage to taxpaying retailers.

The fact that Bezos owns the Washington Post, which constantly scrutinizes the president, may hurt Amazon’s chances of winning the $10 billion cloud contract. Initially, the Department of Defense had shortlisted Amazon and Microsoft as the finalists for the cloud contract. With the involvement of Trump, IBM and Oracle can breathe a sigh of relief as they insist on their inclusion in the contract.

IBM and Oracle’s opposition

IBM and Oracle have always insisted on the splitting of the cloud-computing contract as part of a multicloud strategy. Instead of one company walking away with the entire $10 billion contract, the companies insist on its being split up so small players can also enjoy a piece of the pie.

The emergence of emails showing meetings between Amazon executives and high-level Pentagon officials is another point of concern. Aggrieved cloud players have spoken up on the matter, insisting on the restarting of the entire JEDI short-listing process.

IBM and Oracle are not the only companies opposed to the JEDI contract going to one cloud company. According to the Wall Street Journal, a number of technology companies are opposed as well. Of concern is that awarding the contract to one company could set a precedent and give the winner an unfair advantage in terms of follow-up work.

The excitement that comes with the Pentagon stalling Amazon’s $10 billion contract might be short-lived. Amazon is one of only two companies that meet the department’s minimum requirements for the deal. IBM and Oracle have already lost a lawsuit whereby they protested the department’s settling on two players. Google (GOOGL), on its part, withdrew entirely, citing its ethics policy in relation to military contracts.

The Pentagon says that an award for the cloud-computing contract could come as early as this month. It’s still unclear whether that will be the case. Soaring opposition from the likes of Oracle and IBM and the involvement of President Trump are some of the emerging headwinds.

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