Microsoft Corp. (MSFT) just overtook AWS (Amazon Web Services) to bag a $10 billion government contract. In an unexpected move, Microsoft now manages the JEDI (Joint Enterprise Defense Infrastructure) cloud contract entirely. Earlier, there was a lot of speculation about the deal. Some sources believed AWS was most likely going to secure the Pentagon deal.
Also, there was speculation that the deal could be split and awarded to two or more companies. Even CNBC reported that President Donald Trump expressed disdain for Amazon Inc (AMZN). Finally, on October 25, 2019, the US DoD (Department of Defense) released an official statement, awarding the contract to Microsoft.
Microsoft beats AWS to score the JEDI deal
Microsoft got the Pentagon deal for $10 billion. It’s an open contract with an IDIQ (indefinite delivery and indefinite quantity). The contract could extend to October 24, 2029, or about a decade if the Pentagon exercises all the options specified in the agreement. Microsoft will provide commercial IaaS (Infrastructure as a Service) and PaaS (Platform as a Service) at an enterprise level. The DoD will use these services for its regular business as well as for mission operations.
The DoD has already set aside $1 million in maintenance funds for the fiscal 2020 operations. The maintenance fund is to cover the minimum guarantee for the contract. Also, these funds will cover the minimum guarantee for the CCPO (Cloud Computing Program Office) and the Program Management Support.
AWS’s influence in the government contract world
AWS is the cloud services industry leader among all other companies in the bidding process. Most industry experts noted that inevitably the contract would go to Amazon. Even President Trump’s disapproval for Jeff Bezos did not shake this belief. After all, AWS is the market leader in the cloud technology segment.
Additionally, AWS is engaged in a cloud project with the CIA (Central Intelligence Agency). Secretary of Defense Mark Esper was charged with the task of awarding the contract. However, he backed out, citing a conflict of interest.
What is the JEDI contract deal?
The JEDI deal or Pentagon cloud contract will put the DoD on the cloud platform. The data from the older networks will be moved to the cloud system. This will allow information to be stored and accessed easily. The deal is valued at $10 billion and will span 10 years.
The JEDI deal is not only a very important military contract but also a central platform for future business contracts with the government. With the deal, the DoD will be able to tap into company networks for accessing cloud platforms. Also, because the tech companies keep upgrading their networks, the software functions are enhanced. This way the military can benefit when it comes to addressing security concerns.
From a military point of view, this is a better alternative than building their own cloud platform. And, from the tech company’s perspective, a federal deal of such a magnitude will add value to the company’s goodwill, domestically as well as overseas.
Oracle questions the decision-making process
Initially, many companies were bidding for the contract that Microsoft won. Some of the frontrunning bidders were big tech companies like Oracle, Google, and IBM. However, AWS was the leader in the pack and was considered to have the highest possibility of getting the contract. Microsoft ranked second and was in behind AWS. Most thought that Microsoft would get only a portion of the deal, not the whole deal.
However, Oracle (ORCL) is concerned about the decision-making procedures for the Pentagon deal award. Oracle cited that competition for the contract bids was not fair, and Amazon had a higher chance of getting the contract. Supposedly, the CEO of Oracle Safra Catz met with the president in 2018. The meeting was held to discuss the unfair advantage that Amazon has.
However, the White House said that the president wouldn’t influence the final decision of the DoD. At the time, Press Secretary Sarah Huckabee Sanders said, “The president is not involved in the process.” Also, in this briefing, she confirmed that the DoD would make sure the bidding process stayed competitive.
Google backed out of the Pentagon deal bid
Oracle wasn’t the only one unhappy about the Pentagon bid and Microsoft. Google (GOOGL) decided to back out from the JEDI deal in 2018. Reportedly, Google said that the contract might not align with the company’s policy about AI (Artificial Intelligence). Also, the company is concerned about the use of military drone technology.
CEO Sundar Pichai said, “these are not theoretical concepts; they are concrete standards that will actively govern our research and product development and will impact our business decisions.” Also, Google supported the idea of awarding the contract between two or more bidders.
Stock price movement and conclusion
Microsoft stock was on a dream run throughout the last week. The stock opened at $138.44 on Monday morning. The company released its Q1 2020 results on Wednesday, October 23, after market close. On Wednesday, the stock closed at $137.24. After a positive earnings release, the stock price rose to $139.32 on Thursday morning. This is an increase of 1.5%.
On Friday, Microsoft opened at $139.40 and crossed the $140 threshold in the first half-hour of the trading session. Throughout the day, MSFT traded above $140 and closed at $140.73. The stock continued to trade flat most of the time in the extended trading hours.
Microsoft stock spikes; Amazon stock dips
However, at the end of the extended trading hours on Friday, the news about the Pentagon deal was released. The announcement caused a sudden climb in the stock price. Within fifteen minutes, the stock price rose from $140.74 to $144, a 2.3% increase. At the end of extended trading hours, Microsoft stock was barely short of the $145 threshold. When compared to the previous day close of $139.94, the stock was up by approximately 3.6%.
On the other hand, Amazon stock faced a lot of headwinds during the week. After a poor third-quarter report, Amazon stock crashed by 4.7%. The stock opened below the $1,700 mark on October 25. At the end of the day, Amazon stock closed at $1,761.33. In the extended trading hours, after the Pentagon deal news, AMZN dipped below $1,750. Just before the extended trading hours ended, the stock quote was $1,747.80.