Microsoft Stumps Amazon, Wins JEDI Contract

On October 25, the Pentagon awarded Microsoft (MSFT) with the ten-year cloud contract for JEDI (Joint Enterprise Defence Infrastructure). The government contract, worth $10 billion, will put the US DoD (Department of Defense) on the cloud. As a result, all of the data from the military’s computer systems will be moved to a single cloud system. According to the New York Times, a lot of the military data still operates on technology from the 1980s and 1990s. The deal would modernize the military data and address security concerns. The DoD can access the company’s networks easily from cloud platforms.

JEDI deal is big for Microsoft

The JEDI deal is critical for Microsoft. Notably, the deal would add significant value to the company and its cloud business. The Pentagon cloud contract would allow Microsoft to manage future business contracts with the government.

Investors showed their confidence toward Microsoft stock after the JEDI contract. The stock price rose 3% in extended trading on October 25. However, Amazon (AMZN) stock fell 0.77% in the after-hours market the same day. Amazon lost the JEDI deal to Microsoft. Other bidders for the JEDI contract were IBM (IBM), Oracle (ORCL), and Google (GOOG).

Amazon wanted the JEDI contract

Reportedly, Amazon was expected to secure the JEDI deal. The company’s cloud computing arm, AWS (Amazon Web Services) is the largest cloud service provider in the industry. According to Synergy Research Group, Amazon held a cloud market share of around 33% at the end of the second quarter. Meanwhile, Microsoft is second with a 16% cloud share. Google Cloud, IBM, and Alibaba (BABA) follow Amazon and Microsoft. In the past, AWS had contracts with the federal government. In 2013, AWS signed a ten-year deal with the CIA.

Why did Amazon lose the JEDI contract?

The favoritism towards Amazon generated controversy, which hurt the company. Reportedly, President Trump received complaints about Amazon getting the Pentagon’s contract. Other companies, including Oracle, also raised concerns about Amazon. They thought that Amazon was a favorite to win the JEDI contract. For example, Oracle CEO Safra Catz met with President Trump in 2018 to discuss the issue.

After complaints related to Amazon and the JEDI contract, President Trump delayed the decision-making process. He stated that the administration would review the process to make sure that the decision was fair. Later, Defense Secretary Mark Esper quit the Pentagon review process despite working on it for months.

According to the book “Holding The Line: Inside Trump’s Pentagon with Secretary Mattis,” President Trump ordered Defense Secretary Mattis to “screw Amazon” out of the JEDI contract bid.

In the past, President Trump criticized Amazon, its founder Jeff Bezos, and AWS. He’s also against Bezos’ Washington Post, which covers his administration. President Trump focused on Amazon for not paying fair taxes as well as other grounds. According to reports, losing the JEDI contract could push Bezos to spin-off Amazon Web Services.

What’s next for Amazon?

All of the points mentioned above hinted that Amazon could lose to Microsoft due to criticism from President Trump. Meanwhile, the decision surprised an AWS spokesperson. The spokesperson said, “AWS is the clear leader in cloud computing and a detailed assessment purely on the comparative offerings lead to a different conclusion.” The Pentagon stated that the bid offers and the decision were fair. However, Amazon might challenge the Pentagon’s decision.

The deal could benefit Microsoft, which has a smaller share in the cloud market than Amazon. Recently, Amazon reported disappointing third-quarter results. However, the company earned $9 billion in revenues from AWS in the third quarter.