The contract was coveted not for its dollar value as much as
its prestige: Both companies for years have sought to persuade businesses and
governments that it was safe to shift computing work into their data centers.
Meeting all the security requirements of the U.S. military would have been a
visible stamp of approval likely to sway other corporate and government
clients, analysts said.
Seattle-based Amazon, the biggest cloud computing provider,
was widely expected to win the contract. But when the Pentagon awarded the
sole-source deal to Microsoft in 2019, the announcement gave "huge
credibility" to Microsoft, which had been working hard to catch Amazon
after a late start with cloud technology, said Mark Moerdler, a senior research
analyst at Bernstein.
But the contract has been on hold after Amazon filed a
lawsuit challenging the decision under then-President Donald Trump, alleging
that the former president exerted improper pressure on military officials to
steer the contract away from Amazon.
Trump publicly derided then-Amazon CEO Jeff Bezos and
repeatedly criticized the company. Amazon said in 2019 the Pentagon decision
was full of "egregious errors," which it suggested were a result of
"improper pressure from Trump." The company cited a 2019 book that reported
Trump had directed the Defense Department to "screw Amazon"
https://reut.rs/2V4LqgQ out of the JEDI contract.
Shares of Microsoft and Amazon both closed at a record high
with the online retailer up 4.7% and shares of the software firm a penny higher.
Michael Pachter, an analyst with Wedbush Securities, said
the absolute dollars involved - $10 billion over a decade - are at most a
nice-to-have for the cloud companies, with AWS alone generating $45.3 billion
in sales and $13.5 billion in operating profits for 2020. The value, he said,
was in showcasing the security of the clouds, "but it's not going to move
the needle" for either company.
But the cancellation and new contract could benefit
Microsoft, Moerdler said, because the Redmond, Washington-based company has had
nearly two years during the legal wrangling to invest in its technology.
"If there is now another competition, Microsoft is
going in from a better position," Moerdler said. As recently as September
the Defense Department re-evaluated the contract proposals and said Microsoft's
submission was the best.
While the Trump administration wanted a single provider, the
Biden administration has said it would likely parcel out the project to
multiple companies. Such a move would put the military more in line with
private-sector companies, many of whom split up their cloud computing work
among multiple vendors to avoid being locked in to any specific one.
Other top cloud companies include Oracle Corp, Alphabet
Inc's Google and IBM Corp. Google and IBM on Tuesday said they were both
interested in working with the federal government but stopped on short of
saying whether they would enter the bidding process.
The Pentagon hopes to have the first awards by April 2022
for its new Joint Warfighter Cloud Capability (JWCC).
John Sherman, acting chief information officer for the
Defense Department, said he expects both Microsoft and Amazon will get cloud
contracts. He said the need was urgent.
"I've got to get this now -- as soon as possible --
starting hopefully as soon as April," Sherman said.
Microsoft said in a statement the company was confident it
will "continue to be successful as the DoD selects partners for new
work". Microsoft could submit a termination bid to recover costs of the
scrapped project, Sherman said.
Amazon's cloud unit Amazon Web Services (AWS) said it agreed
with the Pentagon's decision to cancel the contract. Amazon said the initial
award was "not based on the merits of the proposals and instead was the
result of outside influence that has no place in government procurement."
AWS added it looks "forward to continuing to support the DoD’s
modernization efforts and building solutions that help accomplish their
critical missions."
In April a judge refused to dismiss Amazon's claims alleging
the Trump administration interfered in the Pentagon's award to Microsoft after
putting it on hold indefinitely in February 2020.
The now-cancelled Joint Enterprise Defense Infrastructure
Cloud (JEDI) contract was budgeted for as much as $10 billion and was part of a
broader digital modernization of the Pentagon aimed at making it more
technologically agile.
"We don't have an estimate yet, but I wouldn't latch
onto the $10 billion figure," Sherman said, but added that the plan would
likely involve a direct award for "urgently needed" capabilities and
then a "full and open" competition for multiple suppliers by early
2025.
Republican Senator Chuck Grassley praised the Pentagon's
decision.
"The JEDI contract has been burdened by potential
conflicts of interest, size, needless delays and its single awardee
structure," Grassley said, saying a fresh review process "will afford
the program an opportunity for greater public trust and confidence."