Yesterday, according to The Wall Street Journal, Amazon formally filed a challenge over the Pentagon awarding its $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract to Microsoft. It would be easy to view that move through a political lens.

In some ways, that's fair since the company isn't exactly a favorite of the current administration. Plus, many people thought that Amazon was pretty much a lock to win the bid for the massive cloud computing contract until the President announced that he was asking his Department of Defense to look into a process he claimed was "rigged."

In fact, Amazon's filing with the U.S. Court of Federal Claims alleges that "numerous aspects of the JEDI evaluation process contained clear deficiencies, errors, and unmistakable bias, and it's important that these matters be examined and rectified."

All political intrigue aside, the JEDI contract covers the next 10 years and is meant to help the Pentagon consolidate hundreds of different cloud-based services under one provider. According to the Journal's report, "JEDI is designed to serve as an umbrella system to rationalize that number and provide the military with access to services that better keep up with the pace of technology in civilian markets." 

The military has a huge interest in making sure it has the systems in place to manage the variety of computing needs for its forces around the world. However, there's actually a much more interesting battle happening. That would be the fight between two tech giants, Microsoft and Amazon, over supremacy in the cloud. 

The cloud represents a major front for both of these companies for a variety of reasons. First, more and more businesses are transitioning their core computing from legacy systems built and maintained in-house, to cloud-based options that can be accessed anywhere.

Second, the economies of scale are extraordinarily beneficial for providers like Amazon and Microsoft, and to a smaller extent Google. Providing cloud-computing power is a high-margin source of revenue, especially compared with selling iPhone charging cables and toys online.  

Amazon Web Services (AWS) is the largest player in the enterprise cloud computing services market with an almost 50 percent share. Microsoft's Azure lags behind in terms of cloud computing, with roughly 16 percent of the market, but Microsoft's overall services business is actually larger when you consider its commercial and consumer SaaS platform, which includes the Office 365 productivity suite.

When you think about it, there are very few aspects of what you do on a regular basis that are not touched in some way by at least one of these two companies. AWS powers huge swaths of the internet, from websites, services like Netflix, and databases that companies use for everything from sales to manufacturing. Microsoft Azure offers many of the same services, though on a smaller scale so far.

For Amazon, AWS is a relatively small part of its overall business, but it's an extremely important high-margin space that represents a huge area of growth. For Microsoft, the cloud is its fastest area of growth--one that the company is counting on in order to remain one of the three most valuable companies in the world. (Amazon and Apple are the other two.) Azure is also its more profitable division and is expected to be for the foreseeable future. 

That means that both companies have a lot at stake, not just this one government contract. The Department of Defense is not only a huge customer but a stamp of credibility. By awarding the contract to Microsoft, it establishes the company as an even more formidable competitor, which could impact the decisions of other companies down the road.

It's no wonder that Amazon is challenging the decision, but the real takeaway is that the company clearly considers Microsoft a challenger.

Published on: Nov 15, 2019
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