Why Microsoft’s $10B JEDI Cloud Win Shouldn’t Surprise You

The Department of Defense on Oct. 25 announced that it had selected Microsoft Corp. as the winner of its 10-year, $10 billion cloud computing contract, known as JEDI. The move surprised many observers of the federal IT market — and even some of the competitors themselves.

JEDI, short for Joint Enterprise Defense Infrastructure, carries a $1 million guarantee and is expected to generate $220 million in its first two years, according to Pentagon spokesperson Elissa Smith. The win positions Microsoft to challenge market leader Amazon Web Services Inc. for supremacy in the federal cloud computing market.

The announcement comes more than two years since the Pentagon first announced its plan to shift the bulk of its data and IT systems to the cloud, and follows months of controversy: sparring between bidders, investigations into conflicts of interest, bid protests, legal challenges in federal court, and even interventions by members of Congress — all exceedingly rare in the realm of federal IT contracting. And there are signs that the JEDI saga might not yet be over.

Amazon has not yet decided whether to file a protest, an employee close to the matter told Bloomberg Government. The individual requested anonymity because they were not authorized to discuss the matter publicly. Amazon is considering all of its options, and hasn’t ruled out the possibility of taking its case straight to the U.S. Court of Federal Claims, the individual said.

Why Microsoft Had an Edge

Until the award was announced, Amazon was considered the odds-on favorite to win the all-or-nothing JEDI contract, which stands for Joint Enterprise Defense Infrastructure. Amazon, which by some estimates controls more than one-third of the global cloud infrastructure market, was the first public cloud provider to make serious inroads in the federal market. Its $600 million contract with the Central Intelligence Agency opened the door for future work in the defense and intelligence sector. Amazon remains the only cloud service provider accredited by the Pentagon at Impact Level 6 to handle Secret-level information. Microsoft is in the process of acquiring its Impact Level 6 certification, which it must achieve within 270 days of Friday’s award.

But there were indications that Microsoft had more advantages than many initially thought. Microsoft has made a number of shrewd moves in recent months that have strengthened its bid to become the Pentagon’s top cloud computing provider. The Redmond, Wash.-based technology giant has poured investment into its cloud capabilities in an effort to offer enterprise customers with services competitive to Amazon’s. Microsoft’s revenue from its Azure cloud infrastructure products reached $11 billion in its 2019 fiscal year, representing 65% year-over-year growth.

Microsoft also pursued a number of partnerships that were sure to catch the eye of decision makers at the Pentagon. Throughout 2018, Microsoft aggressively pursued prototyping agreements for defense hardware and IT services. Its efforts culminated in a $480 million contract to supply its Hololens augmented reality headsets to the U.S. Army and a $60 million managed services contract to oversee a subset of the U.S. Air Force’s networks. In both cases, the Pentagon issued Microsoft expedited “other transaction” agreements that come with less red tape than is typically associated with government contracting. Pentagon investment with Microsoft reached an all-time high in fiscal 2019, $451 million, and department has yet to report much of its fourth-quarter spending.

Meanwhile in the commercial sector, Microsoft acquired software compiling service GitHub Inc., popular among the kinds of software engineers the department aimed to hire and train. Months later, it announced a partnership with managed services provider ServiceNow Inc., a fixture in heavily regulated industries like government.

Recognizing the Pentagon’s laser-focus on artificial intelligence, in July 2019 Microsoft invested $1 billion with the artificial intelligence research organization, OpenAI, becoming the group’s preferred cloud infrastructure partner for research and prototyping. Similarly, to bolster its ability to deliver real-time data and computing power in austere environments — the so-called “tactical edge” — Microsoft announced a $2 billion partnership with AT&T Inc. to develop and deploy portable data centers connected using AT&T’s 5G mobile network.

In perhaps its boldest move, Microsoft formed an alliance with a former JEDI competitor, Oracle Corp., to counter Amazon’s market advantage. One of the main arguments against the Pentagon’s single-award approach with JEDI is that it would force the department to spend years and millions of dollars redesigning legacy databases, many of which were built using Oracle software. The partnership established a direct link between Oracle and Microsoft environments, offering customers greater flexibility to run Oracle applications on-premises or in Azure without significant redesign required.

What’s Next for JEDI?

Representatives from Amazon Web Services Inc. told reporters that they were “surprised” by the outcome and are “evaluating their options,” in a Friday statement. Amazon has 10 days to decide whether to file a post-award bid protest with the Government Accountability Office, according to federal acquisition regulations.

Amazon appeared to question whether the award decision was made purely on the technical merits of their respective cloud solutions, or whether there were other factors in play. A “detailed assessment purely on the comparative offerings clearly lead[s] to a different conclusion,” according to the statement. Findings from the Pentagon’s technical evaluation have not been released and typically aren’t made public as a matter of standard practice.

In a lengthy court battle, lawyers representing Oracle claimed that several Pentagon staffers, many of whom had either done consulting work for Amazon or had accepted job offers with Amazon while working on the contract, had biased the procurement in the Seattle-based cloud giant’s favor. A federal judge ruled that although certain officials had acted unethically, the integrity of the JEDI procurement remained intact.

Secretary of Defense Mark Esper announced in August that the Pentagon would delay its decision on JEDI pending an internal review by the DOD Inspector General. A Pentagon spokesperson said that department officials had consulted with the inspector general’s office before to its making the award. Although the review is ongoing, the inspector general has found no evidence that would prevent the Pentagon from awarding JEDI, according to a statement.

The competition made national headlines in July when President Donald J. Trump told reporters that he was looking “very seriously” into the contract after claiming that bidders Microsoft, Oracle, and International Business Machines Corp. had been treated “very unfairly.” The president has repeatedly criticized Amazon.com chief executive Jeff Bezos, who also owns The Washington Post. In a new memoir, Guy M. Snodgrass, a former staff member to then-Defense Secretary James Mattis, claimed that the president suggested steering JEDI away from Amazon in order to “screw” the company.

No current or former officials have come forward to corroborate Snodgrass’s claim. But if accurate, it would raise questions about inappropriate political interference in a significant federal procurement. It could also provide Amazon a justification for challenging the award in federal court.

Chris Cornillie is a federal market analyst with Bloomberg Government.

To contact the analyst on this story: Chris Cornillie in Washington at ccornillie@bgov.com

To contact the editors responsible for this story: Daniel Snyder at dsnyder@bgov.com; Jodie Morris at jmorris@bgov.com