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Microsoft to expand pentagon ties with $10 billion JEDI contract

Bloomberg Washington | Updated on October 27, 2019

The Pentagon said the contract was expected to be completed by 2029

Microsoft Corp said it is seeking to expand its partnership with the Pentagon after winning the sought-after JEDI cloud computing contract valued at as much as $10 billion over a decade, dealing a blow to the market leader Amazon.com Inc.

The decision, which was announced by the United States (US) Defense Department late on Friday, may be challenged by Amazon, which was the front-runner, according to a person familiar with the matter, because President Donald Trump weighed in on the bidding process. The terms of the competition were also hotly contested by another rival, Oracle Corp.

The Pentagon has said the cloud project, known as the Joint Enterprise Defense Infrastructure, or JEDI, is intended to help bring American military technology into the modern era.

We look forward to expanding our long-standing partnership with DoD, Microsoft’s US Regulated Industries President Toni Townes-Whitley said in a statement, calling the evaluation process rigorous.

The Defence Department is investing in commercial cloud services, which host computing power and storage in remote data centres, to improve data security and speed up real-time sharing of information across the military.

The Pentagon said the contract was expected to be completed by 2029. Microsoft shares rose 0.6 per cent to $140.73 at Fridays close.

A boost to Miscrosoft’s cloud business

Amazon, which won a lucrative cloud contract with the Central Intelligence Agency (CIA) in 2013, was long seen to have the upper hand in the competition. But politics entered the picture. Trump has long been at odds with Amazons Chief Executive Officer (CEO) Jeff Bezos. Bezos also owns the Washington Post, which Trump claims has treated him unfairly in its coverage

Douglas Stone, an Amazon spokesman said that the company was the clear leader in cloud computing, and a detailed assessment purely on the comparative offerings clearly lead to a different conclusion. “We remain deeply committed to continuing to innovate for the new digital battlefield where security, efficiency, resiliency, and scalability of resources can be the difference between success and failure,” said Stone.

Trump surprised the industry earlier this year when he openly questioned whether the contract was being competitively bid.

The decision is a big boost for Microsoft’s cloud business.

This is a paradigm changer for Microsoft, said Daniel Ives, an analyst at Wedbush Securities who has a buy rating on Microsoft. Its a landmark win that will change the cloud computing battle over the next decade. Its a shocker to Amazon and Bezos to lose it. But for Microsoft it signals a new era of growth in cloud. This adds $10 to the stock in my opinion.

Amazon Web Services, the retail giants cloud computing arm, has a wide lead in the business of selling cloud services to businesses and governments, with $32.5 billion in sales during the most recently reported 12 months. Microsoft, which doesnt break out comparable sales for its Azure unit, likely pulled in a fraction of that, analysts say.

In a statement released later Friday night, the US Defense Department said that the acquisition process was conducted in accordance with applicable laws and regulations. The process cleared review by the US General Accounting Office and the Court of Federal Claims.

The department said that the additional contracts are planned for both cloud services and complementary migration and integration solutions necessary to achieve effective cloud adoption.

The Pentagon’s inspector general said in a separate statement on Friday night that it had not found evidence that they believe would prevent the Department of Defense from making a decision about the award of the contract. The watchdog agency, which was leading a review by multidisciplinary team of auditors, investigators, and attorneys, was aiming to have its work done by the end of November.

US Department of Defense under criticism

The Defense Department had come under criticism for its handling of the winner-take-all project, which was marred by accusations of improper ties between former Pentagon officials and Amazon. Oracle and International Business Machines Corp waged a fierce lobbying and legal campaign over the decision to choose just one provider, arguing it would imperil the Pentagons data and stiffle innovation. Both companies were later eliminated from the competition, but Oracle filed suit.

A judge said the company did not have the legal standing to challenge the terms of the procurement process. Oracle has appealed that verdict. Alphabet Inc’s Google, another large cloud provider, withdrew from consideration last year amid employee concerns over the company’s ties to defense contracting.

As recently as Tuesday, the Pentagon said Defense Defense Secretary Mark Esper had recused himself from any decisions involving the contract to avoid the appearance of a conflict of interest because his son works with one of the original applicants.

IBM confirmed that Espers son has been a digital strategy consultant with the company since February but said that his job was unrelated to IBMs pursuit of the cloud deal.

The government has ramped up scrutiny of large technology companies, including Amazon, Apple Inc, Facebook Inc and Google, over issues ranging from consumer privacy to marketplace competition. Yet even as Microsoft spent much of the 1990s wrangling with US officials, ultimately losing a landmark case that accused the software maker of anti-competitive practices, it has largely stayed out of the recent round of regulatory glare. The company has even become a steady government contractor.

Chris Lynch, the former director of the Pentagons Defense Digital Service who helped design the JEDI project, praised the decision on Twitter. JEDI Cloud is critical to our women and men in uniform, he wrote.

But, Representative Steve Womack of Arkansas, one of several Republican lawmakers who took their concerns about the process to the White House, said he remained concerned with the contract structure. He has said that the single source bid amounts to limiting competition.

Bezos and Microsoft founder Bill Gates are the two richest men in the world, according to the Bloomberg Billionaires Index.

Published on October 27, 2019

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