- The JEDI program was a huge vote of confidence for Microsoft from its most important customer, the US government.
- This week, the Department of Defense announced it was canceling the $10 billion dollar contract.
- Columnist Jason Aten argues the move is a blow to Microsoft’s cloud-computing credibility more than anything.
- See more stories on Insider’s business page.
On Tuesday, the Department of Defense announced it was canceling its massive Joint Enterprise Defense Infrastructure (JEDI) contract exclusively with Microsoft, and instead suggested it may pursue a new deal to include both Microsoft’s Azure and Amazon’s AWS cloud services.
The cancelation is a blow to Microsoft, but not just because the deal was worth $10 billion over the next 10 years. More importantly, it’s a blow to Microsoft’s cloud-computing credibility.
When Microsoft first won the deal in October of 2019, it came as a bit of a surprise. Most observers expected the contract to be awarded to AWS. Even Microsoft appeared to be caught off-guard by the announcement.
The JEDI program was a huge vote of confidence for Microsoft from its most important customer, the US government. The company was tasked with a complete overhaul of the Department of Defense’s cloud infrastructure, while providing the highest levels of cyber security.
Amazon challenged and eventually sued the federal government complaining that Microsoft was awarded the contract because of President Trump’s animosity towards the Washington Post, owned by Amazon’s founder and former CEO, Jeff Bezos.
Amazon’s tactic appears to have paid off. Earlier this year, the Department of Defense indicated that the company’s litigation and further delays in implementing Microsoft’s services could cause it to reconsider the deal altogether.
The Wall Street Journal also reported that the Pentagon was facing pressure from lawmakers to award the contract to multiple vendors to better manage risks and minimize delays.
That’s exactly what happened this week.
Though Microsoft is still expected to provide some cloud services under a new deal, the Department of Defense’s statement has to sting even though it didn’t specifically mention Microsoft or its capabilities:
“The Department has determined that, due to evolving requirements, increased cloud conversancy, and industry advances, the JEDI Cloud contract no longer meets its needs,” a spokesperson said.
Business Insider reached out to Microsoft but did not immediately receive a response.
Fueling doubt about Microsoft Azure
The reason this is a blow to Microsoft has little to do with the money. Sure, $10 billion is a boost to its business. That, however, was expected to be spread over 10 years. Microsoft’s cloud division, which includes Azure, generated more than $17 billion last quarter alone.
More important than the money was that it gave the company a level of third-party validation, that its cloud-computing platform is on par with Amazon, the market leader. The Pentagon, arguably the world’s most sophisticated cyber customer, had chosen Microsoft over Amazon to fully revamp and modernize its tech ecosystem. That gave Microsoft credibility.
Now, however, the Department of Defense says Microsoft’s offering wasn’t going to “meet its needs.” That — combined with the suggestion by Amazon that Microsoft only won the contract due to political influence from a President with a grudge against Bezos — further fuels doubts about Microsoft Azure’s efficacy.
It’s not that people don’t trust Microsoft. The company already provides a vast array of services to millions of enterprise customers, including the US government. Windows is the default operating system on the majority of PCs sold worldwide. Office is the default productivity suite, and most of the government’s email services are powered by Microsoft’s exchange server.
However, when it comes to cloud computing, Amazon controls roughly a third of the market and a host of government contracts, including with the Central Intelligence Agency. By comparison, analysts estimate Microsoft has cornered only around 20% of the market.
Over the past few years, Microsoft has been leveraging its existing relationships to grow its cloud services. So far, it appears to have worked. Revenue from Microsoft’s Azure increased 50% in the most recent quarter and nearly 40% of the boost to its overall cloud business was due to larger, long-term contracts like JEDI.
Going to an enterprise customer and being able to say your services are used by the Department of Defense could go a long way towards alleviating any doubt they might have about signing on to a long-term contract.
That’s why losing the contract is more a credibility setback than anything.