Amazon lost a $10 billion cloud computing contract to Microsoft in a surprise upset. In the aftermath, experts say it means that Amazon Web Services, long the dominant player in the cloud computing space, has to acknowledge Microsoft as an equal for the very first time.
This contract, called the Joint Enterprise Defense Infrastructure contract, is a 10-year project to move sensitive Department of Defense data to the cloud. Amazon was widely seen as the frontrunner, given its position as the top cloud provider on the market, and its history handling sensitive government information. Indeed, Amazon in 2013 won a major $600 million contract to work with the CIA.
Which makes it all the more noteworthy for Amazon. While it doesn't change the fact that Amazon still leads the market in terms of share, losing this deal is an unmistakable sign that Microsoft has become a more powerful competitor.
"It's a black eye for Bezos and Amazon," Ives told Business Insider. "It's their first major setback for cloud in the last decade…Right now for them, it's a bit of a wake up call in how aggressive Microsoft has become in going after the cloud opportunity for the next five years. They're not just stopping at JEDI."
More than that, it could serve as a "wake up call" to Amazon Web Services that it and Microsoft Azure are, at least technologically, playing at the same level, for the same customers, Ives said.
"This JEDI award in my opinion reflects a pivotal moment where the market's perception could see these two players at parity," Daniel Newman, principal analyst and founding partner of Futurum Research, told Business Insider.
Amazon has yet to say whether it plans to challenge the decision. A source familiar with the matter said AWS is "still evaluating options," but didn't disclose what those options may be.
For AWS it's going to be 'business as usual'
The Pentagon may have selected Microsoft for JEDI, but experts say it's only the beginning of a new phase of the competition with Amazon Web Services.
"What I see is the two companies becoming even more competitive," Newman, the Futurum Research analyst, said. "When there's a lot of competition, ultimately the market wins."
Given the size of the contract, many experts expect Amazon to choose to take some kind of action on the JEDI award. Still, it's no sure thing that any protest will be successful, and Microsoft could very well end up still holding the deal when all the dust has settled.
But with or without JEDI, analysts say that Amazon remains the leader in the cloud industry and will continue to stay successful in the government sector. What's more, there will still be plenty of opportunities to help the government move to the cloud in the next decade, and Amazon's offering there is as strong as ever.
"For AWS it's going to be business as usual," Newman said. "AWS still has a significant federal business. They also have an extremely successful enterprise business. I don't see them going down any significant market share without a fight."
AWS can 'swoop in'
At the same time, Amazon could hypothetically still end up with the JEDI contract, whether or not it files an official appeal.
Amazon Web Services was widely considered the favorite to win the JEDI deal in the first place, largely because of its higher security clearances and its experience in working with the CIA's classified data. That could still come into play: While the JEDI contract only requires Microsoft to hold Impact Level 5 security clearance, which it does, if at any time it turns out that the higher Impact Level 6 is required, Amazon is the only one that fits the bill.
Indeed, Amazon's clearances put it in a prime position if Microsoft for some reason cannot fulfill the contract's requirements, says Renee Murphy, principal analyst at Forrester.
"AWS can swoop in and say, 'We're already here,'" Murphy told Business Insider. "They're already that secure, and they already work with those kind of datasets. They're already secure for that kind of regulation. It made perfect sense for DoD to work with them."
The Department of Defense would be perfectly within its rights to make such a move, as well. While Microsoft stands to make $10 billion over the course of 10 years under the JEDI contract, that's actually the maximum payout, dependent on the department's actual use of the cloud tech.
The minimum guarantee of the JEDI deal is that the DoD will pay $1 million to Microsoft over 2 years. The Department of Defense has the option to renew the contract three times and has said it will "rigorously review contract performance" before doing so. Should Microsoft be unable to step up, that leaves the door open for Amazon.
Politics 'clouded' the JEDI process
As hinted at in Amazon's statement, politics, lawsuits, and President Donald Trump himself cast a long shadow over the JEDI deal.
Amazon is the subject of antitrust scrutiny, with prominent Democrats like presidential candidate Sen. Elizabeth Warren calling for the retailer and other Big Tech giants to be broken up.
And more particularly, Oracle, an eliminated bidder for the JEDI deal, filed several protests during the process, arguing in an ultimately-failed lawsuit that the bidding process was "riddled with improprieties" and that the Pentagon set unfair criteria.
Finally, Trump reportedly wanted to "scuttle" the bidding process for JEDI, for fear that Amazon Web Services might win. Trump has publicly feuded with Amazon CEO Jeff Bezos, who owns the Washington Post, which has published coverage critical of the president. A forthcoming book also says that last year, Trump ordered former Defense Secretary James Mattis to "screw Amazon" out of the deal.
"It's a unique situation in terms of what we saw with JEDI," Ives said. "It's no secret that Trump and Bezos are not playing golf together. I think it definitely further clouded the whole situation."
Still, several experts have told Business Insider that the Trump factor in the JEDI decision may have been overrated by some — which is bad for Amazon, in the sense that it means that Microsoft won on the merits, but good in the sense that it means it likely doesn't have to worry about presidential intervention in future deals. That means that the public sector remains a huge opportunity for Amazon, and its dominance of the cloud market is unperturbed.
"It's a tough loss," Alex Zukin, managing director at RBC Capital Markets, told Business Insider. "I don't think the loss is a finality. It's not good signaling to the market today…but this is a very large market opportunity and we are in the early innings. I don't think it's a meaningful blow to AWS in any way."