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Why Microsoft (Not Amazon) Will Win the Pentagon Contract

In 2019, the biggest cloud customer in the world will be the United States Department of Defense. The DoD is currently reviewing bids to award a single cloud provider a multi-year contract. Obviously, this isn’t your typical enterprise IT department, transferring from on-premise servers, or a startup who needs the flexibility of cloud infrastructure to scale. The program is called the Joint Enterprise Defense Initiative, or JEDI, and its purpose is to move the DoD’s massive computing systems into the cloud. This one contract is worth $10 billion, or 25% of the current market, which currently stands at $40 billion in annual revenue.

Many prognosticators and reporters unanimously believe the contract will go to Amazon Web Services. This belief is so strong that vendors, such as Oracle and IBM, made a rebuttal to Congress, believing the terms of the proposal favored Amazon. However, the majority of these forecasts overlook Microsoft’s strength in security and IT, and the alliances Microsoft has been forming with the DoD since Satya Nadella became CEO in 2014. Admittedly, guessing a company other than Amazon will win the Pentagon contract is a pure gamble, however, there are strong indicators for Microsoft that should not be overlooked

Also Read : Microsoft Earnings Likely to Prove Cloud Isn’t Slowing Down

Background on JEDI Contract

The Pentagon contract will move 3.4 million users and 4 million devices off private servers and into the cloud. The security risks of using servers outside the Pentagon’s domain are offset by physically separated government regions and hybrid solutions that extend on-premise servers by adding the cloud where necessary. The benefits of artificial intelligence, deep learning, and other technologies like virtual reality are essential for modern warfare as real-time data will inform missions when soldiers are in the field and also help to prepare them for combat.

“This program is truly about increasing the lethality of our department and providing the best resources to our men and women in uniform,” the Defense Department’s chief management officer, John H. Gibson II, told industry leaders and academics at a public event. Developing the system “will revolutionize how we fight and win wars.”

The DoD will not be the first to make a big move to the cloud. John Edwards, the CIO of the CIA, called moving to the cloud in 2013 ‘the best decision we’ve ever made.” According to Edwards, the 4,000 developers across the intelligence community work in the cloud environment, rather than individually provisioned workstations, which means the scalability does not come at the cost of the security. The Intelligence Community’s Cloud Services contract, called C2S for short, enhances security by not connecting to the internet. The results are better than expected as what used to take 180 days to provision a single server, improved to 60 days, and now takes a few minutes due to virtualization.

Also Read : Here’s Why Microsoft Stock Could Overtake Amazon on Cloud Infrastructure

JEDI Awarded to One Cloud Provider

One point of contention during the request for proposals, released on July 26th, was the stipulation that the contract be awarded to a single cloud provider. This provision caused a rebuttal to be sent to Congress as it narrows down who can compete on these terms. There are nine tech companies who have voiced opposition to the government awarding the JEDI contract to a single provider, including Oracle, Microsoft, IBM, Dell, Hewlett-Packard, Red Hat, and VM Ware.

While some cloud providers argue it will make the JEDI program less secure to be with one provider, this isn’t necessarily true as working with multiple providers introduces new vulnerabilities. One reason for this is that “managing security and data accessibility between clouds currently requires manual configuration that is prone to human error or resource limitation and therefore introduces potential security vulnerabilities,” as stated in the Pentagon’s response.

There are further disadvantages to storing data in separate silos across multiple vendors, which can weaken machine learning and artificial intelligence capabilities, reduce training performance and lower accuracy. The DoD is seeking to remove data silos as they move from their legacy systems, which are scattered across 500 individual cloud efforts.

The Case for Amazon

Amazon’s significant market share is one reason it is favored to win the contract. To put it simply, Amazon has the infrastructure and security clearances to meet the proposal’s guidelines while the majority of cloud contenders are too specialized to contend, such as Oracle with its flagship databases, or VM Ware with virtual machines. These limitations ultimately prevent these companies from meeting all of the proposal’s criteria.

Proponents for Amazon also point to the CIA contract that was awarded to AWS in 2013, which was a $600 million computing contract that services all 17 agencies in the intelligence community. Notably, for the last five years, Amazon has proven it can manage sensitive government information. Last April, Defense secretary Jim Mattis praised Amazon to lawmakers at a hearing when he said, “We’ve examined what CIA achieved in terms of availability of data” and “also security of their data, and it’s very impressive.”

Also Read : Microsoft Stock Price: Technical Analysis

The Case for Microsoft

The CIA contract was decided in 2013, but it wasn’t until 2014 that Satya Nadella started his tenure as CEO that the MS cloud platform Azure began its rise. Nadella worked his way up through the company over the course of nineteen years to president of the cloud business. At this point, Nadella who is not backing down with recent Level 6 security clearances anticipated in Q1 2019, which will put Azure on par with AWS with top-level security (more on this below).

There are many instances in the last four years where the DoD continued to choose Microsoft for software and operating systems. For instance, in May of 2018, the United States Intelligence Community extended its agreement to use MS products such as Azure Government, Office 365 for US Government, and Windows 10 in a joint licensing agreement with Dell. In this announcement, MS stated that over “10 million government customers from every federal cabinet level, including the Department of Defense” rely on MS’s Cloud for Government.


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In 2016, MS won a five-year contract to provide technical support to the Defense Information Systems Agency (DISA). In 2016, the original Windows 10 agreement that took effect in 2017 included 4 million laptops, desktops and mobile devices. More recently, in November of 2018, MS won a $480 million contract with the U.S. government to bring 100,000 augmented reality headsets into the military’s arsenal. The two-year contract will help soldiers prepare for combat training.

The question that remains is if the Pentagon will want to use Amazon for cloud infrastructure while using Microsoft for operating systems and software? If the Pentagon truly wants one provider, then Microsoft can offer an end-to-end solution for the DoD. This will be especially important as we see edge device computing built out, which Microsoft is preparing for with Azure Sphere.

We can also see from the timeline of MS’s press releases that the company is preparing to be a strong contender with Amazon on security:

  • In early 2017, Microsoft granted access to the Azure Government Department of Defense regions at Impact Level-5*, per their website.
  • In August of 2018, MS announced that Azure Stack, the hybrid solution, is available for government customers. This allows customers to maintain their own data centers while using cloud services for its advantages.
  • MS announced Azure Government Secret in October of 2017, which helps U.S. agencies handle classified data in areas such as energy research or law enforcement.
  • In October of 2018, when the Pentagon contract bids were due, MS posted on its blog that by the first quarter of 2019, Azure Government Secret will support “Secret U.S. classified data or Defense Information Systems Agency (DISA) level 6 workloads*.”

*Level 5 security is what Microsoft currently holds while Level 6 is what will be required by the Pentagon and is what Amazon currently holds. Microsoft will achieve Level 6 by Q1 2019. Here is a snapshot of the different levels of security authorizations (image source: Defense Information Systems Agency)

pentagon contract
Levels of Security Authorization Chart

Takeaway:

Microsoft has had a long relationship with the government that precedes the 2013 CIA contract. At the time of this contract, MS was not a cloud contender, but Satya Nadella was determined to change this.  MS will soon be an apples-to-apples contender with AWS on security, hybrid solutions and government cloud regions. Meanwhile, MS has secured the operating systems and software used by the Pentagon, through licensing with Dell. If the DoD were to choose Amazon, they’d still have to work with Microsoft on security, and would technically be working with two vendors. However, if the Pentagon wants one provider for end-to-end cloud computing, software, operating systems, and edge device computing software such as Azure Sphere, then Microsoft is the clear choice.


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8 Comments

    • beth.technology beth.technology

      Hi Tom, Thanks for the comment. Lol. I was going to put the Supermicro hack into the article but I felt it was already pretty contrarian. Here is the excerpt I had written:

      “Pricing may be important to cloud infrastructure customers, but security is monumental. According to a report by Bloomberg, the Chinese government infiltrated a number of U.S. companies by sneaking tiny chips onto the motherboards from a company named Supermicro. The report draws parallels of the timing to when Amazon sold off its physical server business in China in November of 2017 for $300 million, citing the supply chain compromise as the motivation. One source at Amazon described the deal to sell the Chinese servers as an attempt to “hack off the diseased limb.” Overall, the report had more than a dozen inside sources, however, all anonymous due to the implications of sharing classified information.

      Notably, Amazon, Apple, and Supermicro have all refuted the claims. However, if this is a true espionage case, then the people refuting the claims are likely not aware of situation. Regardless, the bombshell report came at a less than auspicious time for Amazon, and if true, it would likely affect the Pentagon’s decision.”

  1. Mike Mike

    Your opening sentence and the math in your opening paragraph are way off.

    • beth.technology beth.technology

      Hi Mike,

      Thanks for the comment. This is the biggest cloud contract and customer to date with many sources confirming this. Here’s one: https://www.cnn.com/2018/11/15/business/amazon-government/index.html

      I understand you may want this to read as adding $1 billion to $2 billion per year to the market due to the multi-year contract (which I clearly reference in the first paragraph). However, everything stated is accurate:

      a) The DoD contract is worth $10 billion
      b) This is 25% of the current market of $40 billion

      I did not say it was worth 25% of the ANNUAL market, which is how you are reading this. At 25% of the current market, this is a huge contract and investors will respond accordingly.

      Cheers, Beth

      • Mike Mike

        That’s a pretty deceptive way to phrase it–what is the point you’re trying to make by doing so? And at any rate, your numbers don’t really add up. The JEDI contract is for 10 years, so it’s going to be worth on average $1B/year, but that almost surely won’t be spread evenly over that time. So a) it probably won’t be worth $1B in the first year (2019), and b) even if it was, that still doesn’t make the DoD the biggest cloud customer.

        Also, where are you getting this $40 billion number from? AWS alone did nearly $7B in Q3 2018, so at that run rate, they’d account for 70% of that total annual number by themselves.

        • beth.technology beth.technology

          Hi Mike, In this case, I used Gartner as a source for the $40B IaaS market. “Industry analyst firm Gartner predicts that the infrastructure-as-a-service (IaaS) market will grow by 35.9% in 2018 (only a slight decrease from 38.6% in 2017) to reach $40.8 billion by the end of the year. IaaS shows no sign of slowing down in the foreseeable future, and is expected to reach $83.5 billion by 2021.”

  2. Bobo Bobo

    The privatization of our government is the worst thing imaginable and that is all that has been happening for the last 40 years. Our government, as broken and corrupted as it is, still has to somewhat answer to the public, although it rarely does, these private companies don’t have to answer one bit to the public, and they won’t. They’re able to acquire, store, and use as much data and information as they want, and with their bought and owned politicians not much can be done about it. Individual people are gaining way, way, way too much wealth, power, and control. All this privatization is just another way to bleed the tax payers dry and control the masses. OUR government, military, and spy agencies should be storing their own data and information.

  3. Max Max

    Hi Beth. Wondering if you could comment a little more on what is the latest with the IL6 certification for Azure. Seems like they made it available for private evaluation in April, but I see no news since. How long do you think such a process might take? Do you have any info on how long it took for AWS, for comparison? Just wondering about the timing here.

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