Microsoft Can Still Declare Victory in Pentagon's Cloud Deal

(Bloomberg Opinion) -- After years of partisan and legal infighting, the U.S. Pentagon gave Amazon.com Inc. a big victory on Tuesday by reopening its blockbuster cloud-computing contract. Assuming the decision doesn't get appealed in the courts, it could be a good result for the government. Even Microsoft Corp., the original sole winner of the initial deal, may be able to declare victory.

The Defense Department said it is abandoning the $10 billion Joint Enterprise Defense Infrastructure or so-called JEDI deal that it awarded to Microsoft in 2019, and which was immediately disputed in court by Amazon. The government explained the move by saying its technology requirements had changed during the years the contract was mired in litigation. It now plans to seek proposals for a multi-vendor deal from a handful of companies that can fulfill its needs, specifically naming Amazon and Microsoft. The government also said it would consider bids from other companies such as Oracle Corp., International Business Machines Corp. and Alphabet Inc.'s Google if they can meet the conditions, but signaled only Amazon and Microsoft had the capabilities it required.

This is good news and should accelerate the eventual deployment of the vital cloud-services infrastructure our military needs. After Microsoft was awarded the contract, Amazon sued the government, alleging the Trump administration interfered with the procurement process. Amazon said the Pentagon buckled under political pressure and disregarded the company's better technology capabilities. Oracle also sued for unfairly being left out of the proposal stage. Then in April, a Federal judge rejected the government's and Microsoft's request to discard Amazon's lawsuit, guaranteeing further litigation and delays.

There are clear winners and losers from the announcement. It appears Oracle, IBM and Google will again lose out on any big proceeds. Amazon obviously benefits from getting access to a high-profile contract. But Microsoft may still be the winner of the entire process.

Microsoft may have lost out on the full deal, but the Defense Department's decision shows that the Pentagon considers the technology giant as a near equal to market leader Amazon Web Services. Even before that, the government's initial award in 2019 gave Microsoft greater credibility among potential corporate customers when touting its cloud-computing prowess. And it looks like this has helped. Data released by Gartner last week showed revenue at Microsoft's Azure cloud division grew by nearly 60% last year, beating the 41% sales growth for the overall market and the 29% rise for Amazon Web Services.

While I doubt the Pentagon's decision was made on purely technical merits, whatever the government needs to do to get the process moving again should be commended. Our troops need access to the modern technological capabilities that cloud computing provides. Following the Pentagon's announcement, Microsoft said in a blog post that it accepted the decision to not move forward with the JEDI contract, saying the security of the country is more important than the single contract. The rest of the bidders should follow Microsoft's lead.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.