With its surprising win of the controversial Pentagon cloud technology contract, Microsoft’s Azure has suddenly emerged as a stronger alternative to cloud technology market leader Amazon Web Services.

Microsoft Corp., whose Azure cloud technology competes with industry leader Amazon Web Services to provide companies with internet infrastructure for growing ecommerce and other operations, gained a surprising lift in the cloud business last week when the Pentagon awarded it a $10 billion cloud-computing services contract that had been expected to go to Amazon.com Inc.

A trend towards more centralized procurement of cloud as well as hybrid purchasing does put Microsoft on an even or better footing.

But the contract—unthinkable for Microsoft even a year ago—will likely come at a cost, legal and internal.

Amazon—which increased its lobbying efforts in Washington this year as the Pentagon neared its contract decision—is considering a challenge to the award of the contract to Microsoft’s much smaller Azure business, citing President Donald Trump’s interference in the bidding process, according to a person familiar with the matter. Amazon had been widely considered the front-runner because of its superior size and previous cloud contract with the Central Intelligence Agency.

Amazon, Microsoft, Google, Oracle Corp. and other providers of cloud-computing and data-storage services are competing to meet increasing demand for cloud technology, which can play a crucial role in business-to-business and retail ecommerce companies’ plans to build out the internet technology infrastructure they need to operate ecommerce technology ecosystems that help them better interact with customers and trading partners. (Microsoft launched Azure in 2010 as Windows Azure, rebranding it in 2014 to Microsoft Azure.)

The Pentagon contract award came shortly after Microsoft reported that its commercial cloud technology business led revenue growth year over year for the first fiscal quarter ended Sept. 30; commercial cloud revenue increased by 36% to $11.6 billion as total revenue increased by 14% to $33.1 billion.


“The world’s leading companies are choosing our cloud to build their digital capability,” Microsoft CEO Satya Nadella said when announcing the Q1 cloud revenue results. “We are accelerating our innovation across the entire tech stack to deliver new value for customers and investing in large and growing markets with expansive opportunity.”

Some employees of Microsoft, meanwhile, have expressed objections to their company’s involvement in military operations, though Nadella says Microsoft’s senior management supports the Pentagon deal and looks forward to additional opportunities with the government.

Microsoft says workers can request to be moved to other projects. But that is no simple matter in huge cloud efforts: Sales, marketing, engineering and data center operations can involve tens of thousands of workers

Analysts wrote that while the dollar amount of the deal made it “inconsequential” for Microsoft’s near-term results, it still represented a milestone for its fast-growing cloud business. The Joint Enterprise Defense Infrastructure award—or JEDI—potentially opens the “floodgates” for other government contracts, in the words of Bloomberg Intelligence, even as Amazon is expected to protest.

Shares of Microsoft spiked as much as 3.1% to an intraday record on Monday, Oct. 28, while Amazon fell 0.8%. Thus far this year, Microsoft has risen more than 40% while Amazon is up about 17%.


This “great win” for Microsoft “validates Azure as a leading hyperscale cloud and signals that Azure continues to gain ground on AWS,” says Brad Reback, an investment analyst at Stifel Financial Corp. There is “plenty of opportunity for similar size (or even larger) deals like this available across enterprises,” and over time, “Azure has the potential to be Microsoft’s largest revenue stream and profit pool.”

The key for Microsoft will be whether it receives any follow-on awards or traction at other agencies, said analyst Walter Pritchard at Citi Research. So far, he says, Amazon “appears to have a substantial lead” in public cloud adoption, but “a trend towards more centralized procurement of cloud as well as hybrid purchasing does put Microsoft on an even or better footing.” At the same time, innovation at Amazon Web Services (AWS) “keeps those that prioritize innovation coming Amazon’s way.”

But Anurag Rana, an analyst with Bloomberg Intelligence, says the JEDI contract is “likely to open [the] floodgates” in terms of Microsoft’s potential government awards. The win “gives it key new opportunities in the federal market, but also with state and local governments across the globe, where use is significantly behind commercial counterparts.”

No matter the potential problems, the contract remains a major win for one of the world’s most valuable companies—showing investors and potential customers that it is a strong alternative to Amazon Web Services, which has been for years considered the default choice

“This is a paradigm changer for Microsoft,” says Daniel Ives, an analyst at Wedbush Securities who has a “buy” rating on Microsoft. “It’s a landmark win that will change the cloud-computing battle over the next decade. It’s a shocker to Amazon and Bezos to lose it.”


Digital Commerce 360 | B2B contributed to this report.

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