Amazon is fighting Microsoft tooth-and-nail over a Pentagon contract

A federal judge ruled on Friday that the Pentagon must put a hold on its Joint Enterprise Defense Infrastructure (JEDI) cloud contract with Microsoft after Amazon sued, arguing it was unfairly awarded to the company. Amazon CEO Jeff Bezos believes Donald Trump's personal issues with him is the reason Amazon was not awarded the contract last year and has sued the Pentagon.

The contract is worth roughly $10 billion over the course of a decade. It's part of the Pentagon's efforts to modernize its technical infrastructure. Amazon is claiming there was "unmistakable bias" during the evaluation process. Bezos is the owner of the Washington Post, which Trump has regularly criticized as allegedly not covering him fairly. That said, he thinks pretty much any negative coverage is unfair.

Once upon a time the Department of Defense thought that awarding a single contract for the massive JEDI cloud project, which will fundamentally alter how the entire United States military functions, made sense. "Single award is advantageous because, among other things, it improves security, improves data accessibility and simplifies the Department’s ability to adopt and use cloud services,” DoD spokesperson Heather Babb said in 2018. Regardless of if that plan makes sense in the long run, the DoD is certainly feeling the headache of such a massive contract right now.

“JEDI Cloud is a pathfinder effort to help DOD learn how to put in place an enterprise cloud solution and a critical first step that enables data-driven decision making and allows DOD to take full advantage of applications and data resources,” Babb said at the time, speaking to TechCrunch.

Although the contract gives the Department of Defense multiple points during the ten-year process to back out, it's widely believed that the company that ultimately wins the contract will fundamentally shape how the Department of Defense, which is the nation's singe largest employer with 2.87 million employees, will use cloud computing internally. To put that in perspective: imagine if your company won the contract to design the Internet used by every person in Chicago, which has a comparable population.

President Trump said last July that he was looking into the contract before it was awarded to Microsoft instead of Amazon. He claimed at the time he was receiving complaints from other companies that had been vying for the contract but provided no evidence of this. Amazon, which is most commonly seen as a shipping company, also owns the influential cloud computing service Amazon Web Services (AWS), which was seen as the likely winner of the contract. Until, Amazon argues, President Trump got involved.

Amazon has to put up $42 million to cover any possible damages the court halting this contract might cause Microsoft. Amazon is hoping to depose Trump, Defense Secretary Mark Esper and former Defense Secretary James Mattis as part of its effort to learn how the decision was made to award the contract to Microsoft over Amazon.

Amazon’s top spokesperson Jay Carney told CNBC that they want to make sure the decision wasn't based on Trump's bias against Bezos. “All we’re trying to do through this protest and this request for a legal review is to ensure that a proper decision was made on behalf of U.S. taxpayers,” Carney said.

Marty Puranik, CEO of the cloud hosting company Atlantic.Net, tells Inverse that this contract is a big deal, so it's not surprising Amazon is fighting for it.

"It's a very prestigious contract, and I think it sets the directionality in terms of where cloud computing is going—who the dominant player is going to be going forward—so I think it's important for both entities, Microsoft and Amazon, to win the contract," Puranik says.

Puranik says because of this contract's massive scope, it's ability to create within the federal government and the crucial national security standards set to be developed, it "checks all the boxes" that people look at when they're judging which cloud hosting service is the most esteemed. He says Amazon is already the market leader, but Microsoft is fighting hard to gain ground.

"AWS was the winner, and then Microsoft kind of scooped it up. That was a big game-changer in the industry because it validated Microsoft's cloud," Puranik says. "Amazon always markets its as the biggest and the best, but to lose a $10 billion contract, that's a statement."

It's going to be tough for Microsoft to beat Amazon in the cloud business, Puranik says, because the company is known for being willing to operate on very low profit margins if it needs to in order to gain market share. He says AWS is currently making a lot of money, but if it needed to make a lot less to beat out Microsoft, it probably would.

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"Microsoft has an existential threat where if Amazon dominates the cloud, they could end up being relegated to being a commodity producer of software inside of Amazon because Amazon's buying all of the server licenses, for example," Puranik says. "Microsoft won't have a lot of pricing power."