Amazon and Microsoft Trade Insults Over High-Stakes JEDI Contract

Amazon filed a protest this week with the Pentagon requesting more clarity on the bidding process, and the two tech giants traded barbs about their respective claims.
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In case there was any doubt, the gloves are officially off in Microsoft and Amazon's ongoing cloud battle. 

The two tech giants swapped testy blog posts this week over the Pentagon's $10 billion JEDI cloud contract, which was surprisingly awarded to Microsoft last year. Amazon  (AMZN) - Get Report and Microsoft  (MSFT) - Get Report are locked in a high-stakes lawsuit over the bidding process for the contract. 

In a blog post on Thursday, Microsoft VP of communications Frank Shaw depicted Amazon as a sore loser that is "asking for a do-over" in the bidding process and interfering with necessary work at the Pentagon. Earlier this year, a judge granted a request by Amazon that Microsoft and the Pentagon postpone work on the project until the conflict plays out in the courts.

Not to be outflanked, Amazon PR exec Drew Herdener took to the AWS blog on Friday to "[set] the record straight."

"Recently, Microsoft has published multiple self-righteous and pontificating blog posts that amount to nothing more than misleading noise intended to distract those following the protest," he wrote. "Nobody knowledgeable and objective believes they have the better offering. And, this has been further underscored by their spotty operational performance during the COVID-19 crisis (and in 2020 YTD)."

Ouch. And yet the burns are far from petty in light of the stakes in the $10 billion deal. 

Microsoft's posts this week were triggered by a new development in the court fight, with Amazon filing a concurrent protest directly with the Pentagon requesting more clarity on the bidding process, which Amazon claims was unfair. In Amazon's original court complaint, it alleged that the Pentagon's process for awarding the contract was tainted by "egregious errors," as well as meddling by President Trump. Trump has expressed disdain for Amazon CEO Jeff Bezos in the past, and claimed at a news conference last year that the process was unfairly weighted towards Amazon. 

The deal is also viewed as a milestone in the future of cloud computing.

Amazon's AWS is the market leader in cloud infrastructure and services, but Microsoft's second-place Azure has been capturing share as the market grows as a whole. And the ten-year JEDI deal could open up more opportunities for Microsoft, with federal cloud spending expected to surge to $9.1 billion by 2024, up from $5.3 billion last year, according to Deltek.

Microsoft shares climbed to record highs after the JEDI deal was announced in October 2019. 

Given sensitivities with military work, some of the lawsuit's details are non-public. The Pentagon's inspector general also investigated the bidding process and found that Microsoft's victory did not appear to stem from White House pressure. 

We may not know how the case will ultimately play out, but Court of Federal Claims Judge Patricia E. Campbell Smith, who is overseeing the case, indicated there was an "error" in the bidding process. And the Pentagon also requested 120 days to "reconsider" certain aspects of the bidding process.

The messy lawsuit could wind up splitting the baby between the two tech giants, according to Wedbush analyst Dan Ives. 

One outcome could be a protracted court battle, with work on the JEDI project delayed. The other possible scenario, according to Ives, is that "the Pentagon reconsiders the bid and ultimately breaks the $10 billion bid up between Microsoft and Amazon (and potentially other vendors) and moves this forward and out of the courts." 

"While initially this was a single source contract, we believe the writing is on the wall that the Pentagon needs to likely break up this contract in order to move it along and start the procurement process given how critical the JEDI deal is to the overall DOD and longer term strategic global military operations/infrastructure," he wrote. 

Shares of Microsoft have gained 14% year to date, while Amazon shares are up  28%.

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