Microsoft Corp. (NASDAQ: MSFT) has won the lucrative $10 billion cloud computing contract from the U.S. Department of Defense (DoD) after months of evaluation. The move is an outright victory for Satya Nadella, and it is a defeat over Jeff Bezos and Amazon.com Inc. (NASDAQ: AMZN). The move also was a victory on top of a prior victory over Oracle Corp. (NYSE: ORCL) and over International Business Machines Corp. (NYSE: IBM).

The Pentagon made the announcement of its decision for the Joint Enterprise Defense Infrastructure project on Friday evening, This so-called JEDI award aims to modernize the DoD’s technology infrastructure. Oracle had previously accused Amazon of having an unfair advantage due to ties at the Pentagon, and IBM had protested its removal from the massive government contract.

What is interesting here is not just the size, nor that President Trump had said he was considering getting involved. Defense Secretary Mark Esper had even removed himself from the process of deciding the winner in recent days. While impressive by the sheer size of $10 billion, perhaps the largest issue will be that this goes above and beyond bragging rights when it comes to competitive cloud contract awards ahead.

DoD said that it had previously awarded contracts of over $11 billion over 10 separate cloud contracts in the past two years. While this latest news is a Microsoft victory for the largest component of the JEDI contract, the DoD statement did note that “additional contracts are planned for both cloud services and complementary migration and integration solutions necessary to achieve effective cloud adoption.”

There is one issue that was long at the core for this decision process and was not given the public attention as much as the drama around the companies involved, and there was a chance the award would be a hybrid that kept multiple vendors involved. Cybersecurity may have been a key issue in this contract, as well as the focus and scope of these companies when it comes to day-to-day operations. After all, Microsoft is a more focused company and Amazon is now targeting almost anything and everything where it thinks it can make a buck or displace other businesses.

It appears as though there were fewer security concerns with Microsoft. And Microsoft has not been called out by the president to the extent that Amazon has been. These points should only be considered as observation and conjecture at this point, and they were not addressed or included in the formal announcement.

The DoD statement said:

Today the Department of Defense has taken another step forward in the implementation of our Cloud Strategy with the award of an enterprise general-purpose cloud contract to Microsoft. This continues our strategy of a multi-vendor, multi-cloud environment as the department’s needs are diverse and cannot be met by any single supplier. This contract will address critical and urgent unmet warfighter requirements for modern cloud infrastructure at all three classification levels delivered out to the tactical edge.

This award is the conclusion of a process that began with the release of the first RFI to industry nearly two years ago. Throughout that time, the department’s focus never wavered from the need to support our warfighters with this essential capability.

Again, this is a contract that is set to work in stages, and it is far too soon to go out and begin modeling how the revenue jump is going to come into play immediately at Microsoft. This is a multiyear award that has option periods extending out more than a decade. While a $10 billion award is massive for any company, even if spread out over a decade, Microsoft generated $125.8 billion in fiscal year 2019 sales, and Refinitiv has a consensus estimate of just over $140 billion for fiscal 2020 and $156 billion for fiscal 2021. Amazon generated almost $233 billion in revenues in 2018, and the Refinitiv estimates of $279 billion in 2019 and over $331 billion in 2020.

The ongoing review and future potentiality for more awards and vendors was noted by the DoD announcement as follows:

The base contract period is two years with a $1 million guarantee. The department projects that user adoption will drive an estimated $210 million of spending during the two year base period. The DOD will rigorously review contract performance prior to the exercise of any options. … The Department continues to assess and pursue various cloud contracting opportunities to diversify the capabilities of the DoD Enterprise Cloud Environment. Additional contracting opportunities are anticipated. … This award is an important step in execution of the Digital Modernization Strategy. … DOD will continue to partner closely with industry to bring the best of commercial innovation to bear on behalf of our nation’s warfighters.

While this announcement has now been made, it remains unclear whether there will be after-the-fact moves and lobbying efforts to overturn, appeal or even create further delays in the implementation. The current state of politics in the United States could also become a factor, but it’s just too soon to see how those balls will bounce and where they will finally settle.

Amazon closed down 1.1% at $1,761.33 on Friday after earnings, but it had traded down closer to $1,700 before the trade news helped the entire market. Its shares ended the week up less than $4 per share. Many analysts on Wall Street had trimmed their price targets after the earnings report.

Microsoft shares closed up 0.5% at $140.73 on Friday, but its stock had been at $137.24 prior to earnings, and the shares closed up more than $3 for the entire week. It was deemed an earnings victor at a time when slower economic growth and concerns about trade are weighing on many companies.

This is one of those contract awards that is massive in scope and seems massive for taxpayers. It is less massive for companies once you consider the duration and ongoing integrations and additional awards that will still be seen. That said, Microsoft being able to include in its sales pitches and competitive cloud contracts that it beat AWS out for the Defense Department’s JEDI contract is probably going to come up in other sales processes in the large enterprise contracts that are coming in the months and years ahead.

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