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Amazon protest could lead to a rebid of $10B Pentagon cloud contract

Amazon Web Services Inc.'s protest of a $10 billion cloud contract award for Microsoft Corp. will delay the contract's implementation and could lead the U.S. Department of Defense to rebid the work, though the outcome may not change, analysts said.

The court review process of the Amazon Web Services, or AWS, formal protest of the DOD award is likely to take months. In the event of a court-ordered rebid, the DOD could change the terms of the request for the work, but that may or may not result in a new winner, the analysts noted.

In a lawsuit filed Nov. 22 in the U.S. Court of Federal Claims, AWS claimed that U.S. President Donald Trump "launched repeated public and behind-the-scenes attacks" to steer the Joint Enterprise Infrastructure Defense, or JEDI, contract away from AWS and thus harm his perceived political enemy Jeffrey Bezos, founder and CEO of AWS's parent company, Amazon.com Inc., and owner of The Washington Post.

If the court sustains the bid protest, AWS could get another chance to compete for JEDI, a flagship deal designed to put a single cloud service provider in charge of remotely hosting and distributing information to warfighters.

"The DOD could rebid [JEDI] as is, they could redefine the scope and rebid it that way, or they could just say 'no this was evaluated fairly, Microsoft won, we're going to move forward with it,'" said Michael Hettinger, founder and manager of the Hettinger Strategy Group, a government relations and federal market advisory firm, in an interview.

SNL Image

President Donald Trump, Microsoft CEO Satya Nadella and
Amazon CEO Jeff Bezos at a 2017 White House event. Amazon is
challenging a 2019 DOD contract award to Microsoft in federal court.

Source: AP Photo

An uncertain path forward

Microsoft, whose Azure cloud platform is used by companies ranging from Daimler AG to online fashion retailer ASOS, is poised to begin preliminary prep work for JEDI. "We are diligently working with the Cloud Computing Program Office to bring this critical new technology to our men and women in uniform," a Microsoft spokesperson said in an emailed statement.

AWS declined to comment beyond its complaint. While it waits for the court's decision, Amazon is likely to lobby its government contract customers to continue working with Amazon, said Andrew Hunter, director of the Defense Industrial Initiatives Group at the Center for Strategic and International Studies in Washington D.C., in an interview. He noted that JEDI will offer an umbrella cloud system that will house classified documents for DOD, but no other government agency would be required to use the platform.

"My guess is, in the meantime, Amazon is going to be busy going to entities within the government who really want to work with them and not with Microsoft," Hunter said.

'Crown jewel' of contracts

The JEDI contract represents the possibility of more growth for whoever ultimately secures it. Hettinger called it the "crown jewel" of government contracts because it offers the potential for a pipeline of lucrative follow-on cloud contracts. Currently, the Pentagon uses a fragmented network of more than 500 clouds across the DOD that are managed individually. The DOD contract is meant to create a larger, centralized cloud that all intelligence agencies can utilize.

"It's not just $10 billion," Hettinger said of the JEDI award. "It's access to a lot of opportunities inside DOD. If you win the biggest and most secure cloud contract in the federal government, that gives you a qualification that sets you apart from your competition."

In its lawsuit, AWS states that it is uniquely qualified to handle the JEDI work given its advanced cloud and security architecture and accredited ability to manage secret and top-secret classified information. AWS, whose clients include the Central Intelligence Agency, is a fast-growing unit of Amazon that reported $25.66 billion in net sales in 2018, up 47% from $17.46 billion in 2017.

The Trump administration and the DOD did not immediately respond to requests for comment.

The legal challenge

Bid protests have been a popular way for companies to challenge the outcome of a government agency decision for decades, but this case is particularly high-profile given that AWS alleges that Trump intervened in a contest where AWS was considered the front-runner.

It is unusual for a U.S. president to express "clear disdain" for a competitor to a contract, but the court challenge will hinge on whether the DOD executed the technical evaluation of the proposal correctly, said Franklin Turner, a co-leader of the government contracts and export controls practice group at McCarter & English, in an interview.

"Anything else at this point is sort of extraneous," he said.

In a Dec. 9 note, Wedbush Securities analyst Daniel Ives said that while AWS's bid protest will cause "noise and delay" to the official start of JEDI, "we do not believe that this will change the decision."

Win or lose, Amazon is giving itself a platform to argue why it should have won, Tom Forte, an analyst with D.A. Davidson, said in an interview.

"If they can make the smallest of arguments that this high-profile contract was awarded not on merit, then it's to AWS's advantage to appeal," Forte said. "They are getting an opportunity to tell the world 'here are the five reasons why we should have been chosen.'"