Department of Defense
The FBI and Department of Homeland Security issued a warning about the North Korean government targeting U.S. businesses with malware. Spc. Garrett L. Dipuma/Louisiana Army National Guard

The U.S. Department of Defense (DoD) announced late on Friday it had awarded a $10 billion cloud computing contract to Microsoft (NASDAQ:MSFT), which beat out larger rival Amazon.com (NASDAQ:AMZN). The decision surprised observers who considered Amazon Web Services (AWS) to be the front-runner for the lucrative government deal.

The Joint Enterprise Defense Infrastructure Cloud (JEDI) contract set off a contentious battle between many of the biggest names in technology. In addition to Amazon and Microsoft, IBM (NYSE:IBM), Oracle (NYSE:ORCL), and Google parent Alphabet competed for the deal. After the initial review process, only Amazon and Microsoft were determined to meet the minimum technical requirements necessary to be part of the final round of consideration.

The 10-year contract is part of a Pentagon efforts to modernize the military's computing infrastructure, much of which is decades old, using computers from the 1980s and 1990s. The technology is woefully inadequate in today's high-tech environment, and the government is spending billions of dollars to update its antiquated information technology (IT) systems.

A process mired in conflict

As a result of the size and importance of the contract, the process was riddled with drama and backbiting from the beginning. There were accusations of numerous conflicts of interest from Oracle, which even went so far as to levy allegations of conspiracy against Amazon. Lawmakers eventually asked for a pause in the deliberations to investigate the claims.

President Trump even weighed in on the proceedings this summer, "I'm getting tremendous complaints about the contract with the Pentagon and with Amazon," he said. "They're saying it wasn't competitively bid."

Trump has been openly hostile toward Amazon and its founder, Jeff Bezos, leading some to worry that he would try to influence the proceedings. A Pentagon spokesperson countered, saying, "The secretary was not ordered by the president to make any specific determination about JEDI, period."

After promising to conduct a thorough review, Defense Secretary Mark Esper was later forced to recuse himself from the decision-making process because his son works for IBM.

May the best cloud win

Amazon released a statement saying, in part:

We're surprised about this conclusion. AWS is the clear leader in cloud computing, and a detailed assessment purely on the comparative offerings clearly led to a different conclusion. We remain deeply committed to continuing to innovate for the new digital battlefield where security, efficiency, resiliency, and scalability of resources can be the difference between success and failure.

The DoD sought to downplay any accusations of favoritism, pointing out that it had awarded more than $11 billion across 10 separate cloud contracts. The Pentagon said in a press release, "As we continue to execute the DOD Cloud Strategy, additional contracts are planned for both cloud services and complementary migration and integration solutions necessary to achieve effective cloud adoption."

The cloud is big business

Cloud computing is among Microsoft's fastest growing businesses. When the company reported earnings earlier this week, it revealed that Azure Cloud revenue grew by 59% year over year, while its commercial cloud revenue of $11.6 billion grew 36%.

The cloud is also Amazon's biggest growth segment. For the third quarter, AWS revenue grew to $9 billion, up 35% year over year. It is also the source of Amazon's juiciest operating margins, lately topping out at 25%.

There will be additional Pentagon contracts in the years ahead, but this deal was viewed as having implications for future awards. Winning this deal is likely to raise Microsoft's status in the cloud computing arena.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft. The Motley Fool is short shares of IBM and recommends the following options: long January 2020 $200 calls on IBM, short January 2020 $200 puts on IBM, long January 2021 $85 calls on Microsoft, and short January 2020 $155 calls on IBM. The Motley Fool has a disclosure policy.

This article originally appeared in The Motley Fool.

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