Pentagon Drops a Bomb on AWS
Friday’s surprise announcement by the Pentagon that it was selecting @Azure over @AWScloud for the #JEDIcontract war cloud caught everyone by surprise. Even Microsoft was caught flat-footed, asking reporters for more time to fashion a comment late on a Friday.
This is the biggest deal in Seattle enterprise technology not because of the $10 billion budget, but because it is accelerating the competitive relationship between the cloud giants. Azure is smaller than AWS but growing faster. JEDI reinforces that narrative.
In Q3 AWS came close to posting $9 billion in quarterly revenue for the first time, and sales accelerated by 35 percent, but growth slowed way down from the 46 percent increase it enjoyed a year ago. Meanwhile Azure continue to speed up with sales up 59 percent in Q3. AWS stock dropped 8 percent on Thursday.
And then came JEDI. The announcement helps Azure more than it hurts AWS, but long term this may be a turning point from AWS market domination to a more competitive horse race.
Some pundits blame Donald Trump for tipping the scales in favor of Azure. If AWS sees evidence of interference I hope they appeal the decision. Absent new evidence I think Trump is a sideshow. This is a much larger competitive battle and it will continue long after Trump is impeached.
The benefits of JEDI for Azure are significant. Azure receives meaningful income (relative to their current revenues), market validation, and gets to define the military cloud for decades to come. Market validation may be the greatest benefit. Today when a company decides to shift to the cloud, they usually pick two cloud vendors for redundancy. AWS is always one of the vendors. The JEDI win helps Azure become the other vendor selected over other market participants GCP or IBM. And Azure is heading to a point where they may be the de facto choice. Of course they will need a lot more wins for that to happen.
The costs for AWS are less dramatic than the benefits to Azure. The income, $1 billion per year, is minor compared to AWS $36 billion in revenues. In terms of prestige, AWS already has major government contracts, such as the CIA, and contracts with hundreds of the world’s largest companies.
But losing the bid is not a good look. And the announcement comes on top of quarterly earnings that revealed sharper declines in AWS sales growth. Amazon hasn’t said anything, but many of us also wonder about the near term future for HQ2 in Virginia.
But Amazon is still the market leader, largely due to innovation and relentless investment. Developers and IT leaders love AWS. The number one cloud platform has more than 160 services and introduced more than 1,000 new features last year. Microsoft has a lot of ground to cover to try to catch up. And by then AWS will be way out in front again. The horse race has begun in earnest.