Amazon and Google are taking on defense contractors in a heated battle for billions in government contracts.
Next month, the Defense Department is expected to bid out a lucrative contract that will task a single cloud provider with building the cloud the U.S. military will use for war.
The Joint Enterprise Defense Infrastructure contract—perhaps worth as much as $10 billion over 10 years—will put a commercial company in charge of hosting and distributing mission-critical workloads and classified military secrets to warfighters around the globe.
Many experts believe Amazon Web Services is considered the odds-on favorite to win JEDI because it already hosts classified data, yet public jockeying for the department’s business spotlights a larger battle among industry for dominion over a growing federal cloud market.
The Defense Department awarded about $2.3 billion in cloud computing contracts in fiscal 2017, according to an estimate from Deltek, a research firm that crunches government spending data. Deltek predicts Defense spending on cloud could grow 20 percent year over year through 2022 and a total potential cloud market across the federal government of more than $6 billion. Those estimates came before the department released JEDI and another cloud contract with an $8 billion ceiling.
In any case, the Trump administration’s quest to modernize decades-old technology and close all but the most necessary of 11,000 federal data centers created a new cloud market sought primarily by two types of companies.
On one side, established tech and defense contractors like Leidos, General Dynamics, Oracle, Microsoft and IBM, whose systems and software already underpin huge swaths of government and military services. They aim to keep a hold on their market shares.
The old guard is being challenged by West Coast disruptors, led by Amazon and Google, which host their own technology ecosystems with thousands of commercial customers and partners.
“There is definitely increased competition based on new companies with new offerings coming into the market, and the Defense Department is looking for new options,” Alex Rossino, senior principal research analyst at Deltek, told Nextgov. “But I would not underestimate the experience established companies have in the marketplace and the Defense Department’s familiarity with them.”
Companies from both sides have nabbed important government cloud contracts. Amazon Web Services arrived as a major government player in 2013 when it landed a $600 million contract to build a commercial cloud for the CIA and intelligence agencies. IBM, General Dynamics and Microsoft each have multimillion-dollar military contracts to host sensitive information on their platforms.
Yet JEDI represents perhaps the most lucrative government cloud contract to date, and a flashpoint in the battle between traditional contractors and new companies.
A Game of Influence
In public, trade groups like the Professional Services Council and IT Alliance for Public Sector—which represent a mix of old and new contracting blood—encouraged the Defense Department to pursue a multi-cloud contract instead of a single award. Yet these groups tow a fine line for fear of alienating members on either side.
These members could be called frenemies: They sometimes partner for business and lobbying but otherwise compete against each other. JEDI has magnified the animosity.
“It’s a balancing act,” one representative told Nextgov. “We have to be very careful in our messaging.”
Behind the scenes, the battle gets more interesting and less cordial.
Bloomberg reported Oracle is leading an anti-Amazon lobbying campaign, in conjunction with Microsoft, IBM, Dell and HPE. According to the report, the campaign’s goal is to get the Defense Department to award the JEDI contract to multiple companies instead of just one.
Oracle, whose co-chief executive met with President Trump in April, took legal action in February against a $950 million Defense Department cloud migration contract awarded to REAN Cloud, an Amazon Web Services partner company. While the case is pending, the Defense Department reduced the value of the contract to $65 million.
Kenneth Glueck, vice president of Oracle, told Nextgov the Defense Department’s “strategy to move to the cloud is the right one.” Oracle, however, continues to take issue with the decision to award JEDI to one company. Oracle, Microsoft, IBM and other “incumbent companies” operate the “vast majority of workloads that make government work,” he said.
“It seems a bit of a shame to exclude what would be perhaps the best solutions,” Glueck added.
Amazon is organizing its own industry group called the Alliance for Digital Innovation. Federal News Radio reported the group will consist of Amazon partners and resellers, and will advocate the company’s positions on government issues. In addition to increasing its federal cloud revenue, Amazon is interested in providing e-commerce services to the federal government.
The Internet Association, an industry group that represents internet companies including Microsoft, Amazon and Google, is also ramping up its presence in Washington. One of the group’s goals is helping its members secure government business.
Financially, companies from both sides are spending big on efforts to influence lawmakers on a variety of issues, including defense and information technology policy.
Google, which is racing to meet government requirements to compete for JEDI and other government contracts, spent $18 million—more than any other company—on federal lobbying in 2017. Amazon spent $13 million last year and has increased its lobbying spend each year since 2012. In 2016, Amazon made a concerted effort to lobby the White House on defense and cloud procurement, according to Bloomberg.
Oracle spent $12.3 million lobbying last year, focusing primarily on the National Defense Authorization Act. IBM spent $5.3 million on a mix of internet and defense policy issues. General Dynamics, which purchased competitor CSRA for $9.7 billion in large part to better compete for defense IT contracts, spent $11 million lobbying almost entirely on defense and tech issues. Microsoft spent $8.7 million lobbying officials.
The point is to ensure lawmakers are on their side. Sources on Capitol Hill tell Nextgov companies have been meeting with staffers from the Armed Services committees, pleading their respective cases.
Congress creates budgets and appropriates funds—or if it’s not satisfied with a program, withholds them. Lawmakers already signaled they’re watching the JEDI procurement, using the omnibus spending package to mandate two reports. The first must outline details such as budget requests while the second directs the defense secretary to outline the department’s cloud plan from best practices to exit strategy. The second report also tells the department to justify a single award instead of multiple awards, something it has not yet done publicly.
The reports are due back to Congress in May, around the same time the Defense Department says it wants to bid out the JEDI contract. Defense Department Comptroller David Norquist told the Senate Armed Services Committee Thursday that the Pentagon will send a justification for the single-award JEDI cloud contract on May 7.
Throughout the acquisition, Defense officials have stood by a timeline to award JEDI by September and initiate migrations by the beginning of fiscal 2019. When asked by the SASC about the "rush" to award JEDI at Thursday’s budget hearing, Defense Secretary James Mattis said it was needed for "lethality."
Defense Department Holding Firm
Defense Department Deputy Secretary Patrick Shanahan told reporters Tuesday that the Pentagon will continue its single-award approach to JEDI. However, Shanahan said the contract would “represent less than 20 percent” of the Defense Department’s cloud capacity, and said the Pentagon would strengthen its relationship with multiple cloud suppliers in the coming years.
The initial JEDI contract gives the winning company two years to prove its worth and options to extend work for an additional eight years. While Defense officials have not assigned a value, market analysts estimate JEDI will be worth approximately $1 billion per year, larger than any previous government cloud contract.
The Defense Department also is pursuing a second multibillion-dollar cloud contract called the Defense Enterprise Office Solution. DEOS, with an $8 billion ceiling, will also pit old guard companies against new ones. Microsoft, IBM and Google, three contenders for JEDI, are also early favorites to win DEOS, according to contracting experts.
“I would characterize the cloud as we’re ushering in a new age of technology,” Shanahan said. “It’s a small step of many steps that are going to occur over the next many years. I don’t think any of us has a crystal ball that’ll even be able to say what it’s going to be like two years from now.”