“Above the cloud with its shadow is the star with its light,” the ancient philosopher and mathematician Pythagoras famously said. Just so, the Federal Aviation Administration’s move to Microsoft’s (NASDAQ:MSFT) cloud service may not only streamline the agency’s email, it may help jump-start a system to guide airliners home more safely and less expensively.
It doesn’t hurt that the deal also gives MSFT a much-needed win over government cloud rivals like Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN).
It all started when FAA prime contractor Computer Sciences Corp. (NYSE:CSC) received a contract worth as much as $91 million (one-year with a six-year option) to implement Microsoft’s Office 365 email and collaboration suite inside a secure private cloud. The contract is a natural outgrowth of the federal government’s “Cloud First” policy announced last year.
CSC will migrate 60,000 FAA employees and 20,000 Transportation Department (DOT) employees — who currently use a crazy quilt of government email systems — to Microsoft 365. Instead of installing software on physical servers, the Microsoft applications are delivered “as a service,” an approach that’s more economical and allows access from anywhere, on virtually any device.
But the FAA settled on implementing Office 365 in a private cloud, instead of using Microsoft’s new Office 365 for Government — a multi-tenant service similar to Google Apps for Government and Amazon Web Services’ GovCloud.
FAA’s move to the cloud will do a lot more than provide less expensive, broader access to employees’ email. Achieving better collaboration throughout the agency will be essential in implementing the FAA’s new National Airspace System. This plan, known as the Next Generation Air Transportation System (NextGen), is a multi-year, multi-billion-dollar program to upgrade the nation’s aging air-traffic-management capabilities.
NextGen will be a boon for airlines like Delta (NYSE:DAL), United Continental (NYSE:UAL), US Airways (NYSE:LCC), American Airlines (OTC:AAMRQ) Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU) and others because it will make flying into busy airports easier, safer and more fuel-efficient.
And since fuel accounts for as much as 40% of airlines’ operating costs, it could increase the industry’s razor-thin margins and potentially boost share prices.
But NextGen can succeed only if the FAA can get the right information to the right person at the right time. It depends on “coordination with, and support from, FAA specialists on safety, airports, the environment, policy development and the other building blocks of modern air traffic management,” according to the agency’s NextGen implementation plan.
CSC already has a tight relationship with the FAA: It has been building new capabilities into the National Airspace System since its first contract with the agency 40 years ago. Hosting the Microsoft cloud solution further enhances that relationship.
So what does all this mean for investors? Here are four takeaways:
1. The FAA contract helps Microsoft in its duel against Google. The stakes are huge as cloud vendors scramble to capture the biggest share of the federal government’s nearly $80 billion IT services business. Microsoft needed this win after Google prevailed in a $35 million contract with the Interior Dept. last month. The two companies have been dueling over that contract in court since 2010.
2. It shows the government’s concern about security. The FAA opted for a CSC-hosted private cloud rather than use MSFT’s new “community” cloud, which raising questions about Microsoft’s Office 365 for Government. Federal agencies clearly have a low comfort level for sharing cloud space with other agencies and organizations — no matter how much security is provided.
3. CSC is poised to gain a big edge with the private cloud. This $91 million contract illustrates the value of quickly being able to bring highly functional, collaborative applications like the Office 365 suite to a secure private cloud. New CSC CEO Mike Lawrie may be shaking up the company, but CSC hasn’t lost its focus on the hot government cloud niche. The FAA contract, combined with CSC’s existing BizCloud (an on-site private cloud that can be up and running for government users in just 10 weeks), has the potential to be a game-changer.
4. The FAA’s collaborative cloud could jump-start NextGen. The faster NextGen takes off, the better it will be for airlines. But NextGen is behind schedule as the agency struggles to coordinate multiple ongoing efforts. Greater collaboration through the cloud could be just what the plan needs to fly.
Bottom Line: The federal government’s “Cloud First” policy will create huge efficiencies for agencies — and cause the cloud providers’ stars to rise or fall. The companies that best align their strategies with federal agencies’ requirements will win what counts most: a bigger piece of Uncle Sam’s nearly $80 billion IT pie.
And that should do go a long way toward lighting up shareholders’ returns.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.