Amazon.com, Inc. Is Changing How the Military Shops

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Amazon - Amazon.com, Inc. Is Changing How the Military Shops

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Government contracting is inefficient and military contracting especially so.

Companies spend millions up-front trying to win contracts. The process can take years. The result is usually a draw, with the same set of companies divvying up the spoils. To get their marketing dollars out, you get the $640 toilet seat.

The Pentagon’s new contract for cloud, called the Joint Enterprise Defense Infrastructure (JEDI), challenges this. They insist there will be one contract, one winner, that proposals will be evaluated and a single system built, which the Department of Defense can use, securely, for cyber warfare.

For months, Amazon.com Inc. (NASDAQ:AMZN) has been seen as the frontrunner. It can build a hyperscale data center, like the one it already has in northern Virginia, quickly and efficiently. So, too, can Microsoft Corp. (NASDAQ:MSFT). But boosting Microsoft isn’t what Amazon’s competitors are focused on.

Split It Up

Sam Gordy, general manager for the federal business at International Business Machines Corp. (NYSE:IBM), has spoken up for the old way of doing business.  Instead of building a single cloud, he suggested commiting to a single standard. Oh, and by the way, IBM loves veterans.

Amazon has already won a $600 million contract to deliver a cloud to the CIA. That contract is, by all reports, delivering on its promises. This is the reality companies like IBM are fighting.

Oracle Corp. (NASDAQ:ORCL) COO Safra Catz, seizing on Donald Trump’s hatred of Bezos, has personally lobbied the President against the potential award.

“It just makes no sense,” she is reported as saying, claiming Amazon has an “unfair advantage.” She was joined by Trump adviser Peter Thiel.

Splitting things up is what the Department of Defense has been doing for decades. This is how non-computing companies like Northrup Grumman Corp. (NYSE:NOC) became cloud providers.  It’s how Computer Sciences, now DXC Technology Inc. (NYSE:DXC), got to $25 billion in revenue. They play the game, and they make taxpayers pay for it.

Amazon Playing, Not Playing the Game

Amazon is represented here by the head of worldwide public sector for Amazon Web Services.  The company is not deploying a host of specialized lobbyists with fruit salad on their chests.

The executive, Teresa Carlson, is taking the old network head-on. “When you are creating new technologies…you can’t settle for old and outdated policy or acquisition legislation,” she said recently.

The last part of the sentence is key. If JEDI is made a single award, the old guard threatens that their bid protests and Congressional challenges will tie things up for 12-18 months. Even then, a single award will be more efficient.

The military spends $40 billion on computing each year and less than 10% goes to “provisioned services” like cloud.

This move is overdue, but there’s a truism of computing in this decade that Amazon’s competitors conveniently ignore. Too many cooks spoil the cloud. There’s a reason clouds are built by single companies. It’s more efficient. Efficiency is what the defense establishment fears.

The Bottom Line on AMZN Stock

Winning or losing the JEDI contract won’t be make-or-break for Amazon. It will be make-or-break for IBM and for Oracle’s cloud ambitions. A rich vein of government profits would be welcome by a defense establishment that has been getting killed by the reality of cloud economics, the fact that it’s cheaper to deploy, cheaper to develop and single-vendor.

The JEDI contract is for $10 billion over 10 years, or $1 billion per year. Amazon Web Services should deliver more than $20 billion in revenue this year. To Amazon, it’s no big deal.

To its competitors, however, this could be a stake through the heart. This is the reason IBM dropped 5.7%, or $9.70 per share, on April 17.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, and MSFT.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/amazon-amzn-changing-military-shops/.

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