Amazon, Oracle, Microsoft Jockey for Pentagon's Cloud Business

Ben Brody, Nico Grant and Naomi Nix (Bloomberg) -- In late February, Oracle Corp. co-CEO Safra Catz met with a top Pentagon official to discuss the government’s defense strategy days before the department was set to outline how it plans to spend billions of dollars on cloud-computing services.

Catz’s meeting with Deputy Secretary of Defense Patrick Shanahan, which was confirmed by a department spokesman, came as technology companies are raising concerns that the Pentagon is leaning toward choosing Amazon.com Inc.’s cloud division as a single provider for a multiyear contract to modernize its technology infrastructure.

Having already won two other government cloud contacts, Amazon Web Services is widely perceived as the front-runner for the Defense Department’s cloud award, while companies including Oracle, Microsoft Corp., and International Business Machines Corp. fight for a piece of that business.

Oracle has a vested interest in how the contract is awarded because it has long-term contracts with multiple government agencies that use its flagship database to store information on their own systems. As the agencies look to switch to cloud computing and eye market leader Amazon, these moves threaten Oracle’s traditional revenue sources. Oracle has tried to protect its database business by offering cloud services of its own, but has come late to that market.

Catz Meeting

The Catz meeting was "one of several such meetings that Deputy Secretary Shanahan is having with senior leaders of technology companies to brief them on the National Defense Strategy and its implementation," Defense Department spokesman Navy Capt. Jeff Davis said in an email. Davis said the Pentagon’s cloud initiative wasn’t specifically discussed and there was no mention of any specific contract or companies. Oracle declined to comment on the meeting.

The Pentagon, which has pledged a fair and competitive selection process, will outline its plans for the procurement to IT vendors at an industry event that more than 100 companies are expected to attend in Northern Virginia on Wednesday. Oracle, Microsoft, IBM, and Alphabet Inc.’s Google are just some of the companies planning to be there.

“For years, Congress urged the department to streamline the way we buy, sustain, and invest in capabilities,” Pentagon spokeswoman Dana White said in a March 1 statement about the event. “We achieve this by leveraging the innovation and ingenuity of the private industry.’’

Shift to Cloud

Cloud services -- in which computing power and storage are hosted in remote data centers run by a third-party company rather than on-site in locally owned machines -- can range from powering email and storing personnel files to running complex decision-making algorithms. The Pentagon said it’s making the shift to the cloud to strengthen its use of emerging technologies, including artificial intelligence, machine learning and the internet of things.

Tech companies, still worried that the Pentagon could favor Amazon, point to the Defense Department’s decision in early February to award a contract of as much as $950 million to REAN Cloud LLC, an Amazon affiliate, to help migrate its data to the cloud. On Monday, the DOD said it was unaware of the award, made by its Silicon Valley-based innovation unit, and reduced the contract to $65 million.

REAN didn’t respond to a request for comment Tuesday.

REAN Contract

Oracle in February formally protested the REAN contract, saying the company was opening a door to AWS and asserting that Amazon pressures clients to use REAN, according to a person familiar with the filing.

The president of the Coalition for Government Procurement, which represents defense contractors including Oracle, IBM and Microsoft, wrote in a November letter that "a single award DOD Enterprise Cloud Acquisition contract would lock-in DOD to a single cloud approach, and, by so doing, give rise to performance and national security risks."

Sam Gordy, the head of federal business for IBM, said he would prefer for the DOD to award multiple-cloud contracts competitively.

"God forbid we go to war in the next year to five years, this will be the cloud on which we go to war," he said. America shouldn’t be held back “because in peacetime it was simple to throw everything onto one cloud."

Modernize Technology

The jockeying over the cloud contracts comes as President Donald Trump’s administration is trying to modernize the federal government’s technology infrastructure. Last March, Trump created the White House Office of American Innovation to solicit input from business leaders on technology improvements, among other issues. In August, the White House’s American Technology council, headed by onetime Microsoft finance chief Chris Liddell, released a report calling for federal departments to accelerate their adoption of the cloud.

Seattle-based Amazon leads the cloud infrastructure market with 44.2 percent, followed by Microsoft’s Azure with 7.1 percent, China’s Alibaba Group Holding Ltd. with 3 percent and Google Cloud Platform at 2.3 percent, based on total cloud industry 2016 revenue, according to research firm Gartner Inc.

Amazon already has a cloud contract with the U.S. Central Intelligence Agency dating back to 2013 that’s worth $600 million. The online retail giant led by Jeff Bezos has the fastest-growing lobbying arm among tech companies and has spoken to the Pentagon about cloud or procurement since at least 2016, according to federal lobbying disclosures.

Present Bids

The companies will likely put their respective strengths on display as they present bids to the government. While Amazon is the leader in cloud services, Mountain View, California-based Google emphasizes its focus on security and Redmond, Washington-based Microsoft touts its ability to move existing databases onto the cloud in stages, while keeping some tasks and data in-house if the customer wants.

The transition to cloud could threaten on-site database providers such as Redwood City, California-based Oracle and IBM, based in Armonk, New York, that have long supplied government technology products but were later entrants into the cloud market.

“For Oracle and IBM, any government contract feels important. They’re entrenched government vendors," said Lydia Leong, a cloud analyst at Gartner. “Shifts to the cloud and going off of their architecture is not a happy situation for them.”