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Pentagon goes winner-take-all for cloud award worth billions

  • Tony Capaccio and Ben Brody
  • Bloomberg
  • March 09 2018, 6:30am EST

(Bloomberg) -- The Pentagon opened a winner-take-all competition Wednesday for a multibillion-dollar cloud services contract, dismaying Microsoft Corp., International Business Machines Corp. and industry groups representing rivals such as Oracle Corp., which worry the move will favor Inc.

While companies jockeying for a piece of the business pushed for the use of multiple cloud providers, the Pentagon announced its decision to go with a single company. The department already has difficulty moving information, particularly to the battlefield, and using multiple clouds would “exponentially increase the complexity,” Tim Van Name, deputy director of the ‎Defense Digital Service, said on a call with reporters.

The scope of the Defense Department’s current technology needs -- 3.4 million users and 4 million devices -- hints at the massive size of the award. Chief Management Officer Jay Gibson confirmed that “we anticipate this will be a multibillion-dollar contract,” although the Pentagon hasn’t given an estimate of the project’s cost.

“Whichever one of you wins this, I’m challenging you to bring your ‘A Game,’” Air Force Brigadier General David Krumm, deputy director for requirements for the Joint Chiefs of Staff, told industry representatives during an earlier briefing near the Pentagon in Washington’s Virginia suburbs. “This is going to make a difference like few things have to get data to our war-fighters when and where he or she needs it.”

A draft request for proposals issued Wednesday sought industry input for a two-year base contract with options for renewal over eight more years. A final request would be released in early May, with a contract award as soon as September, officials told the gathering.

Artificial Intelligence

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.

Having already won two other government cloud contacts, Amazon Web Services is widely perceived as the front-runner for the Defense Department award. Industry groups had called for multiple contract awards, which could improve the opportunities for companies including Oracle, Microsoft, Alphabet Inc.’s Google and International Business Machines Corp.

Chanda Brooks, a Pentagon contracting officer, told the gathering Wednesday that market research shows that multiple companies are capable of meeting the requirements and that the “full and open competition” would result in a single award. Van Name, of the ‎Defense Digital Service, which recruits technology experts from the private sector for stints working on projects at the Pentagon, denied that the department is leaning toward Amazon.

“It’s about the best proposal,” he said. “We have no favorites.”

The industry pushed back on the department’s sole-source position.

Roger Waldron, president of the Coalition for Government Procurement, which represents defense contractors including Oracle, IBM and Microsoft, said “going to a single vendor closes the market to just that vendor for a decade.”

Microsoft and IBM also separately criticized the department’s decision. Microsoft said it was “disappointed,” while Sam Gordy, general manager of IBM U.S. Federal, called the move “flawed.” Google declined to comment, and Oracle didn’t respond to a request for comment.

Scope of Initiative

Underscoring the scope of the initiative, Essye Miller, the Defense Department’s acting chief information officer, said the Pentagon’s information technology covers “over 1,700 data centers and approximately 500 different cloud initiatives across the department.”

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 valued at $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.

Oracle’s Stake

Oracle has a particular 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.

Technology companies worried that the Pentagon favors Amazon point to the decision in early February to award a contract of as much as $950 million to REAN Cloud LLC, an Amazon partner, to help migrate its data to the cloud. On Monday, the Pentagon said it was unaware of the award, made by its Silicon Valley-based innovation unit, and reduced the contract to $65 million.

In a statement Wednesday, Sekhar Puli, REAN Cloud’s managing partner, said that “based on the threat of legal action and protest by the old guard, the only winners in this delay are those large companies that stand to lose money if the DoD proceeds with innovation. In the meantime, the cost of maintaining antiquated government infrastructure has not subsided.”

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

Respective Strengths

The companies competing for the Defense Department contract are expected to put their respective strengths on display as they present bids. 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 the 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.”

--With assistance from Mark Bergen, Dina Bass, Naomi Nix and Nico Grant

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