Cloud(y) Times Ahead

After a nice two week hiatus, The Beta Byte is back in action!

A reader asked me a few weeks ago if I took a break because there was not enough newsworthy activities. In fact, the past few weeks have given me plenty of blogging fodder - if I just wanted to repeat the news. At The Beta Byte, however, my goal is to dig deeper, to take a topic and peel back the layers.

So, without further ado, this week's onion was inspired by an article published in The Wall Street Journal entitled "Pentagon Picks Microsoft for JEDI Cloud-Computing Contract Over Amazon."

You may be scratching your head. Why this article? Why should you care that Microsoft beat Amazon over a government contract? Or perhaps most importantly, why is the contract named after a Star Wars mystical knight order trained to guard the peace and justice throughout the Universe and at one with the Force?

Let's back up and catch you up with a 2 minute background before I answer all these questions.

The Cloud

It's a word you hear constantly today or perhaps used it yourself. The most commonly used phrase is "it's in the cloud." But many readers may not know what "the cloud" exactly is.

The cloud is a collection of servers that store our stuff - photos, cat videos, bank accounts, social media profiles, you name it - it's in these servers. Contrary to popular belief, these servers do not sit in physical clouds - they reside in heavily air conditioned data centers outside of urban areas like Washington D.C., San Antonio or Boston.

Targeted Audience

Everyone.

You may not know it but if you have a smartphone, you have cloud storage space. In fact, for Apple, it's one of their rising revenue streams as it grew over 63% between 2017 and 2018. Google, Apple, Amazon all offer consumer storage.

However, the big spenders in the cloud industry are businesses. In recent years, the cloud has been touted as a cost effective alternative to staffing a large technology department.

Previously, businesses kept all their technology on premise (i.e. accounting system, data storage, software, etc.). It requires space, money and people to manage, not to mention security (a whole topic in itself). The argument is outsourcing is cheaper than on-premise management.

The Players

Unsurprisingly, the main providers of cloud are household technology companies:

Company Market Share

Amazon Web Services 47.8%

Microsoft Azure 15.5%

Alibaba 7.7%

Google 4.0%

IBM 1.8%

Courtesy of Forbes, 2018 Infrastructure as a Service (IaaS) Results

Eagle eye readers will note that these five companies own roughly 80% of the cloud market.

Amazon is far and away the market leader, which ironically, was unintentional. Amazon Web Services (AWS) started in 2003 as an internal program designed to help the company scale. There was little expectation when it formally became a subsidiary in 2006 that 13 years later it would contribute 72% ($2.26B) of Amazon's 3Q19 total operating income.

Bottom line - AWS is really, really important to Amazon.

Bringing it Together

Now that we've established what the cloud is, the target demographic and the main players - let's return to what piqued my interest.

As established above, Amazon Web Services (AWS) continues to be the front runner of cloud over the last decade. However, its dominance has been threatened from internal and external forces.

Internal Forces

Outages

Ever waited what seemed like an obscenely long time for a web page to load? Received an error page? Or just could not navigate to a page? Chances are you just experienced an outage or a failure in one of the data centers.

To consumers, it's annoying but to businesses' it can be a catastrophe especially if things like your point of sale or accounting systems sit in the cloud - resulting in revenue loss, PR nightmares, etc.

Unfortunately, outages happen due to a variety of reasons -

• Software updates gone haywire

• Mistyped commands in the system

• Lightning strikes (this happened at Microsoft Azure's San Antonio data center where the lightning strike overloaded the surge protector which resulted in the cooling system failing, if there's no cooling, the servers overheat which is very, very bad)

The trick (that AWS has mastered) is to contain the outages by creating "availability zones" so that servers are decentralized from each other and diverting traffic when an outage is detected from one data center to another.

Here's the problem - over the past decade, AWS has experienced over a dozen outages varying in severity. As more traffic and business migrate online, outages become a black eye for the company and exploitative fodder for rivals.

HQ Debacle

Who can forget the unsurprising (at least to this blogger) reveal that Amazon was going to establish secondary, tertiary and quaternary headquarters in New York, Arlington, VA and Nashville respectively?

Although the New York plans fell through, the selection of Arlington, VA was strategic for AWS given its proximity to the government. As Tech Crunch noted -

"Arlington puts Amazon in striking distance of DC - it is only three miles from the city, Amazon notes - which is a huge market for the company in terms of government procurement and its AWS business"

It's not a coincidence that Amazon selected DC with a large Pentagon contract (aka the JEDI contract) coming up in 2019.

Side note - for those of you still wondering what the JEDI contract is...The contract requests the consolidation of ~500 separate clouds currently in use by the Pentagon under one "umbrella" so they can scale more easily. It's estimated to be worth $10 billion.

Despite the proximity, there are external forces (i.e. the President's sentiments about Amazon and PR) that continue to hamper their activities. More on that in a minute.

Conflicts of Interest

One of AWS assets is its people. The leadership team running AWS is well seasoned, several of whom were recently promoted to Bezos' elite "S-Team."

Yet, AWS got in hot water back in January for this specific contract over one employee - Deap Ubhi. The problem was Mr. Ubhi's previous employers - AWS and the Pentagon. Oracle (another bidder for the JEDI contract) contested that Mr. Ubhi created a conflict of interest and demanded an investigation. The Pentagon obliged but later declared no conflict of interest occurred. Oracle remained excluded for the final round of the contract which pitted AWS against Microsoft which is a great lead in….

External Factors

Satya Nadella

When Nadella became CEO in 2014, he boldly proclaimed Microsoft was going big in cloud services and would challenge AWS.

Fast forward five years and Microsoft Azure is actually starting to do just that - become a force in the cloud space. Some call-outs:

• Between 2017 and 2018, Azure's revenues increased by 76%

• In 2019, Microsoft announced a flurry of partnerships - with fellow cloud provider, Oracle (yes, the same company mentioned above), SAP SE, Red Hat, VMware and Adobe Inc.

• Hunting big enterprise whales like AT&T, L'Oreal, Walgreens

Essentially, Microsoft has positioned themselves as an excellent rival and alternative to AWS by investing internally and partnering with many AWS rivals.

Government

It's no secret that President Trump and Jeff Bezos have history which began spilling over into AWS' wheelhouse earlier this year. In August, President Trump announced he wanted to "take a very strong look" at the JEDI contract after Oracle's complaint about Mr. Ubhi.

Besides Mr. Trump, other democratic candidates like Elizabeth Warren have boldly proclaimed they will break up big tech - which includes Amazon. So, Amazon's not exactly the most popular company in DC at the moment. (Side note - AWS is the current, preferred provider for the CIA).

Alright, we covered a lot of ground in this blog. Let's do a quick recap. From this blogger's perspective:

• AWS is the cloud leader and will continue to be for the foreseeable future

• However, Microsoft has been making strong gains on AWS

• The JEDI contract represented the perfect storm for AWS as they struggled from internal and external issues

• Microsoft's award of the JEDI (Joint Enterprise Defense Infrastructure) contract is a big, big win

• Government sentiment is against big tech, particularly Amazon

• This contract could foreshadow tough times for Amazon and AWS (who increasingly want to gain market share in lucrative government contracts)

• Lastly, expect AWS to contest the JEDI award to Microsoft

Thanks again!