The Department of Defense announced Tuesday it's calling off the $10 billion cloud contract that was the subject of a legal battle involving Amazon and Microsoft. But it's also announcing a new contract and soliciting proposals from both cloud service providers where both will likely clinch a reward.
The JEDI, or Joint Enterprise Defense Infrastructure, deal has become one of the most tangled contracts for the Department of Defense. In a press release Tuesday, the Pentagon said that "due to evolving requirements, increased cloud conversancy, and industry advances, the JEDI Cloud contract no longer meets its needs."
Shares of Microsoft were down about 0.4% following the news and Amazon shares were up 3.5% after already reaching a 52-week high.
The fight over a cloud computing project does not appear to be completely over yet. The Pentagon said in the press release that it still needs enterprise-scale cloud capability and announced a new multi-vendor contract known as the Joint Warfighter Cloud Capability.
The agency said it plans to solicit proposals from both Amazon and Microsoft for the contract, adding that they are the only cloud service providers that can meet its needs. But, it added, it will continue to do market research to see if others could also meet its specifications.
The lucrative JEDI contract was intended to modernize the Pentagon's IT operations for services rendered over as many as 10 years. Microsoft was awarded the cloud computing contract in 2019, beating out market leader Amazon Web Services.
A month later, Amazon's cloud computing unit, AWS, filed a lawsuit in the U.S. Court of Federal Claims protesting the JEDI decision.
The company argued that President Donald Trump's bias against Amazon and its then-CEO, Jeff Bezos, influenced the Pentagon to give the contract to Microsoft.
Last year, the Pentagon's inspector general released a report saying that the award did not appear to be influenced by the White House.
However, the inspector general noted in the 313-page report published in April 2020 that it had limited cooperation from White House officials throughout its review and, as a result, it could not complete its assessment of allegations of ethical misconduct.
Microsoft said in a blog post Tuesday it understands the Pentagon's decision to cancel the JEDI contract, but said the legal fight over it illustrated a need for reform.
"The 20 months since DoD selected Microsoft as its JEDI partner highlights issues that warrant the attention of policymakers: when one company can delay, for years, critical technology upgrades for those who defend our nation, the protest process needs reform," Toni Townes-Whitley, president of U.S. regulated industries at Microsoft, wrote.
Townes-Whitley added that the DoD decision "doesn't change the fact that not once, but twice, after careful review by professional procurement staff, the DoD decided that Microsoft and our technology best met their needs. It doesn't change the DoD Inspector General's finding that there was no evidence of interference in the procurement process. And it doesn't change the fact that the DoD and other federal agencies – indeed, large enterprises worldwide – select Microsoft to support their cloud computing and digital transformation needs on a regular basis."
Amazon did not immediately respond to CNBC's request for comment.
A Pentagon official said on a call with reporters that the litigation itself was not necessarily the main reason for the shifted approach. But given how much the landscape changed during the intervening time, the agency determined its needs had also shifted.
"The mission needs have been our primary driver on this," said DoD Acting Chief Information Officer John Sherman.
The DoD said its cloud vendor for the new contract will have to meet several criteria, like working on all three classification levels (i.e. unclassified, secret or top secret), be available around the world and have top tier cybersecurity controls.
The agency said it expects the new contract value to be in the multi-billions, though it is still determining the maximum value. It expects the contract to last up to five years, including a three-year performance base period and two, one-year option periods.
The Pentagon expects the JWCC to "be a bridge to our longer term approach," Sherman said. He said the department expects to make the direct rewards through the contract around April 2022 and open a broader competition as soon as 2025.