As of the time of this article, Microsoft's (MSFT) market cap has risen by about $25 billion following news it has landed a $10 billion, 10-year deal to provide cloud infrastructure (IaaS) and developer platform (PaaS) services to the Department of Defense.
Even after accounting for the impact of a 1% Nasdaq gain, markets seem to be betting that the long-term value of Microsoft's DoD contract, which will have its share of costs attached, will go beyond the cash flows that the deal directly produces.
Certainly, there's some hope that, even if politics might have had something to do with the Pentagon's decision, beating out Amazon.com (AMZN) to win the DOD's JEDI contract will lead to additional government contracts in the U.S. and elsewhere. While Microsoft Azure and Amazon Web Services (AWS) have both worked hard to land government deals -- among other things, each has created dedicated cloud regions for government clients that address federal security and compliance needs -- AWS has from all indications been the leader here, racking up a number of major contracts over the last several years, including with the U.S. military.
However, judging by reactions to the deal from analysts and others, there's also some hope that the JEDI deal will more broadly change perceptions of Azure among potential enterprise and government clients. Specifically, that the deal will lead Azure to be viewed less as playing second fiddle to AWS in the public cloud services space, and more as something resembling an equal.
While Azure is growing more quickly than AWS, third-party estimates indicate that AWS is still substantially larger. Earlier this month, Deutsche Bank estimated that AWS would produce 2019 revenue of $35.01 billion (up 36%), and that Azure would produce 2019 revenue of $16.44 billion (up 63%). With regards to IaaS and PaaS revenue in particular, Deutsche forecasts AWS and Azure will have 2019 revenue of $33.96 billion and $11.92 billion, respectively.
Likewise, in July, research firm Gartner estimated that AWS generated $15.5 billion worth of IaaS revenue in 2018, up 27% and good for a 47.8% global share. Azure's IaaS revenue was estimated to be at $5.04 billion, up 61% and good for a 15.5% share.
Last week, Amazon reported its total AWS revenue grew 35% annually in Q3 to $9 billion. Microsoft, which shares Azure's growth rate but not its revenue, reported its Azure revenue rose 59% during its September quarter, while adding the growth rate for Azure's IaaS and PaaS services was higher than the growth rate for "per user" software and services offerings such as its Power BI business intelligence software and Enterprise Mobility + Security solution.
In this context, one can see how the JEDI contract is viewed as potentially being an inflection point for Azure's battle against AWS -- particularly when competing for large-scale cloud migrations by enterprises and government agencies that are similar to what the DOD plans to carry out. When it comes to landing such migration deals, AWS, aided by its scale, mindshare, massive feature set and unmatched ecosystem of software providers and IT services partners, has thus far arguably run circles around its rivals.
AWS still generally claims those advantages following the JEDI deal. But the deal does give Azure some additional mindshare, and adding a billion dollars or so in annual IaaS and PaaS revenue also helps out some in terms of scale. In addition, this revenue could motivate Microsoft, which has already been dialing up its cloud-related R&D and sales investments, to further grow the engineering, sales and marketing resources it directs towards Azure.
Public cloud services aren't a zero-sum game. As existing workloads keep getting migrated to cloud infrastructures and a large chunk of brand-new workloads are deployed on them, AWS and Azure, and for that matter Alphabet's (GOOGL) Google Cloud Platform (GCP), all have room to prosper. And each of these players, it's worth adding, appears poised to take more market share from smaller players that can't measure up in terms of scale, feature sets and software/services ecosystems.
But with all of that said, Microsoft investors do have good reasons to be optimistic that the value of the company's latest Azure win will go beyond its direct financial benefit.
