November 15, 2018

Amazon's biggest customer may soon be the US government

When Jeff Bezos came to Washington in September to talk to the Economic Club, a well-heeled audience of 1,500 of the capital's movers and shakers, he called out only a few people by name: his parents, Jackie and Mike, and one Amazon executive, Teresa Carlson.

"Teresa's here. Where are you Teresa?" Bezos said, looking out into the crowd for Carlson, the company's head of cloud services for the public sector. "Everybody in Washington knows Teresa."

He might be right.

For people in government, Carlson is the face of Amazon Web Services. The cloud hosting business has turned into a revenue juggernaut for Amazon since its founding 14 years ago, earning $6.68 billion in the third quarter. AWS, as it's known, claims a third of the worldwide cloud market --- but its biggest growth opportunity right now may come from the US government.

The Seattle-based tech giant, which announced on Tuesday that it will plant a new headquarters a mile south of the Pentagon, already holds a number of contracts with federal agencies. It's in line for another $10 billion if it succeeds in its bid for a massive Defense Department contract known as JEDI, or Joint Enterprise Defense Infrastructure. Amazon is widely seen as the frontrunner to win the job, which involves hosting data operations critical to military missions across the globe.

Securing the JEDI contract would better set Amazon up to win additional lucrative cloud computing jobs from the federal government, as well as make it even more competitive in the civilian market. Meanwhile, the company is also pursuing another type of federal business: Serving as the portal for all government purchases, and charging fees along the way.

As Amazon takes a larger piece of the federal procurement pie, it could save taxpayer dollars and improve efficiency --- but also, some fear, squeeze out competition.

"When you're in the door, when the next opportunity comes in, you have the competitive advantage," says Steve Schooner, a professor of government procurement law at George Washington University. "The reality is if you are the primary contractor in a certain space, people will turn to you for ideas and opportunities going forward. The growth is potentially unlimited."

A slow build

Before Amazon ever went to Washington, its cloud computing operation had a leg up on everyone else.

Amazon Web Services was born after Bezos realized that buying and maintaining physical warehouses to house data was less efficient than storing it on the internet. Once his engineers figured that out for Amazon's website, they realized they could sell the service to others --- years before other tech companies got in the cloud-hosting game.

"We faced no like-minded competition for 7 years. It's unbelievable," Bezos said at Economic Club event. "The enterprise companies didn't see Amazon as a credible enterprise software company."

It still took a while to get the federal government --- which has a history of pioneering new technologies, but is often slow to adopt them --- on board.

The shift began in 2010, when the incoming Obama administration began pushing federal agencies to put their data into the cloud in an effort to reduce the $19 billion they spent on traditional data centers each year.

Amazon was well-positioned to help.

The company had a substantial head start over competitors like Microsoft, Oracle, and IBM, which were heavily invested in providing the federal government with software and data centers. Moving into the cloud computing business would only cannibalize those steady revenue streams.

"The big benefit [Amazon] had was they could continue to innovate, because they didn't have to disrupt their own business," said Scott Drossos, president of Infiniti Consulting Group, which helps public sector clients move their data to Amazon Web Services' cloud.

In 2010, the Recovery Accountability and Transparency Board --- an agency created by the Obama administration to oversee the use of billions of dollars in stimulus spending following the recession --- moved Recovery.gov to AWS' cloud. According to Amazon, that decision saved the government $750,000 in one year. That same year, Amazon migrated NASA's Jet Propulsion Lab, the Federal Register, the food stamp program and a wiki run by the Department of Energy.

Later that year, Amazon hired Carlson away from Microsoft, where she had led federal sales for nine years, in order to turbocharge their presence in D.C.

Still, federal IT bosses remained skeptical of the security of the cloud. To assuage their concerns, Amazon created a whole new cloud "region," which complied with federal data security requirements in part because it could only be accessed by vetted individuals on US soil.

Over the years, Amazon layered in compliance with an alphabet soup of data security standards and procurement regulations, building further confidence in cloud data storage. They also had to acclimate contracting officers to the idea of buying computing capacity on a pay-as-you-go basis, rather than all at once.

When Marina Martin came in as chief technology officer of the Department of Veterans Affairs in 2013, she took on the massive project of transitioning the agency's rickety IT systems to the cloud. Amazon Web Services was the most attractive option, Martin says.

"They have a tremendous community, and a training environment that I think is really important," Martin says, noting the conferences, videos, and wide network of users who help each other troubleshoot problems.

Building such a robust product tailored for government and spending time holding the hands of federal officials paid off big in 2013, when Amazon won a $600 million contract with the Central Intelligence Agency, putting to rest any doubts about the security of stashing data in the cloud. Now, at Amazon Web Services' annual public sector summit in Washington, federal agencies sing the service's praises --- and none more effusively than CIA Chief Information Officer John Edwards.

"We wanted the best of breed, that's why we partnered with Amazon," Edwards said in a 2017 address to the AWS Public Sector Summit, an event that's taken place annually since 2010, and is now emceed by Carlson. "It's the best decision we ever made. It's the most innovative thing we've ever done."

It's difficult to assess the total magnitude of Amazon Web Services' business with the federal government because so much of it --- including the CIA contract --- is classified, and Amazon declined to disclose a list of its federal clients. It's also difficult to track because the contracts are often granted to third-party firms that execute the task of migrating an agency's data to Amazon's cloud.

But as an indicator of how quickly the government has been ramping up these types of services, data and analytics firm Govini estimates that federal civilian agencies have gone from spending $13.5 million on non-classified Amazon cloud hosting contracts in fiscal 2014 to $45.3 million in 2017, with 2018 on pace to continue the upward trend.

Amazon has also learned to play the Washington game. Since 2013, the money Amazon has spent on lobbying has nearly quadrupled, to $13 million in 2017, according to the nonprofit watchdog Center for Responsive Politics. Federal procurement was one of many issues Amazon weighed in on, along with drones, data privacy, the Post Office, state sales taxes, international trade, net neutrality, and patents. The company started lobbying the Pentagon on cloud computing policy in 2016.

Feel the Force

The CIA contract is peanuts, though, in comparison to the prize Amazon is vying for now: The $10 billion Defense Department JEDI cloud contract.

First announced in September 2017, the solicitation has been delayed by Congressional inquiries and protests by other bidders. Bids were due in October, with an expected award date of April 2019.

The objections center mostly around whether the Pentagon should award the entire contract to one company, an approach that might favor Amazon, or divide it up among multiple companies. The private sector has moved towards a "multi-cloud" strategy in order to insure against failure by one company, and to utilize the best aspects of several different cloud providers. If Amazon wins a $10 billion chunk of the military's business, the fear is that it could set the military on a path toward using Amazon's platform for so much of its data that it would be difficult to change course.

That's the argument that Amazon's competitors have made publicly and in their lobbying efforts. Oracle filed a protest of the solicitation in August saying that awarding the contract to one company was out of step with commercial practices and did not promote competition. IBM followed suit in October, saying that the solicitation was "written with just one company in mind," a thinly-veiled reference to Amazon.

On Wednesday, the Government Accountability Office ruled against Oracle, and a decision in IBM's protest is due in January. Even impartial observers note that going with just one provider carries risk.

"Maybe it's more costly up front to say 'I'm going to do Amazon and Microsoft,'" says Brad Wilson, an analyst at the Rand Group. "The tradeoff is, you're increasing the complexity of your operation by doing that. But maybe keeping them competing is going to provide you with benefits or saving down the road."

The Defense Department defended its decision to go with a single provider in a report to Congress, saying that using multiple clouds would inhibit its ability to analyze information all at once --- to create what it calls a "data lake."

Amazon, meanwhile, has emphasized that it makes it easy to switch between cloud providers by using open standards and allowing data portability, meaning that the Pentagon could hire someone else if it fails to perform. Other than that, it declined to comment on the solicitation process. Other defenders point out that JEDI wasn't the first big cloud solicitation from the federal government or even the military, and it won't be the last.

"Air Force, Army, Navy, they'll all have their own clouds," says John Wood, CEO of Telos, a federal IT contractor that often manages Amazon Web Services migrations. "This is definitely not a winner-take-all initiative, as the competitors are trying to make it out to be."

Wood estimates that less than 5% of the federal government's data has been moved to the cloud, meaning that there's still plenty of work to be done.

Still, even if opportunities abound and switching is easy, the federal contract could give Amazon an advantage long into the future. Steve Schooner, from George Washington University, says there's a certain inertia to government contracting.

"The firm that is in the Pentagon providing IT services to all of the different components who everyone looks to as the go-to contractor for all of their needs, they're going to be first in line when new innovations and technologies are introduced into the defense space," says Schooner.

1-Click Government

Cloud storage isn't the only piece of the approximately $500 billion in annual federal procurement that Amazon has its eye on.

It may also benefit from a provision to a law passed by Congress last year that directs the General Services Administration to set up "commercial e-commerce portals" for government purchase orders costing less than $25,000.

Amazon, which already has an extensive section on its website devoted to serving business customers, is an obvious choice --- so much so that the legislation has commonly been referred to as the "Amazon Amendment," even though companies like Walmart and SAP have also expressed interest in doing the job.

But some of the federal government's existing suppliers are worried, because of what it could cost to operate through Amazon's platform rather than selling to government directly.

Becoming a GSA vendor requires an upfront investment in compliance systems, but then can be a valuable source of stable income. If Amazon became the primary procurement portal, it could not only charge fees to suppliers, but also compete against them with its own generic or branded products, as it does currently in its consumer retail business.

Since 2004, Pacific Ink of San Diego has supplied federal customers with office and restroom supplies, and now does about $12 million in business per year with the General Services Administration. CEO Jaime Mautz thinks the feds should improve the procurement systems they have, rather than hand them over to a private platform --- especially one like Amazon, which offers products that compete against those offered by sellers in its marketplace.

"Already our margins are so thin to have these contracts," Mautz says. "To then add any Amazon fee on top of that is going to take a lot of the companies out of the competition."

Amazon declined to comment on that possibility, but in response to the GSA's request for feedback, the company emphasized that governments can use its platforms to maintain standards for purchasing from small, minority- and women-owned businesses.

It's already happened with purchasing on the state and local government level. In early 2017, a government purchasing alliance called US Communities awarded a contract to Amazon to provide its 55,000 member agencies with access to the Amazon's business portal. The request for proposals estimates that the program facilitates $500 million in purchases per year.

The Institute for Local Self-Reliance, a nonprofit research group that has been skeptical of Amazon's local influence, produced a lengthy report over the summer arguing that the contract was set up for Amazon to win --- and that it won't necessarily offer the lowest prices available.

"It's not a market if it's controlled by a private actor who decides what companies are allowed to sell what, and sets pricing according to the fees that it charges," says Stacy Mitchell, who coauthored the Institute for Local Self-Reliance report. "Amazon's real aim is to take over enough of the business that you don't really have any benchmarks anymore to figure out what is a reasonable price."

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