This post was written with contributions from Charlotte Irwin. Charlotte is a Research Strategist in the ETF and Mutual Fund Research Team.
When Amazon isn’t processing your orders for a new phone case and groceries, it’s busy pursuing billion-dollar federal contracts in cloud computing. Amazon founder Jeff Bezos is also after aerospace contracts for his privately held Blue Origin, a rocket manufacturer and suborbital spaceflight company. This month, both companies will be involved in rulings that could disrupt the federal contract market.
At the end of October, the US Department of Defense (DoD) announced the winner of one of the most coveted technology contracts in US history — the Joint Enterprise Defense Infrastructure (JEDI). Following months of legal and political controversies, the 10-year, $10 billion contract to establish the Pentagon’s cloud computing systems was awarded to Microsoft. The decision not to go with Amazon, whose cloud business leads the industry with 48% market share and has already built out services for the CIA, seems questionable to many. President Trump had, after all, publicly opposed granting the contract to a company controlled by his political nemesis Bezos. Given the scale of the contract, and the high likelihood that it could lead to future federal business, it is possible that Amazon will challenge the ruling in the coming weeks.
This won’t be the only battle a Bezos-owned business faces over a government contract this November. Blue Origin lodged a protest with the Government Accountability Office (GAO) in August arguing that the current bidding process for next-generation rocket development favors incumbents and perpetuates a duopoly in the sector. The GAO’s response is due by November 20, and a ruling in Blue Origin’s favor could go a long way in signaling the government’s openness to nontraditional — and often non-publicly traded — bidders.
Follow the money
It’s no secret that the US government is, to put it mildly, a bit of a spender. Much of that largesse goes to mandatory programs like Social Security and Medicare, and to servicing the ever-increasing national debt. The rest, however, is divvied up each year between the various departments and agencies on a discretionary basis to fund existing operations and to drive strategic initiatives. Frequently, as is the case for the DoD’s cloud services development and the Air Force’s next-gen rocket program, government agencies will use their allocated budgets to contract out services to private companies. More than $2 trillion in federal contracts have been awarded in fiscal years 2016–2020. And 2018 saw these contract values increase for the third-consecutive year, to hit $559 billion, the highest total since 2010.
With modernization a top priority across departments, the areas doling out the most lucrative contracts are telling. In particular, IT obligations had a record year, with the DoD spending $33.8 billion and civilian agencies spending an additional $30.8 billion, a 9.5% year-on-year increase. And that includes only unclassified tenders. The Trump administration has requested nearly $90 billion in IT spend for 2020, with $27 billion earmarked for cybersecurity. And with Congress having passed a $1.4 trillion spending bill in late July, another year of growth is virtually guaranteed.