Microsoft Corporation (MSFT) is building up its government credentials.

The company is part of a trio of technology behemoths chosen for the Joint Defense Cyber Collaborative, an initiative focused on combating ransomware and cyberattacks in cloud computing platforms. The Cybersecurity and Information Security Agency (CISA) is responsible for the program unveiled last week. The Senate has provided additional funding to CISA in its $1 trillion infrastructure bill for the initiative.

Key Takeaways

  • The U.S. government has enlisted the help of a trio of tech behemoths—Microsoft, Amazon, and Alphabet—to bolster its cybersecurity and fight ransomware.
  • Microsoft will benefit from the government contracts because they will establish the tech giant's credentials in cybersecurity.
  • Microsoft is deriving an increasing share of its revenues from cybersecurity solutions.

For Microsoft, CISA's announcement occurs at a critical juncture in its evolution as a cloud services provider. The company's revenues and offerings from its cloud services division multiplied during the pandemic, and its Intelligent Cloud division is now the biggest contributor to Microsoft's top line.

However, those gains have come at the cost of security. Microsoft's product suite has become a favorite target for hackers in recent times. In response, the company bolstered its security products, leading to a surge in revenues for its securities unit. Analysts dubbed the company "a cybersecurity behemoth" after its security unit reported $10 billion in revenues in January this year.

Cybersecurity Government Contracts: A New Frontier for Microsoft

Microsoft faces formidable competition from the cloud divisions of Amazon.com, Inc. (AMZN) and Google parent Alphabet Inc. (GOOG) in its pursuit of government contracts. Earlier this year, the Department of Defense cancelled the JEDI contract given to Microsoft in 2019 after Amazon filed a case against the award.

In recent years, the U.S. government has stepped up its cybersecurity spend. Last year's budget called for a minimum of $17.4 billion in spending on cybersecurity initiatives. (The amount does not reflect the entire amount of the budget "due to the sensitive nature of some activities.") As government functions become increasingly digitized, cybersecurity will become more important, and its spending amount will multiply in the coming years.

Thanks to its range of productivity and security solutions, Microsoft has always maintained a steady stream of revenues from the government for the past couple of decades. Government cybersecurity contracts are a new frontier. According to Bloomberg, the Redmond, Washington-based giant booked $1.5 billion in defense contracts in 2020, up by 50% from 2018 figures.

The importance of government contracts or Microsoft runs beyond mere finances. Cancellation of the JEDI contract may have resulted in a financial loss for Microsoft, but it boosted standing for its cloud services division in the market. This is because government contracts have stringent requirements that are considered a stamp of quality.

"Much of the value of the JEDI win was that it showed large customers that they could trust Azure for tasks where they had previously only considered [Amazon's cloud division] AWS," Mark Moerdler, analyst with Sanford Bernstein & Co., told Bloomberg in an interview. According to the analyst, Microsoft's win helped it gain "massive credibility inside and outside the U.S. government ... and that will not change."