Department Of Defense Cancels VMware's Proposed $1.6 Billion Enterprise Licensing Deal

The U.S. Department of Defense canceled VMware's proposed five-year, $1.6 billion enterprise licensing agreement last week, but didn't say whether its decision was motivated by the fact that several of VMware's cloud rivals are protesting the deal.

In a document filed last Thursday, the Defense Information Security Agency, which handles IT operations for the Defense Department, said only that it needs more time "to further analyze the Government's needs."

The ELA cancelation is a setback for VMware, which has apparently been working on the deal since at least mid-2013. In a quarterly earnings call last July, VMware COO Carl Eschenbach mentioned "a particularly large federal ELA opportunity that we have been engaged on for almost a year."

[Related: Amazon, Citrix, Nutanix Up In Arms Over VMware's Proposed $1.6 Billion DoD Licensing Contract]

A VMware spokesperson declined to comment on the security agency's decision because the vendor is continuing to work with the federal government.

"VMware is extremely proud of the technology support we have provided to the Department of Defense," the spokesperson said in an email.

VMware's proposed ELA is a joint agreement that covers the Army, Navy, Air Force, DISA and other Defense Department agencies. It combines product support for more than 2 million VMware product licenses and is being pitched as an easier, cheaper way for Defense to manage its business relationship with VMware.

But in addition to renewing maintenance and support for existing deployed licenses, VMware's proposed ELA would essentially make the Palo Alto, Calif.-based virtualization vendor the Defense Department's exclusive provider of cloud services for the duration of the contract.

Considering the large number of vendors that are also vying for government cloud business, this part of the contract has unsurprisingly raised hackles with some of them.

"The government cannot argue with a straight face that VMware is the only source for cloud services," said one source familiar with the matter, who spoke on condition of anonymity because he's not authorized to speak publicly about the deal.

The DISA also didn't let other vendors submit proposals because it wanted to make VMware the "sole source" provider for the ELA. DISA explained last month that this is because it needs to keep all this software updated over time for security reasons, and that only VMware and its partners can do this work.

Amazon Web Services, Citrix Systems, Nutanix and Microsoft -- through its reseller partner Minburn Technology Group -- all filed formal protests against the deal last month with the Government Accountability Office.

Last Thursday, the GAO dismissed the four vendors' protests without explaining why.

Sources told CRN the vendors had different reasons for challenging VMware's ELA proposal.

AWS and Microsoft objected to the cloud services aspect, and Citrix didn't like that VMware tried to add desktop virtualization software to what was supposed to be a maintenance contract, sources said.

VMware added software-defined storage to the ELA, and Nutanix -- which develops this technology -- is challenging that aspect of the deal, sources said.

"The DoD was about to get completely duped by VMware," said one source, speaking on condition of anonymity.

PUBLISHED MARCH 18, 2015