Microsoft wins $617 million Pentagon contract for Windows 8, other software

The "Start" icon is displayed on a Microsoft The "Start" icon is displayed on a Microsoft Corp. Surface tablet computer during an event in New York, U.S., on Thursday, Oct. 25, 2012. Microsoft Corp. will be constrained in a contest against Apple Inc. in the market for handheld computers by unveiling a tablet that doesn't work with some of the most widely used downloadable applications. (Oct. 25, 2012) Photo Credit: Bloomberg

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Microsoft Corp. won a $617 million contract with the U.S. Defense Department to provide its latest software, including the Windows 8 operating system.

The three-year agreement announced yesterday by the world's largest software maker covers 1.5 million of the Pentagon's computers. The deal gives the Army, Air Force and Defense Information Systems Agency access to the latest versions of Windows 8 and programs such as Microsoft Office 2013 and SharePoint 2013, a file-sharing platform.

"The large majority of the United States Department of Defense just made the decision to go with Microsoft," Tim Solms, general manager for Pentagon business at the Redmond, Calif.-based company, said in a phone interview. "That's very positive from a business perspective."

The military received seven bids for the contract, according to a December news release. The competitors weren't identified. The award went to a re-seller of Microsoft products, Insight Public Sector, a division of Tempe, Arizona-based Insight Enterprises Inc.

Microsoft, long dominant in personal computers, has lost ground to smartphones and tablets championed by Apple Inc. and Google Inc.

U.S. retail sales of devices running Windows fell 21 percent from a year earlier in the four weeks after Microsoft released Windows 8 on Oct. 26, according to a Nov. 29 report by Port Washington, NY-based NPD Group Inc.

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WINDOWS SALES

The decrease has been fueled by a 24 percent drop in sales of notebook computers as customers opt for Apple's iPad or tablets powered by Google's Android software.

The Pentagon award is "a validation point for Windows 8 after the media has been fairly negative on it as an operating system," Richard Williams, an analyst at Cross Research in Livingston, NJ, said in a phone interview.

"The fact that large organizations are adopting it adds credence to the idea that this software is an industry standard," said Williams, who rates Microsoft shares a buy.

Brad Reback, an Atlanta-based analyst at Stifel Nicolaus & Co., said the agreement may buoy Microsoft's business selling applications that compete with the Internet-based documents offered by Google.

The Pentagon deal also may allay corporate clients' concerns about the security of some of the services that would be provided under the deal, Reback said.

While the contract shows the Defense Department's support of Microsoft's desktop operating system, it doesn't necessarily mean all the users will convert to the latest version, said Reback, who rates Microsoft shares a buy.

"I don't think this signals widespread adoption of Windows 8 within" the Pentagon, he said in a phone interview. "Access is different than usage." The military expects to save "tens of millions" of dollars through lower software license costs under the agreement, according to a news release from the Defense Department.

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