I think Verizon/Terremark has a leg up on Amazon on this one. They have some type of massive secure data center near DC for federal customer clouds.
VMware is easier for a non-cloud application to migrate to the cloud, which is the case for most existing government apps, but isn't as good a platform for building really large scale applications (e.g. you wouldn't want to run Google Apps on VMware)
There's room for both, but the real win for the new Amazon product is moving existing Amazon EC2 apps to a government-specific shard in a new AZ with minimal effort. This is more a 2-5 year thing than a 0-2 year thing.