Snowden Revelations of NSA Complicity Prove Costly to Silicon Valley

Friday, 21 Mar 2014 03:33 PM

By Joe Battaglia

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Revelations by former contractor Edward Snowden tying U.S. tech companies to the National Security Agency's surveillance program are beginning to have a major impact on their bottom line, according to industry analysts.

Despite assurances to the contrary, there is a perception that American technology products enabled the government spying program, and the questioning of trustworthiness is having economic ramifications for companies like IBM and Microsoft.

According to a report in The New York Times, Daniel Castro, a senior analyst at the Information Technology and Innovation Foundation, estimates the cloud computing industry could lose $35 billion over the next two years. Forrester Research, a technology research firm, predicts those losses could escalate as high as $180 billion.

In a meeting with President Obama on Friday at the White House, tech executives, including Eric E. Schmidt of Google and Mark Zuckerberg of Facebook, were expected to express their frustration over the government's exacerbating of a costly situation.

"Most of the companies in this space are very frustrated," Castro told The Times, "because there hasn’t been any kind of response that's made it so they can go back to their customers and say, 'See, this is what's different now, you can trust us again.'"

Anti-American sentiment first arose with the introduction of the Patriot Act, the counterterrorism law expanding government surveillance powers passed in the wake of 9/11, according to Mark J. Barrenechea, who heads OpenText, Canada’s largest software company. He said the attitude has worsened "post-Snowden."

That lingering distrust has emboldened other foreign tech companies while continuing to steer potential business away from the U.S.

Norway's Runbox, which has marketed itself as a safer email service alternative to Gmail by saying it does not comply with foreign court orders seeking personal information, reports a 34-percent increase in customers. Meanwhile, Brazil announced it was ditching Microsoft Outlook for its own email system that uses Brazilian data centers.

"Issues like privacy are more important than finding the cheapest price," Matthias Kunisch, a German software executive, told The Times. Kunisch chose Deutsche Telekom over other U.S. cloud computing providers.

"Because of Snowden, our customers have the perception that American companies have connections to the N.S.A," he said.

Lost business isn't the only economic impact being felt. The addition of state-of-the-art encryption features to customer services and to the cables that link data centers is costing companies dearly. IBM said in January that it would spend $1.2 billion to build 15 new overseas data centers to draw foreign customers sensitive about the location of their data. Salesforce.com has announced similar plans.

Getting relief from the government may be difficult.

Firstly, there is no concrete price tag for the damage being made available. According to The Times, Silicon Valley is complaining about economic harm stemming from federal actions but is reluctant to offer exactly what that number is, potentially out of fear of alarming shareholders. Secondly, some sectors of the business are claiming not to have been impacted "in a major way," as Cisco Systems CEO John T. Chambers told The Times.

"Companies need to keep the priority on the government to do something about it," James Staten, a cloud computing analyst at Forrester, told The Times, "but they don’t have the evidence to go to the government and say billions of dollars are not coming to this country."

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