Will NSA Revelations Hurt US Tech Companies?

Michael Teague |

The diplomatic fallout from recent revelations about NSA spying were brought to the fore once again when Brazilian President Dilma Roussef cancelled a White House dinner that was scheduled for next month, and minced no words in lambasting the US in front of the United Nations general assembly in New York this past Monday.

Roussef was incensed that the powerful National Security Agency had been eavesdropping on her, her government, and the Brazilian oil giant PetroBras, and did not hesitate to use the world stage in order to express her outrage and objections. For their part, European nations such as Germany and France, both close US allies, have been more circumspect in their protestation, but by all accounts are themselves fairly upset.

There is no question that the NSA has caused a huge headache for the US ever since 29-year old security analyst Edward Snowden passed over highly classified information to UK paper The Guardian. At the same time, however, there is growing evidence to suggest that blowback from the release of this most sensitive intelligence could hit American businesses as well.

Cloud Security Alliance is a non-profit organization that focuses on developing best-practices in order to ensure a safe and secure cloud computing environment. In a July survey of non-US residents, the CSA found that 56 percent of respondents were less likely to use US-based cloud services, while 10 percent actually cancelled projects to use those services.

Given that the Snowden leaks are only two months old, there is no precise way to measure or even speculate as to potential extent of the financial impact. Furthermore, the revelations are ongoing, and as The Guardian dutifully sifts through and prepares the Snowden material for public consumption, there could be more revelations that reveal the complicity of American tech companies in various NSA spying schemes.

Still, there are some who have already taken a stab at estimating how much US techs stand to lose. Forrester Research (FORR) is a global research and advisory firm that does the majority of its work in the tech sector. Last month, the company claimed that the total cost to the IT services industry is likely to vastly eclipse previous estimates of $35 billion in lost business by 2016, saying that the amount could reach as high as $180 billion in the same time frame.

According to Forrester’s reasoning, the previous estimate was conservative because it only considered the impact on IT businesses from the standpoint of “the actions of non-US corporations,” that can be categorized in two different ways: “1. US customers would also bypass US cloud providers for their international and overseas business - costing these cloud providers up to 20% of this business as well. 2. Non-US cloud providers will lose as much as 20% of their available overseas and domestic opportunities due to other governments taking similar actions.”

Considering the details we now know about what the NSA has been up to lately, Forrester Research’s estimates seem plausible. As was reported in the New York Times on 5 September, “The agency has circumvented or cracked much of the encryption, or digital scrambling, that guards global commerce and banking systems, protects sensitive data like trade secrets and medical records, and automatically secures the e-mails, Web searches, Internet chats and phone calls of Americans and others around the world, the documents show.”

And the NSA has only been able to do this with at least some degree of complicity on the part of tech companies. While popular techs like Google (GOOG) and Facebook (FB) have made very public displays of their opposition to recent restrictive internet laws such as SOPA and PIPA, what we now know is that these same companies offered no significant objection to the approach of the spy agency, and were even recompensed for the inconvenience. There is no possible way that the NSA could, for instance, have implanted so-called “back doors” that would allow it absolutely unfettered access to otherwise encrypted software and systems of these companies.

For the time being, IT companies throughout Europe are already using the NSA revelations to advertise to customers, and while this could be the beginning of what may result a $180 billion dollar snowball, this is not the only potential negative repercussion. Rebecca MacKinnon, an expert on online censorship, recently told the UK’s Financial Times that “It is difficult to imagine the internet not becoming more compartmentalised and Balkanised,” and added the dire prediction that “Ten years from now, we will look back on the free and open internet with nostalgia.”

The “balkanization” of the internet would be a huge blow to the most idealistic view of the world wide web as a catalyst for global open and free communication. Indeed, just this Balkanization may already be in its incipient phase, with the BRICS countries having recently proposed a “BRICS internet,” in order to ostensibly protect its citizens from the NSA.

Such a compartmentalization of the net would not only be bad for US businesses, but could make for a world even more divided that it presently is.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 117.31 -0.12 -0.10 19,137,844
GOOG Alphabet Inc. 759.11 -3.41 -0.45 1,691,084
FORR Forrester Research Inc. 40.30 0.70 1.77 38,933
DRGDF Detour Gold Corp 13.96 0.38 2.81 11,206

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