NSA Pricked The “Cloud” Bubble For US Tech Companies

The cloud is a growth industry. And a religion in Silicon Valley: you’re better off with all your data and software stored in a data center somewhere on the planet. It’s at the core of Big Data. It’s a beacon of growth that revenue-challenged tech giants like Oracle and IBM wave in the faces of antsy investors.

IBM used the word 14 times during its earnings call in July. “Cloud computing,” “cloud offerings,” “cloud infrastructure,” it was all there. Revenues from the cloud jumped 70% during the first half, IBM bragged – to cover up an ugly tidbit: overall revenues fell 3.3%, and revenues at its US hardware division, Systems and Technology group, plunged 12%.

In between, it mentioned that it would write off $1 billion to pay for axing of 3,300 employees in the US and Canada – “workforce rebalancing,” it called it, and it’s trying to dump the unit. Meanwhile, it’s giving investors some fodder for hope, namely revenue growth from the cloud. Alas, on August 1, IBM admitted that it has been under investigation by the SEC since May on the very issue of revenues from the cloud.

“Cloud computing you can trust,” is the motto on IBM’s Cloud site. Notwithstanding Edward Snowden’s revelations about the NSA’s unhampered access to data stored in the cloud. And it’s serious business: IBM blew $2 billion in July to acquire Softlayer Technologies, which it praised as “the world’s largest privately held cloud computing infrastructure company.” Whatever that means.

The cloud is also the big hope for another revenue-challenged high-tech hero, Oracle. Its cloud revenues were up 50%, screamed the headline on its earnings release for the fourth quarter, ended May 31, though overall revenues stagnated. In the prior quarter, revenues had dropped 1%, instead of rising, with hardware sales being an outright disaster. At the time, Oracle’s fearless leaders ridiculously blamed thousands of “new reps” for their “lack of urgency.” But the global cloud is where the action is for them.

Facebook, Amazon (its AWS hosts a number of big cloud-based websites, such as Netflix), Microsoft, Google… just about all tech companies, online retailers, social media companies, app makers, every company with online storage products, spreadsheets, calendars, collaboration tools, online data back-ups, photo-sharing sites, and what not, they’re all playing in the cloud. You log into a website to access software and your own data – that’s the cloud. In terms of hardware, it’s data centers and fiber-optic links. Thousands of them. Everywhere. Big Data takes place in the cloud. And the cloud is where the NSA goes to pick through everyone’s data.

What we thought had been encrypted and secured on US servers, protected by trustworthy American corporations, has been made accessible, as we now know from the Snowden leaks, not only to companies that are willing to pay for it, but also to the NSA, other members of the Intelligence Community, government agencies in the US, state and local law enforcement agencies, as well as allied foreign governments. Made possible by formerly secret provisions in the Patriot Act and the Foreign Intelligence Surveillance Act.

But there is a price to pay. Tens of billions of dollars, it turns out. The reactions by foreign companies and governments to these revelations have “an immediate and lasting impact” on the US cloud computing industry, determined the Information Technology & Innovation Foundation. In its report, the ITIF estimated that the global market for cloud providers will be $148.8 billion in 2014, $160 billion in 2015, and $207 billion in 2016 – double the size of 2012, and more than four times the size of 2009. Companies in Europe and Asia are trying to grab market share, often with generous help from their governments. Now they have new ammunition.

In a survey conducted after the Snowden leaks, 10% of the foreign companies using cloud computing services said they’d already cancelled a project with a US cloud provider and 56% said they’d be less likely to use US-based providers. Conversely, among US stakeholders in the cloud sector, 36% said that the NSA leaks would make it more difficult doing business outside the US. The report estimated that if US cloud companies lose between 10% and 20% of their foreign business over three years, it will cost them between $21.5 billion to $35 billion.

But the report cautions it could get much more expensive “if foreign governments enact protectionist trade barriers that effectively cut out US providers.” In Europe, momentum in that direction is growing.

German Federal Data Protection commissioners threatened with new bureaucratic hurdles. Interior Minister Hans-Peter Friedrich announced that “whoever fears their communication is being intercepted in any way should use services that don’t go through American servers.” And Justice Minister Jörg-Uwe Hahn called for an outright boycott of US companies.

Similar maneuvering is underway in France. “It’s extremely important to have the governments of Europe take care of this issue,” explained Jean-Francois Audenard, the cloud security advisor to France Telecom; “if all the data of enterprises were going to be under the control of the US, it’s not really good for the future of the European people.”

Even before the leaks, the European Commission was trying to stymie US-based cloud providers by using data security as a fig leaf for competitive considerations. It’s “about building a new industry, and better competing against the United States in particular,” its European Cloud Partnership pointed out. Now its focus has sharpened.

Dollars are already shifting. Mateo Meier, CEO of Artmotion, Switzerland’s largest hosting company, said that revenues jumped 45% since the Snowden leaks. Global companies like IBM and Oracle, that are staking their revenue-growth hopes on the cloud, will feel – or are already feeling – the pressure. And once again, they might have to put their most creative minds to work on finding new excuses for their revenues debacles.

From tiny app makers to giant telecom companies, they’re all chasing after billions by collecting, storing, and mining personal data. Data is money. Much more than money, if governments get it. Which led Cullen Hoback to lament about his new documentary on privacy: “The craziest thing is that I didn’t realize I was making a horror film.” Read…. The Worldwide Surveillance And Privacy War (Which You Already Lost).

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.