Bloomberg News

NSA Spying Risks $35 Billion in U.S. Technology Sales

November 26, 2013

NSA Spying Uproar Risks $35 Billion in U.S. Technology Sales

Medea Benjamin of CodePink protests as Director of the National Security Agency Gen. Keith Alexander waits for the beginning of a hearing before the House (Select) Intelligence Committee on Oct. 29, 2013 on Capitol Hill. Photographer: Alex Wong/Getty Images

International anger over the National Security Agency’s Internet surveillance is hurting global sales by American technology companies and setting back U.S. efforts to promote Internet freedom.

Disclosures of spying abroad may cost U.S. companies as much as $35 billion in lost revenue through 2016 because of doubts about the security of information on their systems, according to the Information Technology & Innovation Foundation, a policy research group in Washington whose board includes representatives of companies such as International Business Machines Corp. (IBM:US) and Intel Corp. (INTC:US)

“The potential fallout is pretty huge given how much our economy depends on the information economy for its growth,” said Rebecca MacKinnon, a senior fellow at the New America Foundation, a Washington policy group. “It’s increasingly where the U.S. advantage lies.”

Any setback in the U.S. push to maintain an open Internet also could inflict indirect damage on companies such as Apple Inc. (AAPL:US) and Google Inc. (GOOG:US) that benefit from global networks with few national restrictions.

Almost 40 percent of the world’s population, or 2.7 billion people, are online, according to the International Telecommunication Union, a Geneva-based United Nations agency.

Cisco Systems Inc. (CSCO:US), the world’s largest maker of computer-networking equipment, said this month that the NSA disclosures are causing some hesitation among customers in emerging markets.

Orders in China fell 18 percent in the three months ended Oct. 26. Elsewhere, Robert Lloyd, head of development and sales, said on a conference call Nov. 13, “it’s not having a material impact, but it’s certainly causing people to stop and then rethink decisions.”

‘Serious Damage’

News about U.S. surveillance disclosed by former NSA contractor Edward Snowden has “the great potential for doing serious damage to the competitiveness” of U.S. companies such as Cupertino, California-based Apple, Facebook Inc., and Microsoft Corp., Richard Salgado, Google’s director for law enforcement and information security, told a U.S. Senate panel Nov. 13. “The trust that’s threatened is essential to these businesses.”

The spying revelations have led governments around the world to consider “proposals that would limit the free flow of information,” Salgado said. “This could have severe unintended consequences, such as a reduction in data security, increased cost, decreased competitiveness, and harm to consumers.”

Brazil, Germany

Countries such as China and Russia that are seeking to impose more national controls on the Internet are finding their views gaining ground. Rising economic powers, including India, Mexico and South Korea, are weighing further limits. Brazil’s President Dilma Rousseff, a target of NSA surveillance, is calling for a new conversation about Internet governance with support from Germany, whose chancellor, Angela Merkel, also was an NSA target.

The uproar in Germany will probably hurt Akamai Technologies Inc. (AKAM:US)’s business there, according to Tom Leighton, chief executive officer of the Cambridge, Massachusetts-based company that helps corporate customers deliver online content faster.

“It’s clearly bad for American companies,” Leighton said Nov. 20 at “The Year Ahead: 2014,” a two-day conference in Chicago hosted by Bloomberg LP. “It’s particularly bad now in Germany, where it’s really being played up, to whip up anti-American corporate sentiment. We’ll probably lose some business there.”

Data Flows

Technology companies aren’t the only ones facing potential damage from disclosure of the NSA’s surveillance, said Myron Brilliant, an executive vice president with the U.S. Chamber of Commerce in Washington. Studies show products and services that rely on cross-border data flows are expected to add an estimated $1 trillion in value to the U.S. economy annually over the next 10 years, he said.

“This is a priority issue, not just for technology or Web-based companies, but also small- and medium-sized businesses,” Brilliant said, listing finance, manufacturing, health care, education, shipping “and other areas not commonly thought of as Internet companies.”

Information technology companies were the first to see fallout after Snowden fled to Hong Kong in May and began releasing details of U.S. surveillance programs. Snowden is now living in Russia.

Facing a backlash that’s already crimping sales in China, San Jose, California-based Cisco may be locked out of future purchases if the Chinese government cites security concerns to favor domestic companies in a projected surge of IT spending, to $520 billion in 2015, to increase urban broadband speeds and expand rural Internet access.

Cloud Forecast

The cloud computing market will be valued at $207 billion by 2016, according to the Information Technology & Innovation Foundation.

A survey by the Cloud Security Alliance, an industry group, found that 10 percent of its non-U.S. members have canceled contracts with U.S.-based cloud providers since May. Fifty-six percent said they’d be less likely to use one.

“People aren’t going to trust the U.S. and U.S. companies as much,” said Jason Healey, director of the Cyber Statecraft Initiative at the Atlantic Council, a Washington-based policy group. “You’re going to see national boundaries begin in cyberspace.”

Internet Regulation

For years, the U.S. has lobbied against such an approach, advocated by countries including China and Russia. In 2011, they submitted a proposed “Internet code of conduct” to the United Nations. The U.S. has pushed back, “trying hard to get up-and-coming countries like Brazil to trust us, not the Chinese, about how the Internet should look,” Healey said.

A top-down intergovernmental approach “would hamper the pace of innovation and hamper global economic development, and it could lead to unprecedented control over what people say and do online,” Daniel A. Sepulveda, the U.S. State Department’s coordinator for international communications and information policy, said in a Nov. 6 phone briefing.

On Nov. 20, the U.S., the U.K. and Australia failed to dilute a draft UN resolution, co-sponsored by Brazil and Germany, calling for protecting citizens’ privacy worldwide.

Brazilian Push

After Snowden’s disclosures revealed that the NSA was monitoring exchanges between Rousseff and her top aides, the Brazilian president has led an effort to establish Internet protections.

Brazil is considering legislation that would require companies such as Mountain View, California-based Google to use local data centers or equipment developed by the government. A preference for non-U.S. providers could hurt companies such as Sunnyvale, California-based Juniper Networks Inc. (JNPR:US), which accounted for 10 percent of Brazil’s router revenue in the first half of the year, or Cisco, which holds 56 percent.

In Germany, Bonn-based Deutsche Telekom AG is part of an alliance of companies promoting a system to keep German e-mail and Web searches within the country.

“The private sector is very worried about this because it messes with what might be most economic way to route message flows and traffic,” said Gene Kimmelman, project director for human rights and Internet policy at the New America Foundation, a Washington policy group. “If you’re forced to have equipment in a certain country, by law, it might add significant expense to an operation.”

European Trade

European Union legislators set to negotiate a trade agreement with the U.S. want to include strict rules for American companies handling EU citizens’ data and fine them heavily for violations.

Some of the anger over the NSA is disingenuous, given that there’s “a substantial awareness that surveillance goes on” in many countries, Kimmelman said.

Even so, Google’s Salgado said international reaction to the NSA’s surveillance risks changing the nature of the Internet.

He said proposals being advanced could lead to the “creation of a splinter net, broken up into smaller national regional pieces with barriers around it to replace the global Internet that we know today.”

To contact the reporter on this story: Nicole Gaouette in Washington at ngaouette@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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