The “Snowden Effect”: The U.S. cloud computing industry is getting hammered.

cloud computing securityI’ve blogged before about the fallout from the Edward Snowden affair and its effects on the U.S. cloud computing industry.

In fact, back in the summer of 2013 I read an interesting thought piece published by my brother, Nelson Nones, Chairman of Geoprise Technologies.  His experiences as an IT specialist who has lived and worked outside the United States for two decades has made him particularly sensitive to what the international implications of the Snowden revelations may be.

In his 2013 analysis, he claimed that the NSA spying revelations would likely have serious consequences for the cloud computing industry.  As he wrote at the time:

“… these threats will be perceived to be so serious that many businesses could decide to abandon the use of cloud computing services going forward — or refuse to consider cloud computing at all — because they bear full responsibility for compliance yet now realize that they have little or no ability to control the attendant non-compliance risks when utilizing major cloud services providers.  

Out front: Geoprise Technologies' Nelson Nones was among the first to warn about the negative consequences of NSA surveillance programs on the U.S. cloud computing industry.
Out front: Geoprise Technologies’ Nelson Nones was among the first to warn about the negative consequences of NSA surveillance programs on the U.S. cloud computing industry.

 

In view of recent revelations, the tantalizing cost savings and efficiencies from cloud computing may be overwhelmed by the financial, business continuity and reputational risks.”

And his prediction as to what would likely happen as a result if these concerns played out in the market was even more chilling:

“Revenues and profits of U.S.-based service providers will suffer to the extent that businesses of every nationality abandon the public cloud computing services they are now using, or refuse to consider public cloud computing services offered by U.S.-based providers, in response to the heightened customer risks that have now been revealed.”

itif_logoShortly thereafter, I began to notice similar writings back here in the United States – in particular those by members of the Information Technology & Innovation Foundation (ITIF), a DC-based think tank focusing on technology policies.  It projected that the U.S. cloud computing industry would forfeit somewhere between $22 billion and $35 billion in lost business as a result of the NSA-related revelations.

For anyone keeping score, that’s between 10% and 20% of the worldwide cloud computing market.

New-America-Foundation-logoAnd now, one year later, the full scope of the impact is being realized.   New America Foundation, a not-for-profit, non-partisan organization focusing on public policy issues, released a report this past week which outlines the impact of Snowden’s NSA revelations.

Here are just two examples of the findings it published:

  • Within days of the first NSA revelations, cloud computing services such as Dropbox and Amazon Web Services reported measurable sales declines.
  • Qualcomm, IBM, Microsoft, HP, Cisco and others have reported sales declines in China – as much as a 10% drop in overall revenue.

Not only that, foreign governments are giving U.S. tech firms wide berth when it comes to contracting for a range of products and services that go well-beyond cloud computing.

Among the casualties:  The German government ended its contract with Verizon as of June … while the Brazilian government selected Swedish-based Saab over Boeing in a contract to replace fighter jets.

In the current environment of security jitters, it’s much easier for foreign competitors to portray themselves as “NSA-proof” — and the “safer choice” for protecting sensitive information.

Hans-Peter Friedrich
Hans-Peter Friedrich

And unambiguous comments like this one made by Germany’s Interior Minister Hans-Peter Friedrich just add fuel to the fire:

“Whoever fears their communication is being monitored in any way should use services that don’t go through American servers.”

Even more ominous, a number of countries are debating – and indeed close to enacting – new legislation that would require companies doing business within their local to use local data centers.

Sure, some of the countries – Vietnam, Brunei, Greece – aren’t overly significant players in the grand scheme of things.  But others certainly are; Brazil and India aren’t inconsequential markets by any measure.

In all, the New America Foundation report forecasts that the fallout from the NSA’s PRISM program will cost cloud-computing companies multiple billions in lost revenues – from $20 billion on the low end to nearly $200 billion on the high end.

This, plus the collateral damage of lost contracts involving ancillary and even unrelated tech services and manufactured products, may result in a contraction of the U.S. tech industry’s growth by as much as 4% — not to mention seriously undermining the United States’ credibility around the world.

Isn’t that just what America needs to have right now:  international credibility problems not only in the political sphere, but also in the economic one.

Unfortunately, what I wrote in my blog post a year ago still stands true today:  “OK, U.S. government and administration officials:  Have fun unscrambling this egg!”

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