Cloud Computing | Nones Notes

I’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.

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.”

Shortly 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.

And 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.

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!”

My brother, Nelson Nones, has lived and worked outside the United States for years. From his vantage point “outside looking in,” I find that his perspectives on U.S. socio-political developments are often somewhat different from the conventional thinking here at home.

This was clearly evident when the news broke In early June about the National Security Agency (NSA) surveillance of e-mail and other digital content. Within just a couple days, Nelson had penned a thought piece on the implications of these revelations on the cloud computing industry.

In his view, the NSA revelations are likely to have numerous serious implications. As he states in his analysis:

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.”

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

You can read Nelson’s full article on his company’s website, Geoprise Technologies Corporation.

I wondered how long it would take for these views to gain traction here in the United States.

It didn’t take long at all. In fact, the Information Technology & Innovation Foundation, a Washington, DC-based think tank focusing on technology policies, released a report a few days ago in which it projects the U.S. cloud computing industry to forfeit between $22 billion and $35 billion in lost business as a result of the revelations about the NSA’s electronic surveillance programs.

That represents between 10% and 20% of a cloud computing market that is expected to be a $207 billion industry by 2016 – revenues which are likely to be sucked up by European and Asian companies instead.

The ITIF report warns that the NSA’s surveillance programs “will likely have an immediate and lasting impact on the competitiveness of the U.S. cloud computing industry if foreign customers decide the risks of storing data with a U.S. company outweighs the benefit.”

The implications are huge because up until now, the United States has been the acknowledged leader in cloud computing usage and innovation, even as other countries have tried to play catch-up.

The ITIF report has garnered the attention of the business press — big time. The Guardian has published a story as has the Financial Times. The story has leached into general news and opinion sites as well, such as The Daily Kos — and others are sure to follow suit.

All of this is a pretty major deal because the cloud computing industry represents one of the fastest growing sectors of the digital communications market. Global spending on cloud computing is anticipated to grow by 100% between 2012 and 2016.

That compares to growth of only about 3% for the global IT market as a whole.

And in case people are thinking that the ITIF report might be unduly alarmist … it appears that the giant sucking sound of cloud computing business going elsewhere has already begun to happen.

Some U.S. tech companies are reporting that they’ve already lost customers, as concerns mount over the NSA’s PRISM program that lets the federal government tap into user information and e-mails held by Internet companies.

The Cloud Security Alliance, a coalition of industry practitioners, corporations, associations and other key stakeholders whose mission is to promote the use of best practices in providing security assurance within cloud computing field, conducted a survey in June and July of companies located outside the U.S. That survey found that ~56% of the responding companies are now less likely to use a U.S.-based cloud computing service, thanks to the NSA’s spying program.

One out of ten respondents reported that they have already canceled contracts with U.S. companies. And that’s only within the past few weeks.

Meanwhile, non-U.S. players in the cloud computing market must surely be laughing all the way to the bank. For example, Artmotion, the largest hosting company in Switzerland, reported a ~45% increase in revenue within just the first month after Edward Snowden’s release of details about the PRISM program.

To be sure, Europeans are wasting no time weighing in on the messy situation the American cloud computing industry suddenly faces. Neelie Kroes, European Commissioner for Digital Affairs, had this to say:

“If European cloud customers cannot trust the United States government, then maybe they won’t trust U.S. cloud providers either. If I am right, there are multibillion-euro consequences for American companies. If I were an American cloud provider, I would be quite frustrated with my government right now.”

Germany’s Interior Minister Hans-Peter Friedrich was even more blunt:

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

What are the companies that fear their communications are being monitored, as Mr. Friedrich posits? Pretty much all of the bigger ones, I’d think.

OK, U.S. government and administration officials: Have fun unscrambling this egg!