Microsoft and Google in a Post-Snowden World

Tech companies are confronting the brutal realities of a post-Snowden world.

Microsoft's China moment.

Photographer: Fred Dufour/AFP/Getty Images

The privacy debate is getting louder in techlandia as it becomes clear that the National Security Agency's digital snooping, along with other government surveillance programs, could upend the U.S. tech industry's global dominance.

Two recent developments drive this home. The first is a high-profile court case involving the U.S. government and Microsoft. The second is China's decision to rip foreign technology out of its most important institutions - state-owned companies, banks and government agencies -- and shift to domestic suppliers.

Before delving into those developments, it's worth noting that both the Microsoft case and the China decision are part of a bigger narrative that started taking shape last summer after Edward Snowden leaked information about the U.S. government's sweeping surveillance programs.

His documents revealed myriad NSA spy programs that hoovered up information on foreign suspects as well as U.S. citizens. The agency had also pressured telecom companies like Verizon and Internet giants like Google to feed customer data into the government's vast surveillance operation. As the Snowden revelations showed, the U.S. government was also actively exploiting corporate security flaws to take whatever it wanted from those companies.

In the wake of all of that, tech firms immediately tried to distance themselves from the NSA, even as the Snowden revelations tarnished their reputations with corporate clients, consumers and governments worldwide. Companies warned that fallout from the Snowden revelations would hurt their future earnings and, anecdotally, it seemed that global customers started to look for alternatives to U.S. tech suppliers.

Yesterday, Bloomberg reported that China intends to replace hardware and software made by Microsoft, Cisco, IBM, Intel and Hewlett-Packard with homegrown operating systems and networking equipment by 2020. For those trying to calculate the impact of all of this, it's good to keep in mind that it's costly and hard to rip out and replace an entire IT stack that you've come to depend on over a long period of time. Simply doing it invites disruption and glitches and all of the things we've come to hate when technological processes go awry.  But it’s the sort of thing that a semi-state run economy like China's can implement, even if it stymies production.

Nevertheless, the move reflects a harsh reality for U.S. tech companies: They earned leadership positions worldwide by making the best hardware and software, and now global politics could obliterate the advantages created by superior innovation and high-quality products. 

Most overseas corporations won’t up and abandon U.S. tech companies since they can’t afford to rebuild their businesses from the ground up. But as Bloomberg has reported, potential clients with new projects overseas will likely look for alternatives to the U.S. technology suppliers. Tech projects in emerging markets are growing at a faster rate than those in developed markets, where infrastructure is already entrenched. Brazil has already said that it can build a $185 million submarine data cable without U.S. help.

Revelations about parts of the NSA surveillance program could cause the U.S. cloud computing industry to lose $35 billion of business by 2016 (about 20 percent of the potential revenues from foreign markets), according to a report from the Information Technology & Innovation Foundation.

Forrester Research thinks that NSA spying could cost the U.S. tech industry as much as $180 billion by 2016 because surveillance worries will affect non-cloud companies too - and domestic customers will want to bypass vendors perceived to be feeding data to the government.

Even if tech companies don’t lose customers right away, privacy concerns have already caused big companies like IBM, and Amazon to move forward with plans to build more overseas data centers.

Microsoft is trying to beat back the tide. Last week it appealed a New York judge's order forcing the company to give the U.S. government customer information that's stored overseas in a data center in Ireland. The Department of Justice wants emails and other personal information that belong to a person connected to a drug trafficking investigation. Since the data is housed in one of Microsoft’s Irish data centers, the company contends that the U.S. government’s domestic search warrant lacks jurisdiction.

Microsoft argues that it may violate European privacy laws if it hands over the information, and it would certainly make foreign nations and individuals think twice about using Microsoft for cloud-based storage. About 30 tech and media giants filed briefs in support of Microsoft, along with dozens of trade associations and academics. Many of the companies, including Amazon, Apple, AT&T and Verizon, have large cloud computing operations or have access to lots of user information.

One brief that was filed jointly by Verizon, Cisco, H-P, eBay, and Infor (and is representative of the arguments made by all of the companies that are taking Microsoft’s side) says:

The District Court’s decision allowing the U.S. government to demand the disclosure of the contents of customer communications (as opposed to Microsoft’s own business records) stored in overseas data centers is extraordinarily sweeping in its scope and impact. It affects not only the e-mail service at issue in the case, but a host of other communication services, data storage providers, and technology companies. It will expose American businesses to legal jeopardy in other countries and damage American businesses economically. It will upset our international agreements and undermine international cooperation. And it will spur retaliation by foreign governments, which will threaten the privacy of Americans and non-Americans alike.

The companies go on to explain that they’re happy to comply with the existing formal mechanisms that law enforcement agencies have used, which essentially pressure other governments to help with investigations and obtain evidence overseas.

Their argument, at heart, is that the Justice Department can work with foreign governments to obtain the information that it wants. But the U.S. wants to move more quickly than that - which it can, thanks to the ingenuity of these tech companies. In that scenario, companies would pay the price in lost business.

If Microsoft trumps the government, that’s a win for companies that are trying hard to assure customers that using a U.S. tech product isn’t the same as giving the NSA and other agencies the freedom to peruse their data. If Microsoft fails, corporate executives and analysts say customers overseas may follow China’s lead and find alternatives.

For its part, the U.S. government is unlikely to change course. It has no interest or advantage in limiting or defanging its big espionage operations. As I wrote a few weeks ago, it's impossible for any superpower to avoid engaging in global espionage.

The question for tech firms, and for their clients overseas, is whether or not the government is going to force them to be active participants in searches and NSA-style surveillance programs. As things now stand, it's pretty clear that the government prioritizes access to data over corporate competitiveness.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.