Inside Business

December 11, 2013 1:14 pm

Data cold war could damage leading US internet companies

This week’s challenge by tech companies on US surveillance shows the issue is becoming critical

A simmering data cold war could do irreparable damage to the brands of some of the leading US internet companies – and their growth prospects in markets far from home.

That, at least, is the fear that has been brewing in Silicon Valley for months, culminating in the extraordinary decision this week by eight prominent companies to challenge their own government over its surveillance practices.


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When enemies like Google, Microsoft and Apple overcome their mutual fear and suspicion like this, it is a sure sign things have reached a critical stage. This is now officially a high-stakes game.

Calling attention to the mass collection of personal data by the National Security Agency carries clear risks. If their calls for change are snubbed by Washington, the internet companies will look even more hapless in the face of a government that, among its recent feats, has hacked into the networks of Google and Yahoo to spy on unencrypted traffic.

They also stand to be accused of cynicism if their campaign is seen mainly as a publicity ploy. The six-month-old surveillance scandal has left a lingering suspicion about the extent of the tech industry’s co-operation – even complicity – in aiding the state’s data gathering.

But for many parts of the US tech industry, this is starting to look like a fight that cannot be avoided.

The recent results of some of the biggest US IT companies offered the first intimations of the potential damage from the NSA scandal. Executives at Cisco, for instance, said last month that an NSA backlash among customers in emerging markets was one reason why its business was faring much worse than expected.

The denunciations of the US data sweep have been strongest in countries like China, Brazil and Russia – until recently markets that were contributing a much-needed shot of growth to otherwise stagnant mature tech companies.

It will be harder to track the impact of the surveillance disclosures on consumer internet companies. So far, nothing suggests that a meaningful number of users have turned away in disgust.

Whether that is because of genuine user complacency or a lack of adequate alternatives could eventually be tested in countries like Germany, where there are efforts to develop homegrown services, though that will take time.

The more measurable and immediate threat for the internet companies comes from a political backlash and the greater regulation it could bring. Companies already suspected of taking a cavalier attitude to their users’ privacy are now in the line of fire. Governments that were already minded to hamper their activities, either for protectionist or politically repressive reasons, have been handed the perfect excuse.

The forms this could take are already being debated in official circles. Blocking cross-border data flows in the name of protecting privacy is the first knee-jerk reaction. From there, it is a short step to censorship and a fragmentation of the open online platform on which the internet companies have thrived.

In such a world, the services of a Facebook or a Google might still be widely available. But partial blocks to some offshore information and slower responsive times or variable service quality could all combine to weaken their hold on users.

In depth

US Security State

US security state

Analysis of revelations about the extent of the surveillance state in the US

The companies themselves would face higher costs in running a patchwork quilt of international networks, each adhering to local norms. They would also be more limited in their ability to “monetise” the data they collect – for instance, by serving targeted advertising – if they are subjected to more restrictive local practices.

Ultimately, the best hope for the internet companies may lie in convincing the US intelligence agencies that they, too, would suffer in such a world.

The home field advantage that the NSA has long enjoyed in the online surveillance game is something that officials openly acknowledge. US internet companies have custody of a disproportionate share of the world’s data and can be forced by court order to hand it over – regardless of the location of the servers that actually hold the information.

It would take a significant act of self-denial on the part of the NSA and its political masters to turn against its current secretive mass data gathering. But now the cat is out of the bag, it might take just such an act to persuade governments and tech users elsewhere that they can trust US tech companies.

That is the calculation the internet companies appear to have made with their head-on challenge to US surveillance. If they are wrong, it could be costly.

Richard Waters is the FT’s West Coast managing editor

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