July 30, 2012 5:01 pm

Increased ‘cloud mercantilism’ and state aid to hit US cloud providers overseas

This article is provided to FT.com readers by PaRR (Policy and Regulatory Report)— a newly launched product of The Mergermarket Group providing proprietary intelligence and research on competition law and sector-specific regulatory changes around the world. www.parr-global.com

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US dominance of the global cloud computing sector is being threatened by an increase in protectionist regulations overseas coupled with state aid programs that are funding potential competitors, a congressman, a sector analyst, and the president of a sector trade organization told PaRR.

The cloud computing industry, which involves providing IT services over the Internet, is expected to rise in value from USD 41bn in 2011 to nearly USD 250bn by 2020.

However, mandates requiring that data generated within a country be stored on servers in that country are anticompetitive and should be combated by the US government, according to Daniel Castro, senior analyst at the Information Technology and Innovation Foundation.

“Localization requirements … serve as a form of protectionism for domestic cloud computing providers since it may not be economically viable for a foreign competitor to build a new data center,” Castro said in prepared remarks at a 25 July hearing before the House Judiciary Intellectual Property, Competition and the Internet Subcommittee.

Castro cited China, Greece, Vietnam, Norway, Russia, and Nigeria as countries with varying forms of “local data” regulation while pointing out that similar laws are pending in Indonesia, Malaysia, and Ukraine.

Restrictions on cross-border data flows also limit the ability of US services industries, for example the insurance and financial services sectors, to expand into lucrative overseas markets such as India.

Robert Holleyman, president of the Business Software Alliance, said joint venture requirements in China, along with regulations that would force US cloud companies such as Rackspace Hosting (NYSE:RAX) to share their source code, were effectively creating a “Great Wall” shutting off access to the Chinese market.

Holleyman also pointed to a marketing campaign by Germany’s Deutsche Telekom (ETR:DTE) that raised privacy concerns surrounding the Patriot Act as a reason why customers should use Deutsche Telekom cloud computing services over US providers.

In an exclusive interview with PaRR after the hearing, Subcommittee Chairman Bob Goodlatte (R-VA) cast doubt on the validity of these data security concerns.

“It appears other countries are using this for trade protection as opposed to real legitimate protection of confidential information,” he said.

When asked how Congress could ensure these trade concerns would be addressed in future trade agreements such as Trans-Pacific Partnership, Goodlatte said he was pressing both the US government and international jurisdictions to address these concerns.

“We will have communication with the administration and I have a number of dialogues with representatives of the European parliament,” he said.

In terms of state aid, Castro pointed out that other countries are “aggressively challenging” US companies in this market, citing two state-backed French projects aimed at creating cloud computing providers.

The French government is reported to be funding one-third of EUR 225m for a joint venture involving Orange Telecom, a division of France Telecom (NYSE:FTE) and Thales (EPA:HO), along with another joint venture of similar value involving SFR (a division of Vivendi (EPA:VIV)) and Bull (Euronext: BULL). China has also built a cloud computing hub, offering tax incentives to cloud computing providers.

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