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What Edward Snowden Has Done to the Cloud

Why you should care

Because the cloud probably consumes you — whether you know it or not — and it’s about to be steered around a sharp turn, thanks to a former NSA contractor named Edward Snowden.

Could we be on the verge of witnessing a shakeup in the cloud?

That’s the question looming over the $47 billion cloud-computing industry: whether the booming industry is having what Silicon Valley refers to as “a BlackBerry moment,” when doubts about a technology’s adequacy threaten sales to the point that a company is doomed.

The answer? Maybe. Because big changes are forecast for the American side of the cloud-computing industry.

Most people picture cloud computing in terms of email — using Gmail (cloud-based), say, rather than Outlook (desktop software). But that’s just the retail — and arguably less important — side of the business.

The cloud also has a gigantic wholesale side that provides backroom operations for just about every major company you interact with on myriad everyday tasks at home and work — from file sharing and banking to filling out health claims and storing photos online. Cloud services offer an outsourcing haven that has rendered many basic in-house computer jobs obsolete.

When you order a film on Netflix, for example, it actually comes via Amazon, a major cloud provider that Netflix uses to store and retrieve its bread-and-butter products of movies and TV shows. (Never mind that Amazon competes with Netflix in the video-on-demand space.)

American companies — IBM, Google, Microsoft, EMC, Rackspace and Amazon — are the world’s dominant players when it comes to cloud services. But then Edward Snowden stormed onto the field, casting a long shadow over the industry by revealing that the U.S. government knows far more about you (if you happen to live in the land of Lady Liberty) than you might think. Forrester Research estimates that shaken confidence in the American cloud industry could cost it $180 billion, or 25 percent, by 2016, with much of that revenue going to foreign competitors in Australia, Germany and France.

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Clients like Netflix now fret over whether the fundamental operations of their business are secure — undermining an individual’s right to privacy on a much vaster, scarier scale. If Snowden’s disclosures upset retail cloud customers who use Gmail and cell phones, think how upset they’ll be to learn that Uncle Sam has access to everything they do on the cloud, from renting movies to buying sex toys to bank transactions.

Before Snowden pulled back the curtain, hordes of retail companies were outsourcing Web operations, data maintenance and full-speed access. “Now businesses are asking: Are we getting the most secure computer infastructure for our money?” says Daniel Castro at the nonprofit Information Technology & Innovation Foundation in Washington, D.C.

Even so, analysts estimate that cloud revenues could double to more than $100 billion in 2017 — a 23.5 percent annual growth rate, and five times that of the overall computer industry. Whether that growth will occur in the U.S. is literally the billion-dollar question. Among non-U.S. residents responding to a recent survey by industry consortium Cloud Security Alliance, 56 percent said they are less likely to use a U.S. cloud provider; 10 percent said they had already canceled a project with one.

“We’re talking about a fundamental rethink about mass-migrating operations to cloud providers,” says Michael Schrage, research fellow at the MIT Sloan School’s Center for Digital Business.

Cloud providers have responded — correctly, Schrage says — that the services they provide are at least and probably much more secure than what most individual clients can provide.

At present, companies face three privacy challenges: the sharing of information without customer permission, criminal hackers and government-mandated disclosures. Companies can prevent and combat the first two, but only the U.S. government can remove the third concern. Until it does, foreign cloud providers will leverage the current queasiness over U.S. government spying to grab business, Castro says. Plus, foreign governments are only too eager to help.

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Quoting Neelie Kroes, European commissioner for digital affairs, Castro puts the point into high relief: “If European cloud customers cannot trust the United States government, then maybe they won’t trust U.S. cloud providers either.” The minute German and French governments, for instance, pledge not to invade cloud servicers inside their borders, voilà! — those foreign competitors will have a major advantage. And those competitors, such as Deutsche Telekom and France Télécom, are more than ready. For example, says Castro, of the $13.5 billion invested in cloud computing in 2011 (the latest figures available), $5.6 billion came from companies “outside North America.”

How important is the wholesale cloud to delivering retail services, like the shoes or books you just ordered? Very. It’s the essence — the enabler — of meeting consumers’ accelerating demand for access to whatever they want wherever, whenever and however they want it — by smartphone, TV, tablet, Google Glass.

The convenience and dramatic savings offered by the cloud — rather than building and maintaining computer storage and software in-house — are obvious for many industries. For example, most big banks have grown in part through acquisitions over the last several decades, which means they likely still use a host of legacy computer networks they inherited and patched together, often inelegantly. How much better would it be to outsource customers’ access to accounts via a cloud vendor that has the latest, most streamlined computers?

Cloud providers are loath to discuss the fallout from Snowden’s revelations about U.S. surveillance, but they are talking plenty to industry analysts and consultants, who say earnings reports that these companies must file with the Securities and Exchange Commission will soon tell the story. “Until we fix this, every foreign competitor will have the advantage over the United States,” Castro says.

Uncle Sam, are you listening?

Kathleen Day is a business professor at Johns Hopkins University and a journalist. A former Washington Post business reporter, she is a contributing editor and writer on business for OZY and USA Today.

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