Louis Basenese

When news broke that the U.S. government had granted itself the right to spy on Americans’ emails and phone calls, it triggered a predictable public firestorm.

But did you know that the revelations could also cost the United States up to $35 billion?

Dig a little deeper and you’ll see that the Foreign Intelligence Surveillance Act (FISA) allowed Washington to go further than just violating people’s privacy. It also has serious ramifications for Corporate America.

Here’s what I’m talking about…

Trouble in the Cloud

It’s been two months since Edward Snowden ratted out the U.S. government. But some say that the mass surveillance program dates back to 2008.

And it turns out that the government wasn’t just rummaging around in Americans’ personal business. It was also snooping in other countries’ private data. That jeopardizes the integrity of U.S.-based companies that specialize in storing data in “the cloud.”

And with foreigners now more wary of U.S. intelligence-gathering practices, it could cost these cloud storage providers billions in lost customer revenue from abroad.

The dollar figure attached to the consequences is still very new — and raw.

But a report from the Information Technology & Innovation Foundation (ITIF) estimated that if U.S. cloud providers were to lose 10-20% of foreign business, it would cost them anywhere from $21.5-35 billion over the next three years.

So what are the odds of this actually happening?

As it happens, pretty good…

Foreigners Are Shunning America

The ITIF conducted a survey shortly after Snowden made his knowledge public, which revealed that “10% of foreign companies using cloud-computing services said they’d already canceled a project with a U.S. cloud provider, and 56% said they’d be less likely to use U.S.-based providers.”

That spells “Trouble”… with a capital “T.” Why?

Because during its earnings call last month, IBM revealed that its cloud revenue soared by 70% over the first half of the year. And it’s just as well that the area performed so well, since the company’s total revenue fell by 3.3%.

And you’ve got to wonder where it puts IBM’s pending multimillion-dollar agreement with Capital online Data Service Co. Ltd. — one of China’s leading Internet data center companies — to build and manage its public cloud service.

Oracle is in the same boat as IBM. While its cloud revenue jumped by 50% for the quarter ending May 31, overall revenue dropped 1%.

With these revenue-challenged companies depending on their cloud businesses, the results of the ITIF survey don’t bode well.

But they’re certainly not the only ones facing the fallout…

America’s Loss Is the World’s Gain

According to The Guardian, some of America’s largest Internet companies are involved in the U.S. government’s mass data collection program: Microsoft, Yahoo, Google, Facebook, Apple, YouTube (owned by Google) and AOL. They all stand to lose credibility, customers and revenue.

But their losses present a big opportunity for European and Asian companies to pick up the slack from the growing global cloud market.

A market that’s forecast to be worth $148.8 billion in 2014… $160 billion in 2015… and $207 billion in 2016.

In fact, Artmotion, Switzerland’s largest offshore hosting company, has already scooped up a big portion of the leftovers. Since the Snowden leaks, its revenue has bounced 45% higher. The description on its website: “State-of-the-art data centre situated within the safe confines of Switzerland, the country for confidentiality and rock-steady reliability.”

And who doesn’t want some confidentiality right now?!

Nobody knows exactly what the fallout will be for U.S. cloud companies just yet. As ITIF analyst Daniel Castro states, “Due to the clandestine nature [of the cloud industry] — Amazon, for example, submerges AWS revenue in a nebulous ‘other’ category, and Microsoft has buried Azure so deep in its balance sheet it’s impossible to get a rough estimate on its cloud revenue — making these predictions is difficult.”

But suffice it to say these companies are facing government-induced head winds, with a suspicious public reluctant to trust American companies with their personal data.

On a positive note, if untrusting users of public clouds seek the safer haven of private or foreign clouds, it could open up new possibilities for investors. I’ll keep you updated on any compelling opportunities that I dig up.

Ahead of the tape,

Louis Basenese
for Tomorrow in Review

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Louis Basenese

A former Wall Street consultant and analyst, Louis helped direct over $1 billion in institutional capital before founding WSD Insider and Wall Street Daily where he serves as Chief Investment Strategist. In addition to being an expert on small-cap stocks, Louis is also well versed in special situations including mergers and acquisitions and spinoffs. His commentary has been featured in several media outlets, including MarketWatch. And he’s also a top-rated speaker at financial conferences throughout the country. A New Jersey native, Louis earned his MBA with honors from the Crummer Graduate School of Business at Rollins College. He draws upon both his academic and professional experiences to edit his short-term trading service: MicroCap Tech Trader.

  • Edward Bear

    Actually, an awful lot of damage was done back when the MPAA/RIAA puppet aka the “justice” department went after MegaUpload. The fact that the Feds arbitrarily shut down *everything*, including users’ access to their own property and data pretty much put the kibosh on trusting anything to the cloud. One guy who put his business data and property in (all legitimate, all his) is STILL fighting to get it back.

    After the Snowden Revelations, the only real advice you can give in regard to “cloud computing” is: Trust NOTHING to “the cloud,” and that means anybody’s cloud.

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