Revelations of NSA spying hurt tech firms

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SAN FRANCISCO -- Microsoft has lost customers, including the government of Brazil.

IBM is spending more than a billion dollars to build data centers overseas to reassure foreign customers that their information is safe from prying eyes in the U.S. government.

And tech firms abroad, from Europe to South America, say they are gaining customers who are shunning U.S. providers, suspicious because of revelations by former National Security Agency contractor Edward J. Snowden that tied these providers to the vast NSA surveillance program.

Even as Washington grapples with the diplomatic and political fallout of Mr. Snowden's leaks, the more urgent issue, companies and analysts say, is economic. Tech executives, including Mark Zuckerberg of Facebook, raised the issue Friday when they went to a White House meeting with President Barack Obama.

It is impossible to see now the full economic ramifications of the spying revelations -- in part because most companies are locked in multiyear contracts -- but the pieces are beginning to add up as businesses question the trustworthiness of U.S. technology products.

Meanwhile, the confirmation hearing last week for the new NSA chief, the video appearance of Mr. Snowden at a technology conference in Texas and the drip of new details about government spying have kept attention focused on an issue that many tech executives have hoped would go away. Despite the tech firms' assertions that they provide information on their customers only when required under law the perception that they enabled the spying program has lingered.

"It's clear to every single tech company that this is affecting their bottom line," said Daniel Castro, a senior analyst at the Information Technology and Innovation Foundation, who predicted that the U.S. cloud computing industry could lose $35 billion by 2016.

Forrester Research, a technology research firm, said the losses could be as high as $180 billion, or 25 percent of industry revenue, based on the size of the cloud computing, Web hosting and outsourcing markets and the worst-case scenario for damages.

The business effect of the Snowden revelations is felt most in the daily conversations between tech companies with products to pitch and their wary customers. The topic of surveillance, which rarely came up before, is now "the new normal" in these conversations, as one tech company executive described it.

"We're hearing from customers, especially global enterprise customers, that they care more than ever about where their content is stored and how it is used and secured," said John E. Frank, deputy general counsel at Microsoft, which has been publicizing that it allows customers to store data in Microsoft data centers in certain countries.

At the same time, Mr. Castro said, companies believe that the federal government is only making a bad situation worse. "Most of the companies in this space are very frustrated because there hasn't been any kind of response that's made it so they can go back to their customers and say, 'See, this is what's different now; you can trust us again,' " he said.

Though it is hard to quantify missed opportunities, U.S. businesses are being left off some requests for proposals from foreign customers that previously would have included them, said James Staten, a cloud computing analyst at Forrester who has read clients' requests for proposals. There are German companies, Mr. Staten said, "explicitly not inviting certain American companies to join."

Mark J. Barrenechea, chief executive of OpenText, Canada's largest software firm, said an anti-American attitude had taken root after passage of the Patriot Act, the counterterrorism law passed after 9/11 that expanded the government's surveillance powers. But "the volume of the discussion has risen significantly post-Snowden," he said. After the Snowden revelations, one of OpenText's clients, a global steel manufacturer based in Britain, demanded that its data not cross U.S. borders.

"Issues like privacy are more important than finding the cheapest price," said German software executive Matthias Kunisch, who spurned U.S. cloud computing providers for Deutsche Telekom. "Because of Snowden, our customers have the perception that American companies have connections to the NSA."

The business blowback can be felt in other ways than lost customers. Security analysts say tech companies have collectively spent millions and possibly billions of dollars adding state-of-the-art encryption features to consumer services, such as Google Search and Microsoft Outlook, and to the cables that link data centers at Google, Yahoo and other companies.

IBM said in January it would spend $1.2 billion to build 15 new data centers, including in London, Hong Kong and Sydney, to lure foreign customers sensitive about the location of their data.

Meanwhile, lawmakers, including those in Germany, are considering legislation to make it costly or even technically impossible for U.S. tech firms to operate inside their borders. Some government officials say such laws may have a motive other than protecting privacy. Shutting out U.S. firms "means more business for local companies," former White House counterterrorism adviser Richard Clarke said last month.

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