Snowden Affair fallout: RIMM experience as blueprint for US Tech?

I have learned over the years to be politically agnostic when I put on my investor's and trader's hat, because political biases can color judgement and lead to negative investment results. While I have my own personal opinions about the Snowden Affair, I have kept them to myself in this blog. It is when Edward Snowden's revelations about the NSA's actions have an impact on the markets that I have to speak up.

The most important story in the Snowden Affair arose when it was discovered that the NSA bugged the EU offices in Washington and penetrated EU computer networks. This post over at Naked Capitalism put the spying scandal into perspective:

Oh, this is getting to be fun!

The lead story at the Financial Times tonight is about how the European Union is threatening to suspend two data sharing agreements with the US. The pink paper also adds that this row has the potential to undermine the EU-US trade negotiations which are set to start next week (we speculated a few days ago that this might come to pass). On our side of the pond, so far only the Wall Street Journal has weighted in, with a cheery headline U.S.-EU Trade Talks on Track Despite Spy Fears which is narrowly accurate since the trade negotiations have not been rescheduled but seems to understate the degree of unhappiness and ire.

The interesting question is how and why has this row escalated now? Mind you, the Eurocrats do have a lot to be angry about. Remember, the US was caught spying on EU officials. Der Speigel released information from Edward Snowden that charged that the NSA had bugged the European Union’s offices in Washington and the UN and hacked into their computers (which enabled them to monitor meetings) and targeted other missions.

If you remember, this story broke shortly before a G8 meeting in Dublin. Obama got the cold shoulder. The European officials appear to have cornered the Americans. This AFP story ran June 14, while the summit was underway:

The United States has agreed to share information with the European Union about its huge Internet and phone surveillance programme, a senior EU official said today.

EU Home Affairs Commissioner Cecilia Malmstrom and Justice Commissioner Viviane Reding secured the agreement from US Attorney General Eric Holder after talks with the American official in Dublin, Malmstrom said.

“Agreed with the US in Dublin to set up a transatlantic expert group to receive more info on PRISM and look at the safeguards,” Malmstrom said on Twitter, without elaborating…

The EU and US officials were meeting as part of already scheduled ministerial talks in the Irish capital.

The move comes days after the EU demanded answers from Holder and warned of a “grave” threat to the rights of European citizens from the intelligence programme.

As I am reading between the lines of the two FT stories tonight, US agrees to talks with EU on surveillance, and Brussels threatens to suspend data sharing with US in spying row, the Administration may be even more on the back foot that it appears. (I welcome input from readers of the European press, particularly those who have a good handle for how the EU deals with the governments of member states over jurisdictional issues).

Notwithstanding the ire of EU officials about American spying, this spying scandal will not serve to help US technology companies in Europe. The EU has privacy standards are far stricter than American ones. Consider this Financial Post story about the privacy concerns about Google Glass:

Google’s wearable computing project Glass raises significant privacy and data protection concerns, according to an international group of 36 authorities, who have signed a joint letter to Google chief executive officer Larry Page.

At issue are the “obvious, and perhaps less obvious, privacy implications of a device that can be worn by an individual and used to film and record audio of other people” – for example, fears of ubiquitous surveillance, and how data collected from the device is stored, shared and used.

It went on to cite a letter to Google CEO Larry Page from various international privacy officials:

The letter includes signatures from Privacy Commissioner of Canada Jennifer Stoddart and her provincial counterparts, but also privacy commissioners from Australia, Israel, Sweden, Mexico and more. The following questions have been raised:

•How does Google Glass comply with data protection laws?

•What are the privacy safeguards Google and application developers are putting in place?

•What information does Google collect via Glass and what information is shared with third parties, including application developers?

•How does Google intend to use this information?

•While we understand that Google has decided not to include facial recognition in Glass, how does Google intend to address the specific issues around facial recognition in the future?

•Is Google doing anything about the broader social and ethical issues raised by such a product, for example, the surreptitious collection of information about other individuals?

•Has Google undertaken any privacy risk assessment the outcomes of which it would be willing to share?

•Would Google be willing to demonstrate the device to our offices and allow any interested data protection authorities to test it?

Now combine those privacy concerns with this Bloomberg story that U.S. Agencies Said to Swap Data With Thousands of Firms:  

Thousands of technology, finance and manufacturing companies are working closely with U.S. national security agencies, providing sensitive information and in return receiving benefits that include access to classified intelligence, four people familiar with the process said.

These programs, whose participants are known as trusted partners, extend far beyond what was revealed by Edward Snowden, a computer technician who did work for the National Security Agency. The role of private companies has come under intense scrutiny since his disclosure this month that the NSA is collecting millions of U.S. residents’ telephone records and the computer communications of foreigners from Google Inc (GOOG). and other Internet companies under court order.

If you were the privacy commissioner or regulator in the EU or any non-US country (e.g. Europe, Singapore, China, etc.), how would you feel about allowing Google Glass into your jurisdiction, knowing that any data that Google retains may wind up in an NSA archive somewhere? Or knowing that Apple cooperates with the US intelligence services, how would you feel about allowing Apple products such as the new iWatch into your country? Do you want to formulate a policy regarding those Android enabled devices? How about allowing your local telecom services provider to enter into a joint venture with a US teleco?

If you don't think that none of that matters, consider the following thought experiment. Supposing that it emerged that the Brazilian security services embedded non-removable technology in every Embraer jet so that it would know:

• The position of the aircraft
• The identity of the crew and passengers
• Conversations of the cockpit crew and the passengers

And the Brazilian security services could access all this in real-time and archived it somewhere in Brazil in perpetuity. Would you be more or less likely to fly in an Embraer jet or to purchase one?

You're not a terrorist. You're not doing anything wrong. Why should you care about your actions being watched by the Brazilian government?

The Snowden revelations about NSA activities, at the margin, damage the competitiveness of American technology companies - and that's what concerns me.

For illustrative purposes, I can remember seeing the story that (then) Research in Motion capitulating to India's demands and handing the country access to its Blackberry network. For me, that was the beginning of the end of the company's competitive position. The same can happen to American technology companies.





Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.