NSA Popping the Technology Bubble

Whatever you think about Edward Snowden, there is no doubt his revelations from inside the National Security Agency (NSA) rocked the technology sector. The consequences are still unfolding more than a year later — and a new independent report says much more is coming.

U.S. technology leaders like Microsoft (MSFT), Cisco (CSCO) and International Business Machines (IBM) are in a nearly impossible position. They have to tolerate whatever secret "requests" the U.S. government makes, both for legal reasons and because Uncle Sam is a huge customer.

At the same time, they need overseas revenue to meet their growth targets, and it is practically impossible to convince foreign leaders that their sensitive data is safe and secure in American hands.

Cisco, for example, openly admitted last year that Snowden was a big reason for the firm's 10 percent revenue drop. The situation hasn't improved since then. Qualcomm (QCOM), IBM, Microsoft and others all blame the "Snowden effect" for lost business in China.

Even some U.S. allies are turning their backs on our technology firms. The German government cancelled a data services contract with Verizon (VZ) in June because it no longer trusts the company to protect its network from NSA spying.

Brazil awarded a $4.5 billion contract for fighter jets to Sweden's Saab instead of Boeing (BA), which had fought hard to win the job.

Last week, the New America Open Technology Institute released a report outlining the economic damage of NSA spying. They make an important point that many observers overlook. The perception that U.S. companies cooperate with the NSA is just as important as the reality.

Whether these companies knew what NSA was doing or cooperated really doesn't matter. What matters is that a good portion of the world is rightly suspicious of them. Regaining the lost trust will take years, even decades.

Meanwhile, foreign competitors wasted no time exploiting this new perception. In some cases, their own governments are pushing them along with "data localization" requirements. Brazil, Germany, Russia, India, Greece and others are moving to require private data stay within their borders.

The once-open Internet is fragmenting into smaller pieces that cannot operate with the global scale U.S. leaders envisioned. Our government's insane drive to penetrate every network in the world is making the world slam the door in our face.

One could argue that this is a small cost if it protects the United States from terrorism. We can't know if it does or not. We can know that the direct costs to the U.S. economy are enormous and growing. The technology sector is our crown jewel — and now most of the world is looking elsewhere.

The result will be slower growth for U.S. tech companies, especially the cloud-computing segment. Some estimates peg the amount of lost revenue at as much as $180 billion during the next three years.

The NSA might be good enough to find the proverbial needle in a haystack. Unfortunately, it looks like they will use it to pop our own homegrown bubble.