Tech giants Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Amazon.com (NASDAQ:AMZN) are generally considered fierce rivals with competing interests. Yet Apple and Amazon recently came to Microsoft's defense in its ongoing battle with the U.S. government over cloud privacy.
The fight between Microsoft and the U.S. government started in April, after a U.S. court issued a search warrant for a customer's emails stored on Microsoft's Irish servers as part of a drug investigation. It's unclear if the customer was a U.S. citizen or not, but Microsoft flatly refused, stating that its Irish servers remained outside the jurisdiction of the U.S. government.
Clashing acts and treaties
The U.S. Department of Justice states that the Stored Communications Act (SCA), part of the Electronics Communications Privacy Act of 1986, enables it to obtain digital data through court orders.
Microsoft argues that the SCA only applies to data stored on U.S. servers, and the U.S. government should work with Irish authorities through the Mutual Legal Assistance Treaty (MLAT) it holds with Ireland. The Irish government has sided with Microsoft, requesting that the European Commission examine whether the U.S. had violated EU data protection laws with its warrant.
Microsoft lost its initial appeal in July, but it plans to continue fighting the DOJ ruling. On December 15th, 28 tech and media companies (including Apple, Amazon, and Verizon,) 23 trade associations, and 35 computer scientists signed ten amicus briefs to express their support for Microsoft.
How the U.S. is killing its top tech companies
Last year, the Edward Snowden leaks revealed that PRISM -- the NSA's mass electronic surveillance data program -- had collected data from Microsoft, Apple, Google, and Facebook. Although the named companies denied providing the NSA "direct access" to their servers, their reputations were tarnished. Last December, eight tech giants -- including the companies named in the PRISM leaks -- demanded that the NSA reform its surveillance policies.
Unfortunately, foreign governments now tend to link U.S. tech and telecom companies with the NSA. In June, the German government replaced Verizon with Deutsche Telekom, citing surveillance concerns presumably related to the Angela Merkel phone-hacking scandal. In May, China banned installations of Microsoft's Windows 8 on its government machines for unclear reasons, shortly before raiding the company's offices in an anti-monopoly probe. In a move to distance itself from the U.S. government, Apple started storing Chinese user data on Chinese servers in August.
If Microsoft hands over its emails, it implies that the DOJ can subpoena data off any foreign server owned by any U.S. company, without first reaching out to the foreign government in question.
Why investors should worry
Tech behemoths like Microsoft and Amazon generate a substantial portion of their revenue overseas. If they are considered unofficial extensions of the U.S. government, foreign governments and large enterprise customers might avoid their products and services.
Microsoft is betting its future on the cloud. Its cloud computing platform, Azure, is expected to become the backbone of Windows 10. In a cloud-based environment where everything is connected, Microsoft must ensure that sensitive data is compartmentalized into regional servers overseen by local governments.
Apple similarly wants to sell plenty of iPhones and Apple Watches in China, but the devices could face global restrictions and bans if user data is considered vulnerable to U.S. probes.
There must be a better way
Microsoft and its allies are right to stand up to the U.S. government. If the DOJ simply worked with the Irish government, instead of demanding that Microsoft just hand over the emails, it could probably have accessed the data by now. Yet the DOJ -- arguably oblivious to America's waning overseas credibility regarding cyber security -- asked Microsoft to do something that would have compromised both its own integrity and that of its industry peers.
Many top U.S. tech companies already have operations in Ireland, where they keep substantial amounts of unrepatriated profits. Therefore, it's not hard to imagine them simply relocating their headquarters to Ireland (as tax inverters did) to break ties with the U.S. government. Hopefully it will never come to that, but the U.S. government certainly isn't making things easy for many of the nation's biggest innovators.