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Instant Analysis: Apple Fights the U.S. Government

By Jamal Carnette, CFA - Feb 17, 2016 at 5:25PM

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Is Apple's newest beef with the U.S. Government thesis altering, or just market noise?

What happened?
Apple
's (AAPL -0.29%) CEO Tim Cook penned a strong missive railing against a recent court order for the device manufacturer to help the FBI unlock an iPhone used by Syed Rizwan Farook, one of the shooters who killed 14 people in San Bernardino. While Cook was complimentary of the FBI, Apple's chief strongly denounced the request to "build a backdoor to the iPhone."

Both Apple and Alphabet have full-disk encryption, which encrypts data on a device level unless the user has the key. Currently, Apple's security features wipe on-device data after 10 failed attempts. The FBI is asking Apple to revoke that feature on this phone in order to undertake a brute force attack and enter all passcode combinations. Apple counters it doesn't have this software, and any such software is essentially a skeleton key that could be employed to unlock any user's device.

Why it matters... or doesn't
Apple is in between a rock and a hard place. On one hand, the refusal seemingly places Apple in the crosshairs of National Security advocates, who fear a proverbial smoking gun scenario where proper law enforcement cannot gather the information it needs to prevent an attack, or to prosecute the offenders. On the other, installing a back door has the potential to alienate Apple's privacy-focused consumers in the United States.

In Silicon Valley, specifically, the trend from both companies and individuals within the technology industry is a shift toward more privacy. If Apple creates a back door and uses it -- even in this limited case -- these consumers could possibly migrate to another operating system.

However, the real risk for Apple lies in its overseas operations. In the recently completed first quarter, Cook mentioned 66% of Apple's revenues come from outside the United States (25% from China alone). Foreign governments have been increasingly concerned with spying from the U.S. Government. Last year, after reporting poor results for Russia, India, and China, Cisco (CSCO 0.02%) CEO John Chambers wrote President Obama to ask for "new standards of conduct" regarding NSA spying after a book from former NSA contractor Edward Snowden had pictures of the NSA working with Cisco equipment.

Right now, this is an intriguing story, but should be filed under market noise. Apple appears not to have the ability to un-encrypt data, and is joined by key competitor Alphabet in its stance. Most likely, this decision is supported by its considerable non-U.S. consumer base.

Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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