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Wolf Richter: NSA Revelations Kill IBM Hardware Sales In China

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Yves here. When Edward Snowden began revealing the true scope of the surveillance state and the degree to which major American tech and communications companies were partners, Ed Harrison almost immediately recognized how damaging the news was to the cloud computing model. Yours truly, among others, wondered how quickly some countries would try to regain control of their Internet architecture, at least to keep the NSA from snooping on strictly domestic communications. That trend would also favor non-US service and equipment providers. For instance, a book I’m reading now, Spies for Hire by Tim Shorrock, mentions in passing that the NSA wanted to restrict US companies developing stronger forms of encryption because if they got too good, the NSA would not be able to crack it either. The Americans were very unhappy, and argued that that restriction would enable Europeans and the Japanese to take the lead in that field. The solution? The NSA let our domestic players go ahead as long as they got secret decryption keys. Mind you, this tidbit was public knowledge before the Snowden exposes, but remember also that aside from websites that needed encryption to allow for Internet commerce, most people didn’t give encryption a passing thought. These sort of security/privacy issues have gone mainstream, to the detriment of some US players.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

The first shot was fired on Monday. Teradata, which sells analytics tools for Big Data, warned that quarterly revenues plunged 21% in Asia and 19% in the Middle East and Africa. Wednesday evening, it was IBM’s turn to confess that its hardware sales in China had simply collapsed. Every word was colored by Edward Snowden’s revelations about the NSA’s hand-in-glove collaboration with American tech companies, from startups to mastodons like IBM.

But the fiasco was tucked away under the lesser debacle of IBM’s overall revenues, which fell 4.1% from prior year, the sixth straight quarter of declines in a row. Software revenue inched up 1%, service revenue skidded 3%. At the hardware unit, Systems and Technology, revenue plunged 17%. Within that, sales of UNIX and Linux Power System servers plummeted a dizzying 38%. Governmental and corporate IT departments had just about stopped buying these machines.

IBM quickly pointed out that there were some pockets of growth in its lineup: business analytics sales rose 8%, Smarter Planet 20%, and Cloud, that new Nirvana for tech, jumped 70%. But in the overall scheme of things, they didn’t amount to enough to make a big difference.

All regions were crummy. Revenues in Europe/Middle East/Africa ticked up 1%. In the Americas, they ticked down 1% – “The improvement came equally from the US and Canada and once again, we had strong performance in Latin America,” is how CFO Mark Loughridge spun the situation during the earnings call because it was less bad than last quarter.

But there was nothing to spin in Asia-Pacific, where revenues plunged 15%. Revenues in IBM’s “growth markets” dropped 9%. They include the BRIC countries – Brazil, Russia, India, and China – where revenues sagged 15%. In China, which accounts for 5% of IBM’s total revenues, sales dropped 22%, with hardware sales, nearly half of IBM’s business there, falling off a cliff: down 40%.

Mr. Loughridge, in his prepared statement, tried to come up with a logical-sounding panic-free explanation: 

We were impacted by the process surrounding China’s development of a broad based economic reform plan, which will be available mid-November. In the meantime, demand from state-owned enterprises and the public sector has slowed significantly as decision-making and procurement cycles lengthened.

So, would that unprecedented collapse of demand for hardware in China end after mid-November? Nope. These “changes will take time to implement,” he warned. In fact, he did not expect demand to pick up “until after the first quarter of next year.” Not anytime soon.

No one believed that rigmarole.

When an analyst needled him, Mr. Loughridge began to deviate from the scrip: “The hardware business across those elements of the product line accepting zSeries performance (IBM mainframe computers), it was down substantially. We were talking 40%, 50%. Enormous reductions on a year-to-year basis in a geography where we intended to see growth rates.”  

They’d intended to see double digit growth rates. He referred to last year, when sales in China were up 19%, “driven heavily by really strong performance in hardware base,” he said. But suddenly, hardware sales collapsed “40%, 50%” from last year. IBM didn’t even have time to come up with a credible excuse. He was struggling to make sense of it, grasping at flimsy straws and the same economic reform plan theory that no had believed earlier, but this time, it got all tangled up:

And you got to look at that and say, what significantly accounts for that. And I would say, quite honestly, if you look at the elements in China and we have worked with the team in China that simply has been a substantial impact as the process surrounding China’s development of broad based economic reform plan takes shape. And that is going to be announced and available, we think in November and probably it will take some time to implement. So I think we are looking at a couple of quarters, but once that economic plan is announced, it adds clarity to market, we should see, I think and fairly within our team, a recovery in the demand pattern for state-owned enterprise public sector.

The explanation is more obvious. In mid-August, an anonymous source told the Shanghai Securities News, a branch of the state-owned Xinhua News Agency, which reports directly to the Propaganda and Public Information Departments of the Communist Party, that IBM, along with Oracle and EMC, have become targets of the Ministry of Public Security and the cabinet-level Development Research Centre due to the Snowden revelations.

“At present, thanks to their technological superiority, many of our core information technology systems are basically dominated by foreign hardware and software firms, but the Prism scandal implies security problems,” the source said, according to Reuters. So the government would launch an investigation into these security problems, the source said.

Absolute stonewalling ensued. IBM told Reuters that it was unable to comment. Oracle and EMC weren’t available for comment. The Ministry of Public Security refused to comment. The Development Research Centre knew nothing of any such investigation. The Ministry of Industry and Information Technology “could not confirm anything because of the matter’s sensitivity.”

I’d warned about its impact at the time [read.... US Tech Companies Raked Over The Coals In China]. Snowden’s revelations started hitting in May. Not much later, the Chinese security apparatus must have alerted IT buyers in government agencies, state-owned enterprises, and major independent corporations to turn off the order pipeline for sensitive products until this is sorted out. As Mr. Loughridge’s efforts have shown, it’s hard to explain any other way that hardware sales suddenly collapsed by “40%, 50%” in China, where they’d boomed until then.

This is the first quantitative indication of the price Corporate America has to pay for gorging at the big trough of the US Intelligence Community, and particularly the NSA with its endlessly ballooning budget. For once, there is a price to be paid, if only temporarily, for helping build a perfect, seamless, borderless surveillance society. The companies will deny it. At the same time, they’ll be looking for solutions. China, Russia, and Brazil are too important to just get kicked out of – and other countries might follow suit.

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62 comments

  1. from Mexico

    Brazil’s president, Dilma Rousseff, after NSA’s spying on her personal conversations as well as those of Petrobras, postponed a planned Oct 23 offical trip to Washington and instead is pushing hard for the BRICs to completely disconnect from the Anglosphere-European internet backbone:

    http://www.jornada.unam.mx/2013/10/13/politica/014o1pol?partner=rss

    The author of the above linked article, Alfredo Jalife-Rahme, asserts that what is at stake in the “Rousseff initiative” is on the same order of importance as the US’s global dollar hegemony.

    Google’s Eric Schmidt has been one of the more outspoken in striking back against Rousseff and the “balkanization of the internet.” Schmidt “does not hide his preference for US hegemony over national whims to liberate themselves from the US monopoly,” Jalife-Rahame explains. “The balkanization is contrary to globalization of telecommunications and the internet, which now is under the absolute monopoly of the United States.”

    The European think tank DeDefensa categorizes Rousseff’s proposed “nationalization” of the internet “outside of the norms of the United States,” and “national control of the internet” is on a collision course with the prerogatives of globalization.

    Executives of the world’s communicaitons conglomerates are in an uproar over the Rousseff initative. During the recent World Conference on International Communications in Dubai, they attacked it as leading to “a balkanized internet which will suppress On Line liberty.”

    The transnational corporations and the US government are endeavoring to isolate Brazil from Russia, China, India and South Africa. Andrew Blum of Tubes argues that it will be “very difficult for Brazil to break its internet from the rest of the world.”

    But, as Jalife-Rahme concludes: “An isolated action by Brazil would be suicidal, but a collective action by the BRICS would obligate the United States to share the succulent pieces of the communications pie” with the rest of the world.

    1. Jim Haygood

      Brazil’s dilemma (along with the rest of LatAm) is that there’s only one skinny cable on the Atlantic side connecting Brazil with Africa, and none at all on the Pacific side that don’t pass through the benighted Drone Curtain countries of North America.

      http://www.deeshaa.org/wp-content/uploads/2008/02/cable_map_lg.jpg

      What’s the answer — new global physical infrastructure, bypassing the paranoid Anglo-Saxon Stasi states and their tapped lines? Or uncrackable encryption over the existing compromised network?

      With minds focused, likely there will be progress on both fronts. The U.S. can no more be an IT power in the 21st century than the USSR could in the mid-20th, with its rigid controls over info dissemination. ‘National security’ is a code word for terminal cultural decline.

      1. NotTimothyGeithner

        Its not a simple answer, but the U.S. has other interests. Boeing is having problems and was expecting to land a major contract with Brazil. Now, the U.S. is not exactly a popular country even publicly among embracers of neo-liberalism around the globe as they wonder if they have been screwed.

        With the contraction of the U.S. consumer, these contracts matter more so than ever especially as U.S. arms sales have been the “bright” spot of the economy under Obama.

        American-affiliated companies will be hit hard over this, and I think the path forward is for Latin America to focus on cutting out U.S. companies especially when the Chinese can deliver the same product.

        1. from Mexico

          Yep. If the US deliberately wanted to drive Latin America into the arms of China, they couldn’t be doing a more masterful job of it.

          And one shouldn’t think for a moment that the Chineese haven’t picked up the ball that the NSA has fumbled and are running with it:

          The previous stops on Xi’s trip, Trinidad & Tobago, Costa Rica, and Mexico, each represent a distinct part of China’s new and still-developing foreign policy towards the Western Hemisphere. The visit itself was, in many ways, historic.

          [....]

          Much of President Xi’s visit with President Enrique Peña Nieto of Mexico revolved around bolstering the states’ commercial ties. Though trade relations between the two countries have been difficult in recent years, owing to Mexico’s large bilateral trade deficit and China’s increasing importance to the U.S. economy, the leaders signed a number of agreements that solidify China’s place as one of Mexico’s top trading partners.

          The Chinese president’s stops in Costa Rica and Trinidad & Tobago mirrored Obama’s and Biden’s trips, respectively. In Costa Rica, Xi initiated large-scale infrastructure investments—a cornerstone of China’s activities in the region. And in Trinidad & Tobago, Xi, like Biden, sought to strategically position his own country’s access to the Caribbean nation’s abundance of oil and natural gas resources.

          All in all, President Xi’s trip revealed China’s desire to broaden and deepen its economic ties with Latin American countries, a goal it has thus far worked to achieve through investments, joint-infrastructure projects, and trade agreements.

          http://csis.org/publication/chinese-president-xi-jinping-tours-americas-why-does-it-matter

          Then there’s Maduro’s recent trip to China:

          Published Sunday, September 22, 2013 11:06AM EDT

          BEIJING — China and Venezuela signed various agreements Sunday during a visit by the Venezuelan president that is meant to strengthen economic ties between the South American nation and its leading creditor.

          President Nicolas Maduro told his Chinese counterpart, Xi Jinping, that the main goal of his trip was to further consolidate and expand the strategic partnership between the two countries….

          [....]

          Xi called Maduro “China’s good friend” and said his visit would propel bilateral relations “to new heights.”

          Read more: http://www.ctvnews.ca/business/venezuela-signs-various-agreements-with-china-on-trip-to-beijing-1.1465450#ixzz2hziFmOGk

          1. NotTimothyGeithner

            Lets not forget the Russians. The world perspective is that the threat of a few Russian missiles was enough to scare the U.S. from committing the fleets to Syria. Maybe the cheap Russian missiles are enough, and I’m certain Putin would be happy to oblige their requests because they aren’t suited for offense.

            We didn’t even try drones in Syria because I’m positive they can be knocked out or seized by any halfway competent outfits which leaves poor people in tribal areas as the primary victims of drones.

            1. from Mexico

              Sivkov Konstantin Valentinovich, second in command to the now-famous Leonid Ivashov, was in Mexico City a couple of weeks ago. He spoke at a conference organized by the Center for Transition Sciences (CTS) at the Universidad Autónoma Metropolitana.

              Konstantin pronounced Russia in favor of a multipolar world, as opposed to the unipolar world preferred by US neocons. It looks like Russia, unlike China, isn’t so interested in developing economic relations with Mexico or Central America, only South America:

              http://www.jornada.unam.mx/2013/10/09/opinion/022o1pol

              1. NotTimothyGeithner

                Its a good move to stay out of Central America. Russia has plenty of markets. There is no reason to poke the U.S. especially when D.C. is intent on killing the empire on its own.

                There is no reason for the Russians to become involved with our fascist drug war.

          2. optimader

            “..Yep. If the US deliberately wanted to drive Latin America into the arms of China, they couldn’t be doing a more masterful job of it…”

            Absolutely, in a different way, same goes for Africa.

            China has the advantage of no grand scheme World Order Plan to blow up on them, their interests are purely mercantile, and that is revealed in their approach. They barely (wisely) deal with N. Korea.

            Frankly it’s quite apparent that they want to replace the US as the Global Hegemon, their focus is advancing their economic interest, plenty challenge for them right now.

            1. optimader

              Should read
              ..Frankly it’s quite apparent that they DON’T want to replace the US as the Global Hegemon, their focus is advancing their..

      2. Keith B. Bates at the Peephole

        As an incremental reform, governments could throw their weight behind civil society efforts like https://leap.se/en . EFF pulling out of the Global Network Initiative makes it clear whose side the IT oligopoly is on: regardless of who’s paying, the big firms all work for NSA.

      3. Nathanael

        It will not be difficult for Brazil to lay new Atlantic cables. On the Pacific side, of course, Chile or Peru or somoene would have to do it.

  2. pero no

    Underlying these reports is a concern for the health of IBM as a company. With all the IBM has done, starting with their aid to Nazi’s during WWII, should we really be worried about them?

    1. Yves Smith Post author

      Did you read the preamble? IBM simply serves as an example of what is happening to a lot of US tech players as a result of the NSA revelations.

      1. optimader

        1.)Yes I did;
        2.)Indeed IBM is a canary in the coal mine;
        3.)As I stated at the time of NSA revelations, it will cause serious harm to “Brand” USA, personally I would expect Microsoft to take a big hit, their operating system is swiss cheese;

        To be clear, I consider the NSA to be the source of the damage not Mr. Snowden or Mr. Greenwald –heroic measures on their count.

        I also consider the Corporations that tacitly went along w/ the NSA program to be co-conspirators. Personally, I am quietly AMAZED that no Corporate entity said no publically. They presumably did not want to jeopardize USG sales. What I still don’t get is how there could ever be the expectation that such a pervasive surveillance and data acquisition program could ever be kept secret. Mr. Snowden blew it up in spectacular fashion, but exposure was inevitable, and the commercial blowback is as well.

        To the point of the post I responded to, the “health” of IBM has come and gone before. Relative to “aid to the Nazi” being the moral predicate to moderate my level of “concern” for IBM’s well being.. Well we can start a very long list of entities (and individuals) that had poorly considered affiliations in hindsight.
        –One that comes to mind is the Businessman-philanthropist (Occidental Petroleum) Dr. Armand Hammer who notably provided Uncle Joe Stalin the first pencil manufacturing factory in the Soviet Union in return for Right to 2nd refusal (after the Hermitage)of Romanov art and jewels.

        As I stated before the NSA revelations, I consider “cloud” storage to be a flawed concept for storage/archiving of proprietary information.

        1. Brooklin Bridge

          I consider “cloud” storage to be a flawed concept for storage/archiving of proprietary information. -Optimader

          Agree completely and would assume American as well as Chinese companies would too after Snowden revelations. Which is why I’m perplexed at the reference to a 70% increase in sales of the Cloud, “IBM quickly pointed out that there were some pockets of growth in its lineup: business analytics sales rose 8%, Smarter Planet 20%, and Cloud, that new Nirvana for tech, jumped 70%.” Huh???

          Are American corporations as dumb as the livestock they breed?

          1. optimader

            that might be one of the explanations. We have a vendor with whom we outlined why went w/ our own secure server and back up arrangement rather than “cloud storage” and “cloud computing” They forged ahead in that direction anyway, w/ what I consider to be superficial reasoning, and we are now having issues w/ the relationship because we do not want proprietary info we supply them stored or processed in a “cloud environment”.

            Once it out there you’ve lost control of it, full stop.

          2. pero no

            I think we’ll have to see whether the NSA spying impacts the cloud. It’s probably too early to tell. Amazon would be the company to watch here.

            The cloud is a buzzword and a euphemism for giving control of ones computing and data to someone else. Anyone who buys into it, domestic or foreign, is as dumb as the livestock they breed.

        2. pero no

          It’s traditional to regard IBM as a kind of bellweather, since traditionally it served that role. However, it’s a completely different company than a few years ago. There’s been a massive restructuring of operations and shedding of core businesses; A mass exodus of talent and a corresponding decline of quality; and a feeling among customers that they want to stop doing business with IBM. This has caused much hand-wringing in the tech community. This is the background of my comment.

          Any company that gives tech support for genocide, in my opinion, is not just committing a mistake recognizable in hindsight. https://en.wikipedia.org/wiki/IBM_and_the_Holocaust

        3. Nathanael

          “Personally, I am quietly AMAZED that no Corporate entity said no publically. They presumably did not want to jeopardize USG sales. ”

          Actually, they were threatened with being imprisoned like Chelsea Manning, or perhaps imprisoned without trial like the innocent people at Guantanamo Bay.

  3. Dino Reno

    No longer a manufacturing based economy or a service economy, we now proudly boast of being an information economy. The impact of Snowden’s revelations on this economy will be beyond measure. Endless war was but a small prelude to the soul crushing mandate of endless spying that will cripple then kill the American economic model now built on computing, finance, social media, search and advertising. Nothing could be more tenuous since all trust has been destroyed. Since Mr. Market depends, in large measure, on these companies for its inflated value, the impact will be immense. Once this foreign business leaves, it is not coming back.

  4. Clive

    Save a documentary on Japanese TV about quantum encryption which is unbreakable (or, at least, infallible at detecting interception).

    The science bit was way, way above my pay grade (I have trouble with coffee making machines) and the synopsis in English is a bit rubbish:
    http://www3.nhk.or.jp/nhkworld/english/tv/scienceview/archives20121124.html

    But the point is, other nations will capitalise on the demand (and demand there is / will be) for this unbreakable encryption to be commercialised.

    US Homeland Security policy is therefore actively harmful to US interests because, of course, the NSA will do everything it can to prevent the implementation of this technology. The rest of us will simply move on.

    (brief techy interlude: if I understood the principles of quantum encryption correctly, it might also instigate a shift away from routed communications back to good ole’ switched circuits. But I am out of my depth and happy to admit it here !)

      1. Synoia

        Quantum encryption is suseptable to man-in-the-middle attacks.

        It has already been broken in this manner. The NSA has the clout to be the man-in-the-middle on all networks.

        1. pero no

          Ultimately, quantum encryption to exchange session keys is a solution to a problem that’s already been solved.

          It’s possible though some breakthrough will be made, and it will enable people to know when their internet traffic is being read, so that they can at least stop communication.
          It was never about being unbreakable, but about detecting evesdropping.

  5. damian

    Feinstein represents the epi-center of technology of USA – California – she will be out without a doubt next round – too bad she has more than 4 years left in office.

    Citizens cant stop all this but business will not get cut by 50% and stand still

    1. NotTimothyGeithner

      Feinstein and Boxer are the perfect examples of why the Senate needs to abolished. There is no way to challenge these monsters at the ballot box in a state the size of California.

      What is their leverage? The President and the Congress have created a budget situation where they can’t vote to save California, Virginia, and Maryland from the anti-MIC storm which is brewing. The MIC will seek to hurt those states before themselves. Their isn’t a President in these states, and only Virginia has a chance to go the other way.

      If they cut programs across the board, the Senators will start to move things out of those states to their own states, and six Senators isn’t enough to stop it.

      The MIC will do what it takes. The hardware side of the defense industry has been pro-union and used union labor to guarantee union support for their projects.

      The retired Colonel with the inside track for the contract of Project X doesn’t care about Barbara Mikulski or Ben Cardin.

  6. Richard Lyon

    This is the first concrete financial evidence I have seen of an impact on US tech industry from the NSA fallout. IBM is of course no longer in the forefront of that industry. I think that the most significant player on the global stage is Google. The last I saw they were claiming that they had seen no impact on their revenues from the news. That may or may not be true.

    This presents an interesting quandary for the US government. The major tech players are no longer American companies in the sense of being integral parts of the US domestic economy. Many of them are now getting more than half their revenues from outside the US. Their links to the NSA are part and parcel of their function of transnational control agent.

    1. NotTimothyGeithner

      They are integral to the MIC which helps protect and funds them. Stock prices are keeping the bourgeoise element in-line as they pray for trickle prosperity down prosperity to take their minds off the disaster they helped create.

      It doesn’t take long for HP, which was Apple before Apple, to become HP, which is the anti-Apple.

      1. Richard Lyon

        At this point it seems most accurate to view the MIC as the agent of the transnational financial elite, rather than something that exist for the benefit of American society.

        1. NotTimothyGeithner

          The Navy advertises its “a global force for good” in their own commercials. They don’t even pretend anymore.

    2. dw

      well IBM has never really been a big seller to consumers, but the slow down in sales isnt good. but then what other seller of hardware isnt from the US? or isnt based on US company specs? Google is US based, its in no better shape as far China is going to be concerned. nor any of the other US based companies. so just who do the Chinese buy from ? there are very few choices to pick from.

      1. NotTimothyGeithner

        From who do the Chinese buy?

        Are you kidding? There aren’t Apple Factories in Chinas. There are factories which make Apple products. Oh look, the kid of Politburo member just announced an investor group behind a company called Orange which makes products to compete with Apple, and they are made in the same factory Apple used to be made in.

        The Chinese could kick Apple out, and Apple would have a supply problem over night.

        The answer is they already make it the products. They will just cut out the middle man, and since the shine is off both parties in the American empire, the desire to not buy a Chinese company isn’t as strong as a few years ago.

      2. NotTimothyGeithner

        And its not just consumers. Its governments and businesses. If I was company X, I’m not certain I want to do business with an American company, and when province Z needs to update their computers, they use to go to IBM but now the voters or at least the people who prop them up may not be so keen on American products being shipped. Much like how IBM and Boeing are seeing orders disappear.

  7. charles sereno

    Isolationism should work as well as austerity. Because the US is so “exceptionally” advanced in IT, the rest of the world will just shoot themseves in the foot by shunning our products. Pity them. If they continue down this stubborn path, we can next withhold our arms and Treasuries from them. Empire shall not be disrespected.

    1. Bruno Marr

      Well, I can assure you that many of the smart IT and computer science folk are not all “American” and will gladly work for great pay and a wonderful lifestyle near the Copa.

  8. human

    So Mr Snowden is now officially a Terrorist(tm) by having interfered with a corporates’ expected profits! Long live Edward Snowden!

  9. Min

    Unbreakable encryption exists through the use of one time pads. Old technology. I think that the Soviets were the first to use them.

    1. dw

      no. those are much older than that. problem was always trying to keep them in sync once those using them got far apart

  10. kevinearick

    politics…temporarily…buy…crack me up;

    Education

    If you want to escape the gravity of war, now that the empire is contracting and the ‘elites’ are jockeying, you have to redefine education. Education is not a function of consensus, other than the consensus is always wrong, because it is hopelessly lost in the past.

    The Nobel process is obviously corrupt. That’s what the Nobel outcome data tells you. Spying is a function of peer pressure groupthink, which produces scale gravity, but it can never produce quality. America is being rewarded for collective stupidity, supplying artificial demand for artificial supply. That’s History.

    Education may only occur in a home built for the purpose, independent of peer pressure gravity. Of course legacy capital is fixated on mass; it’s slow. And like all forms of gravity, capital can only compute itself, compounding error, debt, so it must define debt as an asset. That’s the bankruptcy game.

    If all the universe did was compute itself, you wouldn’t exist. Space travel is not about gravity, which is a simple derivative. The objective is not to hop from planet to planet seeking resources to exploit. Nor is the objective to replicate humanity, which is a derivative. Think ahead.

    Learn for your self. Experiment. Navigate.

    Billions of dollars into NSA and you can break into its data bank for a few thousand dollars and about 20 minutes of your time, if you time it right. If you know what you are doing, you can even have it send you reports periodically. So what? You have much better things to do, with your life.

    The empire can only know what you are going to do if you follow its data, the herd from the past, to confirm its self-biased equations on one side of a vortex which itself is the equivalent of a plankter in the ocean. That’s why they call it herd behavior. Markets go up, down and around again, fattening up the herd for slaughter and repeating the process.

    You are the path to the unknown.

    There is nothing wrong with social schooling. Calling it education, however, is damn stupid, propaganda. Don’t train government to control you with conformity and then rebel expecting a different outcome. If you want continuation, buy its crap after it gets out of your way, not before.

  11. optimader

    “..Ed Harrison almost immediately recognized how damaging the news was to the cloud computing model..”

    Not to diminish Mr. Harrison, but who didn’t recognize it? A Connect The Dots metaphor would have three dots.

    1. Yves Smith Post author

      No, I mean IMMEDIATELY. As in via e-mail when the news broke. And what you are discussing is hindsight bias. A lot of people didn’t believe the Snowden allegations (remember the initial efforts to discredit him and Greenwald over the “direct access to server” controversy?) or went into “nothing to see here” mode (“oh this may be news to the stupid public but people who have reason to care already know”). A lot of people were too busy debating who he was and what he had to think about the practical implications.

      1. optimader

        You’re right, I stated that incorrectly.. Rather than Who DIDNT GET IT, I should have said MANY OTHER DID GET IT IMMEDIATELY.

        For many situationally aware this NSA surveillance activity and data extraction/collection have been known to exist, what remained UNCONFIRMED was the incredible pervasiveness. More a case of HOW MUCH, not so much IF.

        As for me, my colleagues and I were speculating the next day on how deep this will undermine Brand USA.
        And yes there are people that probably still don’t believe the revelations.

        Beyond communication and data storage, there is a whole layer of US technology companies that are being challenges to preserve their historical status as the preeminent vendors in the field of Process Control (and Process Technology). These systems provide proprietary control all aspects of very large complex enterprises (think Petroleum refineries, Chemical Plants Nuke Plants etc etc).

        Don’t think people employed in this field (Honeywell, UOP, Emerson Electric ect ect) didn’t take a collective sht when Snowden’s revelations broke. They needed this like they need polio.

        1. optimader

          “For many situationally aware this NSA surveillance activity and data extraction/collection have been known to exist, what remained UNCONFIRMED was the incredible pervasiveness. More a case of HOW MUCH, not so much IF.”

          I know you like links, public domain, no surprises here..

          http://www.pbs.org/wgbh/pages/frontline/homefront/interviews/klein.html

          posted may. 15, 2007

          Take me back to the summer of 2002. What happens? …

          … In 2002 I was sitting at my workstation one day, and some e-mail came in. I opened it up, and it was just a notice saying that somebody from the National Security Agency, NSA, was going to come visit for some business. They didn’t say what, of course, just letting us know. I was also told the same thing by the manager of the office.

          Don Henry?

          Don Henry, who mentioned that there was going to be a visit from this person from the National Security Agency. … That struck me as a little odd to begin with, because I remember from back in the ’70s, the NSA is not supposed to be doing domestic spying, so what were they doing in an AT&T company office? It struck me as odd, but I didn’t know anything more about it, so I just let it lie and waited for the guy to come.

          Sometime later, maybe a few weeks — I don’t remember exactly — he did show up. This NSA representative showed up at the door. I happened to be the one who opened the door. I let him in. I directed him to the appropriate people. He was very closemouthed and unsmiling, and he did his business. … I didn’t hear anything about it for a while, and I thought, well, that was over and I’ll probably never hear anything about it again. So I never kept the e-mail. I thought it was just routine e-mail, and I’d never hear about it again. That whole incident probably took place in, I think it was the summer of 2002.

          Then in the fall we started hearing these stories. … We’d start talking to those guys over there at Folsom Street, and we’d hear stories coming back, because the field support guys, they would work at several offices. The guy that the NSA had interviewed [at our office on Geary Street] we heard was working on something over at Folsom Street. And I heard from our manager, Don, that he’s working on some new room that’s being built — not Don; I mean the other guy. And so people start speculating: Now, what’s this new room being built?

          At the same time I started getting more suspicious about it. This was around the end of 2002. You might recall there was a big blowup in the news about the Total Information Awareness [TIA] program, led by Adm. [John] Poindexter, which caused the big upsetness in Congress, because what Poindexter was proposing to do was draw in databases from everywhere — and this was in The New York Times — draw in Internet data, bank records, travel records, everything into one big conglomeration which could be searchable by the government so they could find out everything about what anybody’s doing at any time of day. And all this would be done without any warrants. This is how it was presented by Poindexter himself in The New York Times, and that caused a great upset, brouhaha, in Congress. …

          You’ve seen these stories in the paper about Poindexter. So what’s the scuttlebutt [in the office]? …

          We obviously started to speculate, because the stuff that was being talked about by Poindexter was he wanted to get, without warrants, huge databases so he could do searching and connect the dots, whatever that means, on everybody without warrants. … And funny thing, by coincidence, here this NSA guy shows up in our office at the same time. And the Total Information Awareness Program is involved with the NSA and with DARPA, which is the Defense [Advanced Research] Projects Agency.

          So I began to connect the two, because it seemed quite logical at least that if they are looking for large amounts of Internet data to sift through and vacuum up, what would be a perfect place? It would be in the Internet room at a place like AT&T. And lo and behold, the NSA guy shows up. …

          Then I started learning that it’s not only a new room; it’s a room that all the technicians cannot go into. Only the one guy — a management guy, no union people — a management field specialist with security clearance obviously given to him by the NSA, only he could go into this room, which was being built on the sixth floor, right next door to the phone switch room. So I got very worried about that. What does this mean? What are they doing there? …

          Then it started to get more interesting in January of 2003 when … they brought us over there for a tour to see the office.

  12. Glen

    China has very good reason to not buy the hardware. Check out Intel Vpro technology. It’s designed with built in the hardware remote management features, Active Management Technology (AMT) This is great for corporate enterprise laptop and PC management but it obviously leaves potential security holes in the hardware which cannot be removed:

    http://en.wikipedia.org/wiki/Intel_vPro

    These seem to implemented at the system level in the CPU northbridge/southbridge. However, there are suspicions that there is also an embedded 3G wireless modem inside the CPU chip itself which could potentially allow access to your data at any time even when the PC or laptop is turned off:

    http://news.softpedia.com/news/Secret-3G-Radio-in-Every-Intel-vPro-CPU-Could-Steal-Your-Ideas-at-Any-Time-385194.shtml
    http://www.theregister.co.uk/2013/09/23/intel_stuns_world_with_wakeon3g/

    Now there is no question the above assertions seem to be coming from the tin foil hat brigade, but given all the recent Snowden revelations, one does wonder.

    The banning of foreign built computer hardware is not a new event, the US government banned the use of China built laptops on high security networks after IBM sold their laptop business to Lenovo back in 2006:

    http://www.informationweek.com/security/government/intelligence-agencies-banned-lenovo-pcs/240159087

  13. Brooklin Bridge

    American companies have an issue with solutions whenever they can not be arrived at by more lying, more advertizing, more propaganda. Those are the only solutions imaginable to our corporate world because those solutions can be bought with money and passed on to the consumer as a cost. It’s not that they removed the word honesty from the language -written and oral; rather, the notion is utterly removed from their conceptual framework, they simply don’t see it except as a recipe word frequently used in jingles or slogans. The notion of honesty for them is like the notion of sight for a totally blind community that has never made contact with the outside world.

    The auto industry had the same experience in the 70′s when the public started complaining en masse about “planned obsolesence”. American automobiles back then started having problems by two years old and were contantly in the shop by four years. And the Shops were almost as big a shark industry as the manufacturers. Auto makers were called into Washington to speak before Congress and as usual it generated a lot of noise and absolutely nothing else. They were congenitally unable to admit planned obsolesence was not only true, but constituted the principal business model of the industry in America. So they relied on 1) advertizing, etc. and 2) simply ignoring the problem and assuming it would go away like poor folk do who are trying to get redress for grievances and find that hunger and lack of resources always wins out over time.

    Now the computing, telcom, etc., industries have the exact same problem admitting the business model is to profit off every bit and byte of data that their customers, corporate and public, put on their machines and devices and to provide the ability for government to use the same data for purposes of keeping the rabble quiet and consumer friendly. The biggest change is the extraordinary game changing intrusiveness of the digital age and the equally amazing “yawn” it elicits from the public at large.

    1. Brooklin Bridge

      One other exceptional change has been the total black box opacity of software and hardware. There was a brief period in the 90′s when Microsoft might have gone in the direction of greater public awareness and education (the way the Unix world had done a generation before by distributing Unix machines with compilers and exceptional technical help/Man pages to Universities and High Schools), but they chose the opposite direction and the profitization developments of the last fifteen years on the Web celebrated that ignorance and took it up a whole level from there.

  14. OpenThePodBayDoorsHAL

    I keep thinking about The Wheel and how slowly it turns these days. But turn it does. The Wheel is huge, with spokes that include American Empire, the Financial Elite, Information Overlords, the National Myth, NeoFascist Corporatism, Supine Obedience, and Mother Nature herself. Each with their ebb & flow but none exempt in the end from the laws of gravity, action & reaction, entropy, the inexorable and inescapable laws that govern how the entire universe operates. In the end no matter how deformed that Wheel may become in the short run, it rolls, it turns, and returns. You reap what you sow, and those who have sown the Wind will reap the Whirlwind as certainly as Night follows Day.

    1. Brooklin Bridge

      In the physical world the wheel is indeed turning, but it is also breaking up. There is no guarantee at all humans will be here in 100 years and there is significant reason to speculate otherwise.

  15. allcoppedout

    I still doubt the actual information Snowden made off with is very important. Good luck to the guy and I’d help him in any way. The problem has long been public ignorance and propaganda like Bond/NCIS/Spooks/Homeland and our chronic main media history. I’m not, I hope, in nothing to see here mode.

    The classic ways to get old-fashioned surveillance were listening/observation posts and building work. It’s hardly surprising the US would double-up on hidden subsidies to give massive market-winning advantages to IBM, Amazon, Google, Microsoft etc. and getting them to build-in spy doors (as surely as bugs were once plastered-over to create walls with ears). US businesses have long been subsidised and protected under free-market BS and military and SIS budgets. We probably need to start analysis with British, Dutch and French piracy.

    In the complexity of history, Snowden, Manning and others are only producing the archives released under various time-lapse rules (30, 50, 70 years etc.) in contemporary time. The encryption stuff has been around forever too – offhand the Nazi Enigma machine was built by the Belgians for commercial signals traffic from the Far East in 1909.

    I cannot believe, much as I applaud Assange, Snowden, Manning or people trying to blow the whistle on NHS malpractice or bent cops, that the issues were not known long ago. The practical implications of whistle-blowing are well understood, at least in terms of the usual paranoid-schizoid position of the establishment.

    1. Nathanael

      Snowden has quite explicitly stated that he got away with pretty much everything important which the NSA had, and that he chose not to leak anything which would be harmful to the US.

      Frankly, I believe him. He’s competent and the NSA is run by incompetent felons. The other NSA whistleblowers (Binney, etc.) have said that the NSA’s databases have zero internal security — zero.

  16. Brooklin Bridge

    One thing that puzzles me in this post is the following, “[...] and Cloud, that new Nirvana for tech, jumped 70%.”

    I assume that jump was in this country but still, that’s quite a jump given the revelations about what American companies do with data entrusted to them and the cloud is nothing but data entrusted to American mastodons (love that metaphor). I would have expected the so called cloud to loose all its air and drop like a rock.

    1. NotTimothyGeithner

      Snowden started leaking in June. Cutting operations/upgrades already in progress is difficult. Its only October.

      It wouldn’t surprise me if there was no Snowden effect on revenue through now. The Snowden effect will be a future problem. I bet IBM is trying to cover declining demand by inferring the problem is Snowden, not a drop in demand for their product.

  17. Conscience of a Conservative

    I’m wondering if the slow-down didn’t start earlier but was somehow masked by financial engineering or a failure to recognize dubious sales or back-logs. China’s slowing down and IBM is so large and has put such an emphasis on China that it was bound to be affected. Anyway that’s my gut instinct here.

  18. zeolite, nom nom nom

    Was it EPIC that said it would take a ‘privacy chenobyl’ to wake people up to erosion of their rights?

    Well here it is, our privacy chenobyl. Taste the fallout, mmm, metallic. Look at that ionized green glow! US firms in ISIC J, you’re fcuked.

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