Proposed Privacy Rules Threaten Tech Giants
Alphabet

Proposed Privacy Rules Threaten Tech Giants

Washington lawmakers are set to take another whack at end to end encryption. It could make everyone less safe.

A bipartisan group of United States Senators introduced EARN IT on Tuesday. This new legislation is aimed at protecting children from online exploitation.

This legislation could mean big changes. Some are prepared. But for others, it could get messy.

Throughout the western world, lawmakers have become focused on rolling back encryption on smart devices. Tech companies like Facebook (FB), Apple (AAPL), Alphabet (GOOGL) and Amazon.com (AMZN) are locking down their products with code that makes it impossible for even the developers to decipher messages.

This is a selling feature for the industry. Tech company leaders go to great lengths to reassure users that the personal messages they send and the data they store is protected, safe and not accessible by third parties — including law enforcement.

Apple, in 2016, famously went to court to lawfully disobey a writ for the U.S. magistrate. The FBI wanted the company to make special software to unlock the iPhone of a San Bernardino terror suspect.

According to a Wired report, Apple managers considered the new software to be a backdoor key that might be lost, stolen or misused in the future. They also saw the writ as wholly political. They dug in and refused to comply.

The Eliminate Abusive and Rampant Neglect of Interactive Technologies Act, EARN IT, is also political. Lawmakers claim it will protect of children from predators online. The bill presumes tech companies would choose the side of abusers over children.

The end game, however, looks a lot like San Bernardino. It’s about publicly shaming tech companies into building software backdoors around encryption.

Currently, Section 230 of the Communications Decency Act of 1996, gives companies like Facebook immunity from lawsuits arising from user content. The proposed law would force tech companies to meet new safety standards before they become immune from any lawsuits.

The kicker is these new standards will be set by the Department of Justice, Homeland Security and the Federal Trade Commission — agencies that have long advocated for lawful access to encrypted messages.

Related post: Facebook Locks Down Privacy, But Lawmakers Demand the Key

The New York Times reported in December 2019 that William Barr, Attorney General, made dealing with problems created by end-to-end encryption his top priority. He mused that criminals should not be able to do whatever they want online, completely impervious to government surveillance. His solution is a backdoor that allows law enforcement to look at the data.

The implications for big tech are severe. Either the companies create a backdoor, or the firms become subjected to endless lawsuits. EARN IT would make Facebook, Google, Apple and other large firms legally responsible for every piece of user content uploaded to their platforms.

Thus far, most of big tech has been quiet. The lone exception is Match Group (MTCH), the parent company of the popular dating apps Tinder, Match.com, OkCupid and others.

It’s an important break with the rest of the industry, according to Axios, because it could splinter solidarity and lead to the limiting of end-to-end encryption.

That’s a big deal. Companies like Apple have made privacy the cornerstone of their business model.

These new concerns also come at an especially bad time for the sector. Politicians from both parties are looking to either break up or severely curtail business practices. In most cases, formal investigations are underway.

The FTC announced in February that investigators would begin probing past acquisitions for Apple, Alphabet, Amazon.com and Facebook.

Of the big four, Alphabet and Amazon.com are clearly in the best shape.

Alphabet began a reorganization process in 2015. The headline at the time was the new company reigned in the many disparate parts created by the fertile minds of founders Larry Page and Sergey Brin.

In reality, the new focus gave rise to separate, sustainable businesses. Through the years these new entities, like Waymo, its autonomous vehicle subsidiary, and Google Cloud, have hired sought after chief executives. They have even lured outside investors.

The story at Amazon is one of continued solid growth from ecommerce and cloud computing, coupled with the possibility of new businesses in entertainment and advertising. The firm had $280 billion in sales during 2019, and growth remains robust. Revenues were up 20.4% year-over-year. And all the key businesses can be severed without too much pain.

Related Post: Apple Pay’s Success Draws in Regulators

It’s going to be trickier at Apple and Facebook. As politicians circle, investors should be fearful. Apple is a tightly integrated business being built around services revenue. Customers probably would not choose Apple Music and iCloud if the close integration went away.

Facebook is an amazing business, but at the end of the day, its bread and butter is still the main site.

Investors are wrong to ignore the mess politicians plan for big tech. Prepare now.

Best wishes,

Jon D. Markman

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