By Sam Schechner
When energy giant Enel SpA started looking last year for an
outside company to manage its computer systems and files, the
Italian firm had a red line: All its data had to stay in the
European Union.
The company that got the contract? U.S. tech giant Amazon.com
Inc., which won by promising that Enel's data would be housed in a
German facility that met Enel's other requirements: "reliable,
flexible, agile and cheap."
Political and legal pressure has for years been mounting on
European companies to store their sensitive information in Europe
-- in part to keep it away from what many suspect are prying
American eyes. But the push toward so-called data localization has
done little to slow the growth of U.S.-based cloud-computing
businesses operating in Europe.
Behind the growth: Big European companies are moving more of
their computing work to outside providers. American firms have the
scale to offer low prices, and are quick to roll out new services
and upgrades, analysts say.
Americans also have built at least a dozen new data centers in
Europe in recent years, reducing European competitors' home-field
advantage and helping convince European firms that U.S. providers
can keep their data safe.
The allegations in 2013 by former National Security Agency
contractor Edward Snowden of widespread U.S. government
surveillance and the potential involvement of technology firms
triggered a backlash in Europe and led to calls by privacy
advocates to protect European data.
U.S. firms disputed the scale of their cooperation and said they
often challenged surveillance requests.
But, since then, the top four providers of cloud infrastructure
in Western Europe are all U.S. firms, and they have expanded their
market share by a third in the region, hitting 40% in 2015,
according to market researcher IDC.
The four companies -- Amazon, Microsoft Corp., Alphabet Inc.'s
Google and International Business Machines Corp. -- nearly tripled
their combined cloud-infrastructure revenue in the region to $2
billion by the end of the three-year period, IDC says. Together,
Western European firms saw their revenue increase 86% during that
period.
"On paper, European companies should be poised to take advantage
of this growth. But they are less nimble," said Jonathan Atkin, a
senior analyst for RBC Capital Markets. American firms "have bigger
checkbooks to make decisions on this scale."
The expanding share of American firms in Europe's
cloud-infrastructure business comes as something of a surprise.
After the Snowden leaks, industry-supported think tank
Information Technology & Innovation Foundation estimated that
the fallout would cost American cloud firms between $21.5 billion
and $35 billion globally over three years.
Initially, European firms looked poised to take advantage, and
used fear of U.S. government surveillance as a marketing tool.
Deutsche Telekom AG sold "Email made in Germany." Two French
consortia, including one run by Orange SA, promoted their own
"sovereign cloud" offerings with promises of EUR150 million ($167
million) in government backing to get these ventures off the
ground.
Pressure on U.S. companies mounted last year when the EU's top
court struck down a trans-Atlantic privacy accord that allowed
companies in Europe to easily store data on U.S. servers. It wasn't
until July that the EU and the U.S. completed a replacement
agreement, which would give European companies more confidence to
store data with U.S. firms -- through privacy advocates promise to
challenge the deal in court.
American tech firms responded to the threats to their European
growth with more investment.
Since 2013, IBM says it has doubled the number of its data
centers in Europe to 12, with one more going online in the fall.
Amazon, in late 2014, opened a new set of data centers in the
Frankfurt area, on top of another set in Dublin. Microsoft opened
three new data hubs, and last year announced a deal to allow
customers in Germany to designate Deutsche Telecom as the trustee
in control of their data.
"In a post-Snowden world, people want to know what governments
can get access to their information and when," said John Frank,
Microsoft's vice president of EU government affairs.
Google has taken a different tack and doesn't promise to keep
Europeans' data only in the EU, noting that such localization can
be inefficient. The company, nevertheless, has expanded its data
centers in Belgium, Finland and Ireland, and is opening a new one
in the Netherlands.
U.S. firms face tough local competition in a fragmented market.
European telecom giants have networks that enable them to offer
competitive cloud infrastructure. Germany business-software giant
SAP SE competes in the related market for business services that
run on top of basic cloud infrastructure, where analysts say much
of the cloud business's growth is set to come.
Still, many European companies use U.S. cloud firms, including
France's Schneider Electric, BMW AG and Spotify AB.
Enel, for instance, began its process of shifting to the cloud
last year, even though using European infrastructure comes at an
added cost. The standard cost of hosting data in Frankfurt is 8%
more expensive than Amazon's least expensive U.S. facilities, such
as those in Virginia, the company said. Still, Enel says it has
saved roughly 11% in computation costs and 48% in storage costs
over the past year.
"It comes down to scale, economics, automation of these big
players," said Jack Sepple, senior managing director of cloud for
consulting firm Accenture, which advised Enel on the shift to
Amazon. "Local companies have trouble keeping up."
Write to Sam Schechner at sam.schechner@wsj.com
(END) Dow Jones Newswires
August 04, 2016 05:44 ET (09:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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