The first is because it will remind the public that Silicon Valley-based Apple, Google and Yahoo all have histories with U.S. spies that many find unnerving — even if they weren’t eagerly cooperating, as AT&T reportedly did. The second is because the AT&T leak illustrates yet again that the U.S. government isn’t good at keeping secrets — meaning past examples of corporate cooperation with mass invasions of privacy could come to light in the future.

But the third reason may be the most consequential: the potential fallout this could have for Silicon Valley’s designs on the constantly growing China market. Vinod Aggarwal, a UC Berkeley business and political science professor and the director of the Berkeley Asia Pacific Economic Cooperation Study Center, warns that revelations about ties between tech firms and U.S. spies could easily be used as a reason to keep U.S. products out of any foreign market — China in particular:

The fallout from the NSA scandal is already starting to crimp U.S. corporate expansion plans in Europe. Analysts had expected AT&T to acquire Vodafone Group, whose cellphone operations cover many EU states. Accusations that AT&T gives the NSA data on customers’ telephone calls is raising red flags in those European countries, like Germany, where privacy is taken seriously. Regulators and legislators are already making noises about this deal. If AT&T does go ahead – and even if it prevails and acquires Vodafone — there will be strings attached and much more oversight from European government agencies. Potential regulatory risk has suddenly soared for AT&T.

 

For many foreign companies and governments, there is a certain justice in AT&T paying a price for its links to the U.S. government. After all, it was Huawei’s apparent links to the Chinese military that so enraged one U.S. congressional committee that they recommended that no U.S. public agency or firm should buy Huawei’s telecoms equipment. That effectively shut Huawei out of the U.S. market.

That’s from an essay that Aggarwal co-authored in the Harvard Business Review in late 2013 after the first mass wave of leaks by former NSA contractor Edward Snowden, which included inflammatory revelations about AT&T that hinted at the company’s vast cooperation with the NSA that was reported this week.

Apple’s biggest market may be imperiled

This hostility toward Huawei could easily be invoked by Beijing to hamper Apple at any time. Given that the Cupertino-based company sees China as absolutely crucial to its future, it may consider taking Aggarwal’s advice that tech companies need to sell themselves as international brands, not American ones, so they’re not seen as “as an extension of a troubled hegemon.”

In April, Apple confirmed that China had passed the U.S. in iPhone sales. As Quartz magazine reported in June, Apple has deliberately cultivated the Chinese market.

When Apple first made the iPhone available in gold color — with the 5S in 2013 — smart observers identified it as a play for the Chinese consumer. And, Tim Cook says, the glitter has proved golden in the world’s largest smart-phone market.

 

In an interview with the the Hong Kong edition of Bloomberg Businessweek (available only in print), the Apple CEO points to the gold iPhone — subsequent generations of the phone and the iPad are available in that color — as but one example of how the company localized for the Chinese market.

 

“A big reason for why we released the gold iPhone as because many Chinese consumers like the color gold,” Cook told the publication. “To be clear, sales for the gold iPhones in China have far, far exceeded other markets.”

 

Cook also noted how the introduction of third-party keyboards in iOS 8 was partially inspired by requests from China’s iPhone owners. Typing in Chinese can be very tedious, and many of China’s most popular third-party keyboards had moved from PC to Android seamlessly but weren’t available on Apple phones.

China’s economy and stock market have had a rough few weeks. The Beijing regime is already accused of trying to distract the public from its economic headaches with saber-rattling in the South China Sea, building a military airstrip on a disputed island over the strong objections of the U.S. and Japan. Adopting policies that invoke economic nationalism to keep out or limit Silicon Valley firms in the world’s most populous nation would be an even bigger distraction.

A 2012 Bloomberg News analysis headlined “The Facebook Effect” laid out the picture:

“The potential for California (STOCA1) to see a tax windfall from a Facebook Inc. public stock offering this year demonstrates how much the state relies on capital-gains taxes, a volatile revenue stream that hampers its credit rating.

“Menlo Park, California-based Facebook, the world’s most- used social-networking site, is considering the largest initial public offering for an Internet company on record, a person familiar with the plans said last year. Estimated at $10 billion, the offering would make instant millionaires of company employees and require the state to adjust its revenue forecast to reflect additional capital-gains taxes they’d pay, the state’s legislative analyst said yesterday.

“That kind of unanticipated boost shows the boom-and-bust cycle that capital gains taxes often inflict on California’s budget. In fact, capital-gains tax revenue as a percentage of the state’s general fund plummeted from 12 percent to just 3 percent between 2007 and 2009 as investors pulled away from the stock market, a decline of $9.3 billion, according to state finance department figures.”

'I can’t imagine foreign buyers trusting American products'

This reliance on capital gains could haunt the Brown administration and the Legislature in short order if the NSA scandal keeps damaging the reputation of Facebook and other California industry giants like Google, Yahoo and Twitter. A Tuesday report on Forbes.com has some context:

“Princeton technologist Ed Felten — who used to be government-employed at the Federal Trade Commission — writes, 'This is going to put U.S. companies at a competitive disadvantage, because people will believe that U.S. companies lack the ability to protect their customers—and people will suspect that U.S. companies may feel compelled to lie to their customers about security.'

“'I can’t imagine foreign buyers trusting American products,” says security expert Bruce Schneier. 'We have to assume companies have been co-opted, wittingly or unwittingly. If you were a company in Sweden, are you really going to want to buy American products?'

“Earlier this summer, technology analyst Daniel Castro authored a report suggesting that revelations about corporate cooperation with the government through programs like PRISM would take a toll on cloud computing businesses to the tune of $22 to $35 billion over the next three years 'if foreign customers decide the risks of storing data with a U.S. company outweigh the benefits.'”

This backlash is well under way. Facebook, Google and Yahoo are begging the Obama administration to be allowed to reveal the extent of their cooperation with the NSA. Whether or not the White House agrees, the corporate titans are sending a message to the world that things aren't as bad as they may seem. Are they telling the truth? Who knows?

But they know what the perception is. It's why Google is also taking other decisive steps to address its image problem. This is from the weekend Washington Post:

“Google is racing to encrypt the torrents of information that flow among its data centers around the world in a bid to thwart snooping by the NSA and the intelligence agencies of foreign governments, company officials said Friday.

“The move by Google is among the most concrete signs yet that recent revelations about the National Security Agency’s sweeping surveillance efforts have provoked significant backlash within an American technology industry that U.S. government officials long courted as a potential partner in spying programs.”

Jerry Brown and state lawmakers better wish Google good luck, and Yahoo and Facebook, too. Otherwise, the fallout from the largest spying scandal in world history could buffet state budgets for decades to come.

Maybe this will finally end the inexplicably blithe reaction most Californians have to the fact that their government is spying illegally on millions of Americans with the coerced assistance of the Golden State's tech giants.