How Regulators Enticed Verizon to Sell Out Customers to the NSA

Verizon, the phone company whose disclosure of customer data to
the federal government is at the center of the furor over
cooperation by technology companies with top-secret national
security programs, has offered a precise, clear, but little-noticed
public explanation of why it did what it did.

The Verizon explanation is not in the vague and
cryptic memo the
company issued last week after the Guardian exposed its program. It
came, instead, in the company’s annual filing with
the Securities and Exchange Commission, included in Verizon’s
annual report to shareholders. It said, “As part of the FCC’s
approval of Vodaphone’s ownership interest, Verizon Wireless,
Verizon, and Vodaphone entered into an agreement with the U.S.
Department of Defense, Department of Justice and Federal Bureau of
Investigation which imposes national security and law
enforcement-related obligations on the ways in which Verizon
Wireless stores information and otherwise conducts its
business.”

That explanation was offered on February 26, months before
the Guardian article. But it gets right to the heart of the matter,
which is that there is a connection between Verizon’s status as a
highly regulated company and its agreement to cooperate extensively
with the government. The New York Times reported Sunday that
such cooperation advanced to the point that “Verizon had set up a
dedicated fiber-optic line running from New Jersey to Quantico,
Va., home to a large military base, allowing government officials
to gain access to all communications flowing through the carrier’s
operations center.”

Verizon needed FCC approval to sell part of its wireless
business to a British company, Vodaphone. It needs FCC approval to
do lots of other things, too, ranging from acquisitions to building
wireless networks on new parts of the spectrum. In addition, the
federal government is a big Verizon customer. The company’s Web
site says,
“We understand the public sector. We’ve worked with governmental
organizations for decades. In fact, we are the leading provider of
communications services to the U.S. federal government.”

These federal contracts are worth tens of billions of dollars to
Verizon. A single 2009 contract from
the Defense Information Systems Agency to Verizon Business Network
Services Inc. was worth as much as $2.5 billion over ten years. A
Verizon press
release in 2008 touted another pair of defense contracts
worth as much as $1.12 billion. The online biographies of
executives at Verizon Enterprise Solutions include some individual
Verizon executives who boast that their efforts have resulted in
more than $10 billion in federal sector business for Verizon. A
Verizon Web site focused on the “National Intelligence
Sector” promises,
“we understand technology and have the experts in place to help
intelligence missions succeed.”

Verizon was created by the federal government to begin with,
first through the government-imposed breakup of Bell system (the
1984 result of a 1974 antitrust lawsuit filed by the Department of
Justice), then government approval of the mergers of Bell Atlantic,
GTE, and Nynex.

And though details are still emerging, some of the other
companies that apparently chose to cooperate with the government
data collection programs rather than challenge them also are either
highly regulated or do a lot of business with the government.
Google, for example, is providing the
email for the 7,200 faculty, staff and midshipmen at the U.S. Naval
Academy, for the 5,000 staff at the Department of
Energy’s Idaho
National Laboratory, and for the 17,000 employees at
the General
Services Administration. Microsoft had its own antitrust battle
with the Department of Justice, from which it emerged more whole
than the Bell phone system did but nevertheless somewhat
chastened.

Reasonable people may reach differing conclusions over whether
these data collection activities are justified by the Islamist
terrorist threat. Senators such as Ron Wyden and Rand Paul have
raised concerns about the issue. The most durable policy solution
may be a market-based one that would easily allow new entrants to
arise and raise capital in the telecommunications business without
their having to get a lot of permission from the government. If
some new phone company or email service provider began with a
promise that they’d obey lawful court orders, but that they’d also
fight really hard as a rule not to give customer information to the
government, the customers would line up — if the government would
let them.