Cybersecurity for Novices Has U.K. Firm Trouncing Silicon Valley

(Bloomberg) — In a world where protecting against cyber crime is high on most big business agendas, a U.K. provider of IT security to clients as small as dentists and neighborhood stores is outpacing the best that Silicon Valley has to offer.

Sophos Group Plc shares have more than doubled in 2017, beating every other stock in the Nasdaq CEA Cybersecurity Index, including larger California-based peers such as Symantec Corp. and Palo Alto Networks Inc. The stock has also left domestic equities trailing, being one of the top five performers in the U.K.’s FTSE All-Share Index.

Investors’ appetite is understandable. After this year’s global WannaCry ransomware attacks and headline-grabbing hacks at Uber Technologies Inc. and Equifax Inc., demand for cyber security has never been greater — whether you are a multinational corporation or a local shop owner. It’s a platform that’s giving Sophos some lofty ambitions in a British technology sector that was jolted by the $32 billion Japanese takeover of ARM Holdings in July 2016.


“We should be, we will be, the U.K. tech champion,” Chief Financial Officer Nick Bray said in an interview.

To get there, Bray will need to overtake software giants including Sage Group Plc and his former employer Micro Focus International Plc, whose market value of about 10.8 billion pounds ($14.5 billion) dwarfs Sophos’s 2.5 billion pounds.

The executive’s optimism is mostly shared by analysts, with nine out of 10 having buy recommendations on the stock and none advising clients to sell. Morgan Stanley named Sophos its top European technology sector pick for 2018 in a note on Friday. Yet, after this year’s gains, not all are bullish: KeyBanc’s Rob Owens cut Sophos to sector weight last month when it was trading about 12 percent above its current price of 541 pence.

“It’s had a heck of a run,” Owens said in an interview. “It’s not overly expensive, but it’s not overly cheap anymore.” Trading about 31 times calendar 2018 free cash flow, the stock is “fairly valued” compared with companies like Symantec and Qualys Inc., he said.

Demand for Sophos’s services is growing as cyber crime tactics evolve. According to Bray, criminal gangs are changing tack and aiming hacks at a large number of smaller companies instead of a handful of bigger corporations, making cybersecurity “very relevant’’ for smaller firms.

Sophos’s products are aimed at mid-market businesses with up to 5,000 employees, but also include very small companies that are “playing catch up” with the need to protect against cyberattacks, he said. A dental practice could lose access to its patient records, for example.

While knowledge of IT security remains in the “very embryonic” stages, both general awareness and the sophistication of customers is increasing, Bray said.

The same game of catch-up appears to be happening with investors. Bray said Sophos was initially “misunderstood” when it sold stock in a 2015 initial public offering at 225 pence a share, having pulled a previous attempt at an IPO in 2007. A challenge of listing in London over the U.S. was that “we had to get the awareness up of what we did,” Bray said.

Sophos has “spent a lot of time educating” investors on the size of its addressable market, its competitive position and its financial model, specifically the size of its customer base and its renewal rate, the executive said. In November, the company raised its outlook for the 2018 financial year, reporting 22 percent first-half billings growth and hailing its renewal rate, a growing base of subscription revenue and a 220 percent rise in sales of its Sophos Central cloud platform.

After riding a wave in technology stocks for much of the year, Sophos shares have slipped back with the sector in recent weeks, also weighed down by a share placing by early investor Apax Partners. That and some recent share sales by directors led to oversupply, a weak share price and “misplaced concern about the fundamentals, which are very strong,” said Numis analyst David Toms, who upgraded the stock to add from hold last week.

Organic growth remains Sophos’s primary focus, according to Bray. The company is always evaluating “targeted technology tuck-ins” to boost its offering via mergers and acquisitions. Any deals it does pursue, like the 2015 purchase of Dutch endpoint protection firm SurfRight and this year’s acquisition of the software product arm of Invincea, would be done to expand the product offering and boost cross-selling scope, burnishing its organic growth potential.

Yet the pace of the company’s growth raises the question of whether Sophos may itself become a target. While no board members want to sell, “it’s not impossible,” Bray said. “You can never stop somebody knocking at the door.”

Net Neutrality Rules Swept Aside by Republican-Led U.S. FCC

(Bloomberg) — The U.S. Federal Communications Commission swept aside rules barring broadband providers from favoring the internet traffic of websites willing to pay for speedier service, sending the future of net neutrality on to a likely court challenge.

The Republican-led commission voted 3-to-2 on Thursday to remove Obama-era prohibitions on blocking web traffic, slowing it or demanding payment for faster passage via their networks. Over objections from its Democrats, the FCC gave up most authority over broadband providers such as AT&T Inc. and Comcast Corp. and handed enforcement to other agencies. The changes won’t take place for at least two months.

“It is time for us to restore internet freedom,” said FCC Chairman Ajit Pai, who was chosen by President Donald Trump to lead the agency, and who dissented when the FCC adopted the rules under Democratic leadership in 2015. “We are restoring the light-touch framework that has governed the internet for most of its existence.”


“This decision puts the Federal Communications Commission on the wrong side of history, the wrong side of the law, and the wrong side of the American public,” said Jessica Rosenworcel, a Democratic member who voted against changing the rules.

The change frees broadband providers to begin charging websites for smooth passage over their networks. Critics said that threatens to pose barriers for smaller companies and startups, which can’t afford fees that established web companies may pay to broadband providers, or won’t have the heft to brush aside demands for payment. Broadband providers said they have no plans for anti-competitive “fast lanes,” since consumers demand unfettered web access.

The FCC’s vote concludes a tumultuous eight-month passage since Pai, proposed gutting the earlier rules. The agency took in nearly 24 million comments, but many of those appeared to be of dubious origin including almost half a million routed through Russia. Dozens of Democratic lawmakers expressed opposition, while Republicans lauded Pai’s plan.

The FCC’s action will “return the internet to a consumer-driven marketplace free of innovation-stifling regulations,” Senate Majority Leader Mitch McConnell, a Kentucky Republican, said in remarks prepared before the agency’s vote.

Democratic Senator Amy Klobuchar, of Minnesota, said the FCC with its vote “will put internet service providers, not consumers, in charge of determining the future of the internet.”

Pai argued that the Obama-era rules brought needless government intrusion to a thriving sector, and discouraged investment in broadband. Supporters said investment has flowed unhindered, and that rules are needed to keep internet service providers from unfairly exploiting their position as gateways to homes and businesses.

The FCC with its 2015 rules claimed powers that could include regulating rates charged by internet service providers. The agency said it wouldn’t immediately do so, but the prospect helped propel broadband providers’ opposition.

The cable and telephone companies also criticized the breadth of what critics called utility-style regulations, including a portion written to allow the FCC to vet data-handling practices it couldn’t yet envision. Companies supporting Pai’s rollback proposal included AT&T, Verizon Communications Inc. and cable providers led by Comcast and Charter Communications Inc.

Web companies such as Alphabet Inc.’s Google, Facebook Inc. and Amazon.com Inc. wanted to keep the previous regulations. “Having clear, legally sustainable rules in place finally established rules of the road and provided legal certainty,” the Internet Association, a trade group for web companies, said in comments to the FCC. “The commission should maintain its existing net neutrality rules and must not weaken their firm legal basis.”

With its vote the FCC rescinded its 2015 decision to treat internet service providers using a portion of the laws designed to regulate utilities. Much of the debate over net neutrality has revolved around this question of classification: whether Washington regulators can wield the kind of intrusive rulemaking that’s also used, for instance, to tell telephone providers when and where they can stop offering service.

The FCC also abandoned the bulk of its oversight role, saying antitrust authorities and the Federal Trade Commission can monitor for anti-competitive practices. Critics say those agencies don’t have expertise and act only after abuses occur, rather than setting rules that guide behavior.

In addition, the authority of the FTC is under question in a case before federal judges in California, where AT&T is contesting a sanction from the FTC for deceiving smartphone consumers who paid for unlimited data only to have their download speeds cut.

Opponents of Pai’s rules are expected to ask U.S. judges to overturn the ruling and restore the old rules. Issues before the judges will include whether the FCC has adequate grounds to reverse a decision taken less than three years earlier. Judges last year upheld the previous rules.

Congress could write a law to overrule the FCC’s action, but it hasn’t acted as Democrats dismiss Republican invitations to legislate to a permanently weaken the 2015 rules. The Democrats’ “wall of resistance” may weaken in the new year after partisan fervor heightened by Thursday’s vote has a chance to abate, Cowen & Co. analyst Paul Gallant said in a Nov. 21 note. A bill might restore some basic net neutrality protections and also bar the FCC from regulating rates, Gallant said.

The new rules are to take effect 60 days after being published in the Federal Register that chronicles regulatory activity, the FCC said in its draft order for Thursday’s vote.

Squarespace Is Said to Raise Funding at $1.7 Billion Valuation

(Bloomberg) — For years, Squarespace Inc. has been a leader in the old-school art of designing websites. Its main rival, Wix.com Ltd., has been public since 2013, but Squarespace remains private.

Now in its teenage years, Squarespace is giving early employees and investors a way to cash out. The New York-based company said General Atlantic LLC, an investment firm and Squarespace backer, is injecting a new round of funding, most of which will go toward buying stock from other investors and employees.

General Atlantic will commit about $200 million to the deal, and the new shares value the business at $1.7 billion, said a person with knowledge of the deal. Squarespace Chief Executive Officer Anthony Casalena declined to comment on terms of the funding.


As many technology companies postpone initial public offerings indefinitely, early backers are getting restless. The Bloomberg U.S. Startups Barometer, an index tracking the private technology industry, shows IPOs and acquisitions are at a three-year low. More startups are arranging deals similar to Squarespace’s to appease shareholders. Uber Technologies Inc. recently offered stockholders the option to sell to a group of investors led by SoftBank Group Corp. at a 30 percent discount to the most recent valuation. At least two high-profile backers have already agreed to participate.

Unlike Uber, Squarespace is profitable. “If anything, we actually would have been interested in buying more,” Anton Levy, managing director and head of internet and technology at General Atlantic, said in an interview. “Even people that were early investors that have made a fabulous return sold a small percentage.”

Revenue in the past year increased 50 percent to about $300 million, Casalena said. Squarespace isn’t far behind Wix, which is expected to generate about $424 million this year. The Squarespace brand has gained recognition among consumers for its ubiquitous podcast ads and a Super Bowl commercial featuring John Malkovich.

But Casalena suggested Squarespace has more to do before a potential IPO. He said the company is focused on helping customers sell products through their sites. This effort puts Squarespace more directly in competition with Bigcommerce Inc., Etsy Inc., Shopify Inc. and, most terrifyingly, Amazon.com Inc. “It’s the most requested feature on the platform right now,” Casalena said. “A lot of people are there building a brand. They want to sell something.”

Its broad customer base, which includes wedding photographers to family-run pizza parlors, gives Squarespace a unique group of people to grow its commerce products into, whereas a company like Shopify is focused on online-only e-commerce sites that sell physical goods, Casalena said.

The funding round is a milestone for the 13-year-old business and its 700 employees, Casalena said. It brings Squarespace into the realm of Buzzfeed Inc. and Reddit Inc., both with similar valuations, according to research firm CB Insights. “We’ve been a little under the radar for a lot of people,” Casalena said.

The next stage of growth is to build into more international markets like France and Germany, he said. Right now, around 30 percent of the company’s business is outside the U.S.

Analysts and bankers have been expecting the company to go public since at least 2016. Casalena declined to comment on IPO plans but said he’s building a company capable of doing so. “We want to do this on our own time table,” he said. “We’re not in a rush.”

As U.S. Unwinds Web Rules, Industry’s Voice Echoes the Loudest

(Bloomberg) — Republican regulators moving to kill Obama-era open internet regulations say one big reason for their action is that the rules have depressed investment in broadband.

But much of the research being held up by Federal Communications Commission Chairman Ajit Pai to justify rescinding that rule comes from the very companies that stand to benefit and their advocates. Even some of the authors involved question whether all the research cited by regulators is valid.

“This is a classic case of garbage in, garbage out,” said telecom industry analyst Craig Moffett, a founding partner of New York-based MoffettNathanson. “There are so many other factors that drive capital investment beyond just regulatory environment.”


With the FCC poised to vote Thursday to eliminate the 2015 restrictions on internet service providers, or ISPs, the seemingly academic question of how reliable the studies are could quickly become critical when opponents file lawsuits asking judges to undo the vote.

Under laws designed to prevent wide swings in policy during changes in administrations, Pai will need to prove that scrapping the rules is justified by changes in conditions since they were put in place. The move can’t be arbitrary or capricious, according to a law that sets out procedures for federal rulemaking.

Major Turnaround

It will be difficult “for the agency to justify a major turnaround based on data from such a short time frame,” said Andrew Jay Schwartzman of the Institute for Public Representation at Georgetown University Law Center.

“The Commission relies on self-serving public statements by ISP executives,” some of which are contradicted by statements by broadband executives to the Securities and Exchange Commission, Schwartzman added.

Pai has marshaled the studies to argue that certain types of investment have declined or are under threat. Total capital expenditure by publicly traded broadband providers has grown in the two years since the open internet rules went into effect, according to net neutrality advocates.

Doug Brake, a telecom policy analyst with the Information Technology and Innovation Foundation, wrote a post on the foundation’s website arguing that whether investment is up or down after the open internet rules went into effect doesn’t necessarily show whether the FCC is to thank or to blame for those changes. Brake, who isn’t a fan of the net neutrality rule, but who thinks Pai’s order goes too far, said in an interview that the studies Pai cites resemble “soundbites” more than quality scholarship.

‘No Real Rigor’

“There’s no real rigor,” said Brake. “Peer review always helps make the discussion a bit more rigorous,” referring to the academic process in which experts evaluate scholarship to ensure quality ahead of publication.

George Ford, chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, which offers assessments on regulatory policy, noted that the order leans on research posted to personal blogging sites, which he dismissed as “junk.”

“It’s stunning really to me,” he said. “It’s not a serious piece of research.”

Of the 88 footnotes in the section of Pai’s order on investment, approximately 75 directly address some aspect of investment by broadband providers under the current rules. More than 30 of those cite comments by internet providers and their trade associations, including U.S. Telecom, the Wireless Internet Service Providers Association and the American Cable Association. Another 15 dismiss comments from advocates of the current regulations. Most of the rest, including Ford’s and Brake’s work, appeared as internet posts, sometimes by people or groups with ties to the telecom industry. Among the research cited on investment under the rules, there was one university study and one piece of research that had been peer-reviewed.

Taking Aim

Pai is taking aim at the FCC’s re-classification of broadband providers under a 1934 law originally aimed at telephone companies. The 2015 move, which was designed to stop discrimination against content, including websites and videos, was considered a hard-fought victory for internet companies such as Alphabet Inc.’s Google, content-creators including Hollywood studios and grassroots activists. It was viewed as a loss for telecom and cable service companies like AT&T Inc. and Comcast Corp.

Although the section is a small part of his overall order, Pai himself has argued that the studies on investment are crucial to his proposal. In May, he said the process that led to his rule was fundamentally a “public discussion about how we can best maintain a free and open internet while making sure that ISP’s have strong incentives to bring next generation networks and services to all Americans.”

‘Telecom Industry’

Gigi Sohn, a former FCC aide who helped write the 2015 rules, said the research is “bought and paid for by the telecom industry.”

“They can’t really say with a straight face that the regulatory environment is the complete and total determinant of whether” broadband providers invest or not, Sohn said.

Among the studies that Pai cites, the one that’s most criticized by net-neutrality advocates is Ford’s of the Phoenix Center. Despite its claims of independence, the Washington-based non-profit has a history of pro-telecom conclusions and industry ties, including overseeing what it called a “Friends of Telecoms Competition” to recognize lawmakers “based upon a confidential survey of the foremost players in the U.S. telecommunications industry,” according to its 2001 annual report. It also holds an annual symposium on telecommunications. The center doesn’t disclose its funding.

‘Leading Telecoms Players’

Ford has worked at both the FCC and in the telecommunications industry, according to a copy of his resume posted on the center’s site. The center listed Ford first among a group of “leading telecoms players” who had addressed the group in 2001.

His study argued that fear of the Obama net neutrality rule depressed telecommunications investment five years before it was approved.

Ford said his ties to industry didn’t influence his research and that the Phoenix Center has never taken money from businesses to produce a particular study. He pointed to his use of open data sources and his presentation of his methods, which he said allows for replication and discussion from other experts in the comments on the proposed rule. Ford defended the center as being independent and dismissed criticism as name-calling.

The types of studies Pai cites are hardly unique to the telecom industry: Opponents are doing the same. The Internet Association, which represents technology companies including Google and Facebook Inc. has been at the forefront of fighting Pai’s order, citing an analysis by its own in-house economist.

“I haven’t seen an air-tight case on either side, neither one showing the 2015 order impacted investment nor one showing that it certainly didn’t,” said Bloomberg Intelligence telecom policy analyst Matthew Schettenhelm. “My sense is that there are lots of way to slice the numbers, but definitively establishing one causal factor is difficult.”

Iron Mountain to Buy Io Data Centers’ U.S. Unit for $1.3 Billion

(Bloomberg) — Iron Mountain Inc. agreed to acquire the U.S. operations of Io Data Centers LLC for $1.3 billion, adding to a string of deals this year by the data storage and management real estate investment trust.

Io will receive an additional $60 million based on the future performance of the centers, Iron Mountain said in a statement Monday. Iron Mountain is acquiring land and buildings in New Jersey, Ohio and Arizona that provide 62 megawatts of capacity.

The data center market is “super exciting for us,” William L. Meaney, chief executive officer of Iron Mountain, said in an interview. Large enterprises developing their cloud strategies “really fuels the growth of people like ourselves,” he said.


Iron Mountain agreed in July to buy Mag Datacenters LLC, which operates private data center business Fortrust, for about $130 million. In October, it said it was acquiring data centers in Singapore and London from Credit Suisse Group AG in a $100 million transaction.

“We look at a lot of deals but we’re really disciplined,” Meaney said. With the Io assets “we were able to find both the quality of assets and pricing that made sense,” he said.

The purchase of Phoenix-based Io’s U.S. operations will be Iron Mountain’s second biggest deal by valuation, after its 2015 agreement to acquire Recall Holdings Ltd. for about $2.6 billion.

Iron Mountain’s data center business is expected to contribute about 7 percent of its total revenue by 2020, according to the statement. That’s up from just under 2 percent now, Meaney said. The deal is likely to close in January 2018.

Iron Mountain shares closed at $40.70 Monday, valuing the Boston-based company at about $11 billion.

Ardea Partners, Centerview Partners and Evercore Inc. were financial advisers to Iron Mountain on the Io deal, with Morgan Lewis & Bockius LLP, Sullivan & Worcester LLP and Weil Gotshal & Manges LLP providing legal advice.

Goldman Sachs Group Inc. was financial adviser to Io and Simpson Thacher & Bartlett LLP was legal counsel.

Founded in 1951 as Iron Mountain Atomic Storage Inc., the company initially existed to protect documents from war or other disasters by saving them inside a depleted New York iron ore mine. It now provides services including art storage and secure destruction of information to about 230,000 customers in more than 50 countries, according to its website.

Comcast’s Pledge to Behave Without Open-Web Rules Draws Doubters

(Bloomberg) — Broadband provider Comcast Corp. spent years fighting regulations that bar it from charging high-volume internet companies more to speed their content along.

Yet the cable company is adamant that it won’t do that once those net-neutrality rules are lifted by U.S. regulators later this week.

“Any reporting that we are preparing to offer paid prioritization is absolutely false and inaccurate,” Sena Fitzmaurice, a Comcast spokeswoman, said in an email.


As the Republican-led Federal Communications Commission prepares to lift Obama-era rules enforcing “net neutrality,” the pledges from Comcast and other internet-service providers to not take advantage of the newfound freedom by charging content providers extra for “fast lanes” is being greeted with skepticism.

Internet service providers “want to do paid prioritization,” Tom Wheeler, who passed the rules in 2015 when he served as the FCC’s Democratic chairman, said in an interview.

He and others point to the recent disappearance from Comcast’s website of a pledge not to create fast lanes. “Something like this is no happenstance,” Wheeler said.

With a vote on Dec. 14, the FCC is set to let broadband providers such as Comcast and AT&T Inc. block or slow internet traffic and offer fast lanes for websites that pay more. It’s a win for internet service providers who say the utility-style regulation has slowed investment and discouraged innovation. They’ve lobbied and litigated against the rules yet still forecast little change in their operations.

Skeptics raise the specter of an internet driven more by deep pockets than bright ideas, with established businesses buying even more dominance. For instance, broadband providers could slow the likes of Netflix Inc. or Dish Network Corp.’s Sling TV, or charge the streaming video companies fees that startups couldn’t afford.

The repeal push comes from FCC Chairman Ajit Pai, who was named by President Donald Trump, and has won support from the other two members of the agency’s Republican majority, ensuring passage. Pai has said another agency, the Federal Trade Commission, will protect competition and consumers, and the agencies plan to work together.

“It’s naive not to recognize the incentives,” said Dane Jasper, chief executive officer of Sonic, a Santa Rosa, California-based provider of internet service to about 100,000 residential customers in California.

Jasper said companies such as AT&T, which owns DirecTV, and Comcast, which owns NBC, have a motive to discourage customers from using the likes of Netflix, Amazon.com Inc.’s Prime video, Dish’s Sling TV or Sony Inc.’s PlayStation Vue.

Jasper in an interview identified another incentive that could work to damp competition: If large broadband companies can extract a fee from the likes of Netflix, the internet service providers can lower the monthly fee charged to consumers. Companies the size of Sonic don’t have the leverage to demand a fee from content providers, leaving them without leeway to lower prices to compete, he said.

“I’m going to be forced to offer the service for more,” Jasper said.

A trade group of broadband providers including AT&T and Comcast pledged last week to not block or slow web traffic and otherwise avoid “unfair discrimination against lawful traffic online,” according to a statement. The group, Broadband for America, also represents companies including the largest wireless carrier Verizon Communications Inc.

Comcast changed the language about its web practices that is posted on a corporate page in late April, as Pai was announcing his intention to gut the Obama-era rules. The altered wording was reported earlier by the online publication Ars Technica.

Last month after Pai announced details, the company’s Senior Executive Vice President David Cohen wrote in a blog post: “Comcast’s commitment to our customers remains the same: we do not and will not block, throttle, or discriminate against lawful content and we will be transparent with our customers about these policies.”

Other carriers made similar pledges.

“From a customer perspective, I don’t see much changing,” John Stephens, AT&T’s chief financial officer, told investors at a conference Dec. 5. “We believe in not blocking or advantaging one’s website over others, that’s not what we do.”

At Verizon, spokesman Rich Young said that “our internet customers will continue to be able to go where they want and do what they want online.”

The companies don’t need to offer fast lanes because networks are delivering all types of data so quickly that even users who wait in line behind others suffer only a negligible delay, said Roger Entner, an analyst with Recon Analytics LLC.

Paid prioritization would amount to “somebody paying money for nothing,” Entner said.

Broadband providers won’t assemble packages of favored web channels, excluding others, because consumers won’t accept “a walled garden,” Entner said. “It’s a non-starter in markets where there’s competition.”

About 61 percent of Americans don’t have a choice of competing fixed-line broadband providers, according to the FCC.

Selling Capacity

Still, web companies express apprehension about broadband providers’ plans.

“They want to sell special capability and have people pay for it. And those who can’t pay for it will lack the same access,” Ed Black, president of the Computer & Communications Industry Association, said in an interview. “There will be innumerable ways to do that, sometimes shrouded, sometimes defended as technically efficient.”

Members of Black’s Washington-based trade group include Alphabet Inc.’s Google, Amazon.com, Dish Network and online ride hailing service Uber Technologies Inc.

Black mocked pledges of good behavior.

“‘Oh, we’re not going to do anything!’” Black said. “Then why did you make it the most unbelievably high priority — millions in lobbying, millions in PR campaigns?”

Several analysts said they expect few changes before Pai’s rules relaxation has been tested in court. A challenge is all but inevitable, and it’s not certain federal courts will accept the Republicans overturning a rule passed less than three years ago by Democrats.

“I’d be surprised if they did anything until a court rules,” said Blair Levin, a former FCC official under Democrats. “They haven’t told Wall Street how they could make money, and usually companies are not shy about that.”

“This is a bad thing for the entire internet ecosystem,” David Schaeffer, chief executive officer of Cogent Communications Holdings Inc., which provides links between companies and data networks, told investors Dec. 4.

“What these rules will allow companies to do is, choose whether or not for their end users, they will have adequate connections. We think that’s a bad idea,” Schaeffer said.

Microsoft Takes Path Less Traveled to Build a Quantum Computer

(Bloomberg) — In the race to commercialize a new type of powerful computer, Microsoft Corp. has just pulled up to the starting line with a slick-looking set of wheels. There’s just one problem: it doesn’t have an engine – at least not yet. The Redmond, Washington-based tech giant is competing with Alphabet Inc.’s Google, International Business Machines Corp. and a clutch of small, specialized companies to develop quantum computers – machines that, in theory, will be many times more powerful than existing computers by bending the laws of physics.

Microsoft says it has a different approach that will make its technology less error-prone and more suitable for commercial use. If it works. On Monday, the company unveiled a new programming language called Q# – pronounced Q Sharp – and tools that help coders craft software for quantum computers. Microsoft is also releasing simulators that will let programmers test that software on a traditional desktop computer or through its Azure cloud-computing service.

The machines are one of the advanced technologies, along with artificial intelligence and augmented reality, that Microsoft Chief Executive Officer Satya Nadella considers crucial to the future of his company. Microsoft, like IBM and Google, will most likely rent computing time on these quantum machines through the internet as a service.D-Wave Systems Inc. in 2011 became the first company to sell a quantum computer, although its technology has been controversial and can only perform a certain subset of mathematical problems. Google and IBM have produced machines that are thought to be close to achieving “quantum supremacy” – the ability to tackle a problem too complex to solve on any standard supercomputer. IBM and startup Rigetti Computing also have software for their machines.


Microsoft, in contrast, is still trying to build a working machine. It is pursuing a novel design based on controlling an elusive particle called a Majorana fermion that no one was sure even existed a few years ago. Engineers are close to being able to control the Majorana fermion in a way that will enable them to perform calculations, Todd Holmdahl, head of Microsoft’s quantum computing efforts, said in an interview. Holmdahl, who led development of the Xbox and the company’s HoloLens goggles, said Microsoft will have a quantum computer on the market within five years.

“We are talking to multiple customers today and we are proposing quantum-inspired services for certain problems,” he added.

These systems push the boundaries of how atoms and other tiny particles work. While traditional computers process bits of information as 1s or zeros, quantum machines rely on “qubits” that can be a 1 and a zero at the same time. So two qubits can represent four numbers simultaneously, and three qubits can represent eight numbers, and so on. This means quantum computers can perform calculations much faster than standard machines and tackle problems that are way more complex.

Applications could include things like creating new drugs and new materials or solving complex chemistry problems. The “killer app” of quantum computing is discovering a more efficient way to synthesize ammonia for fertilizer – a process that currently consumes three percent of the world’s natural gas, according to Krysta Svore, who oversees the software aspects of Microsoft’s quantum work.

The technology is still emerging from a long research phase, and its capabilities are hotly debated. Researchers have only been able to keep qubits in a quantum state for fractions of a second. When qubits fall out of a quantum state they produce errors in their calculations, which can negate any benefit of using a quantum computer.

Microsoft says it uses a different design – called a topological quantum computer – that in theory will create more stable qubits. This could produce a machine with an error rate from 1,000 to 10,000 times better than computers other companies are building, Holmdahl said.

Reducing or correcting the errors in quantum calculations is essential for the technology to fulfill its commercial potential, said Jonathan Breeze, a research fellow working on advanced materials at Imperial College London.The lower error rate of Microsoft’s design may mean it can be more useful for tackling real applications — even with a smaller number of qubits – perhaps less than 100. Svore said her team has already proven mathematically that algorithms that use a quantum approach can speed up machine learning applications substantially – enabling them to run as much as 4,000 times faster. (Machine learning is a type of artificial intelligence behind recent advances in computers’ ability to identify objects in images, translate languages and drive cars).

“We want to solve today’s unsolvable problems and we have an opportunity with a unique, differentiated technology to do that,” Holmdahl said.

U.K. Banks Aren’t Telling Regulators About All Cyber Attacks

(Bloomberg) — U.K. banks still aren’t telling regulators about all the cyber attacks on the financial services industry despite a ten-fold increase in reports to the  Financial Conduct Authority over the last four years.

“Our suspicion is that there’s currently a material under-reporting of successful cyber attacks,” Megan Butler, the FCA’s director of supervision, said in a speech Tuesday, according to a copy of her remarks on the regulator’s website. “The number of breaches relayed back to us looks modest when you set it against the number of attacks on the industry.”

The number of material attacks reported by firms to the FCA has grown to 49 this year from five in 2014, as hacks become one of the biggest threats to the safety of the financial services industry. The type of hacks is also increasingly concerning for regulators and firms with ransomware making up 17 percent of attacks reported to the regulator, according to Butler.


The FCA opened an investigation in October into the hack of credit reporting company Equifax Ltd. that saw personal data stolen from at least 143 million people. Outside of the FCA’s supervision, Uber Technologies Inc. paid hackers $100,000 to delete data taken from 2.7 million U.K. customers in a 2016 security breach.

Better Coordination

Butler emphasized the need for incidents to be reported to the regulator as they’re happening. She told the ICI global capital markets conference in London that the FCA had recently spent time with a number of U.S. agencies looking at how they could better coordinate cyber supervision against the global threat.

One of the challenges facing firms and regulators is the growing use of cryptocurrencies such as bitcoin in cyber attacks.

Rob Wainwright, the director of Europol, said at a London conference last week that crytocurrencies were a “great enabler for ransomware” because they allow people to act anonymously. He also highlighted the problem of cyber crime and fraud divisions in banks working separately when common actors could be better pursued together.

The growing sophistication of technology is also a positive for banks though when it comes to crime. On Wednesday, Rob Gruppetta, the FCA’s head of financial crime, said firms are working on replacing humans with artificial intelligence to detect money laundering, according to a copy of his comments on the FCA’s website. Gruppetta discussed how comfortable regulators would be if firms replaced human monitoring wholesale with technology.

“We are chiefly concerned about whether these systems are effective and spot the needles in the haystack,” Gruppetta said at an FCA fintech event. “Any bank hoping for a black box in the corner that will sniff out the launderers will be disappointed, but the technology has the capability to better achieve what we all want: keeping finance clean.”

Tech Companies Identify, Remove 40,000 Terrorist Videos, Images

(Bloomberg) — Big technology companies have added the digital signatures of 40,000 terrorist videos and images to a shared database as they seek to keep extremist content off their platforms.

Facebook Inc., Google’s YouTube, which is owned by Alphabet Inc., Microsoft Corp., and Twitter Inc. revealed the numbers in a joint blog post Monday.

The four big social media companies, which are part of a group called the Global Internet Forum to Counter Terrorism, announced one year ago that they would begin sharing digital fingerprints – known as hashes – of videos they removed from their platforms for terrorism.


Under the initiative, if a company removes a piece of content from its network for violating policies around terrorism, it is logged in the shared database. Then, if someone tries to post the same content to one of the other participating social networks, the content is automatically flagged for review – usually by a human analyst – and possible removal.

Technology companies have been under increasing pressure from Western politicians to do more to tackle terrorist propaganda and recruitment online. British Prime Minister Theresa May has been particularly active in accusing tech companies of not doing enough to keep extremists off their platforms and has called for international regulation to force the companies to do more or face substantial penalties.

The companies, for their part, have recently been highlighting their progress in using artificial intelligence and tools like the shared hash database to identify and remove terrorist content faster.  Last week, Facebook officials said in a blog post that their automated systems spotted 99 percent of the ISIS and Al Qaeda-related content the social network removes before the offending posts were flagged by users – and that in some cases the system was able to prevent the content from ever being published in the first place.

Twitter said in September that it also removed 99 percent of terrorist posts without relying on user complaints. YouTube said that, as of November, its algorithms automatically spotted about 83 percent of the terrorist-related content that the company removes.

As a result, terrorist groups have increasingly shifted their propaganda and recruiting efforts to newer, smaller social media platforms.

The four big tech companies said Ask.fm, Cloudinary, Instagram, which is also owned by Facebook, Justpaste.it, LinkedIn, which is owned by Microsoft, Oath, and Snap Inc. were going to begin participating in the shared terrorist content hash database.

Notably, however, Telegram, which has become a popular forum for terrorist groups such as ISIS to use to spread propaganda and reach out to potential recruits, is not part of the project.

“We recognize that our work is far from done, but we are confident that we are heading in the right direction,” the four companies said in their joint blog post.

From Amazon to Etsy, Tech Fights Trump’s Plan to Save Coal

(Bloomberg) — Selling custom nose rings, crocheted bunnies and hand-carved Santas is energy-intensive stuff.

Just ask Etsy Inc., the go-to marketplace for crafts that doubled its electricity use in two years to feed power-sucking data centers that keep the $2.8 billion-a-year business running. It’s one of the many technology giants including Amazon.com Inc. and  Alphabet Inc.’s Google demanding cheaper — and cleaner — electricity as their data demands grow.

This hunger for power has set Silicon Valley on a collision course with the Trump administration, which is working up a plan to keep coal plants afloat by raising electricity prices. As a rare source of demand growth, these tech firms have become formidable advocates for clean energy. They’ve contracted enough renewable energy to displace at least 12 coal generators, and some are paying millions to sever ties with utilities to find their own supply.


Big Tech is no longer “afraid to throw around their weight or their ability to influence — some might say bully — their local utility or local governments in what they want to get,” said Lucas Beran, a senior research analyst on IHS Markit’s data center and cloud team.

It’s easy to see why the companies have become such advocates. Power used by all the nation’s data centers is set to climb 4 percent from 2014 to 2020, according to an Energy Department report. Server farms now draw enough electricity to light up Las Vegas and the rest of Nevada, twice over. Etsy alone used 10,679 megawatt-hours last year — enough to supply 1,000 homes.

While coal still accounts for about a third of U.S. electricity, it’s losing ground to cheaper natural gas, wind and solar. Hundreds of mines have shut in recent years, and President Donald Trump campaigned on a pledge to revive them. His administration is now calling on the Federal Energy Regulatory Commission to enact a plan that would subsidize coal-fired power plants.

This is part of a series looking at Trump’s plan to rescue coal. Read the last story here.

In a letter last month, Etsy called on regulators to reject Trump’s plan, which it described as a barrier to “making creative entrepreneurship a path to economic security.” Separately, a group that includes Amazon and Microsoft Corp. said the administration is overlooking the potential of renewable power, grid technology and energy storage, warning that the proposal would create “burdensome out-of-market costs on consumers like our companies.”

Their push for clean power extends well beyond Washington. Alphabet has called on utilities to create “buy-as-you-go” renewable energy programs. The demands of modern electricity consumers have outgrown the standard utility business model designed “for a bygone era,” it said in a white paper last year. The Mountain View, California-based company, which runs the world’s largest online search engine, has signed contracts to buy 2.6 gigawatts of renewable energy that it said will lead to $3.5 billion of investments.

The fight to transform power supplies is just the latest instance of technology companies flexing their political muscle and green image. Earlier this year, the industry opposed Trump’s decision to remove the U.S. from the international Paris climate accord. Many including Google, Microsoft and Facebook Inc. pledged to continue the battle against global warming.

Meanwhile, building solar and wind farms is now less expensive than keeping coal generators online in parts of the U.S., and solar power is set to become the world’s cheapest source of electricity. Renewables account for about 15 percent of the U.S. power mix, compared with almost nothing two decades ago.

The quest to be green hasn’t been easy. Microsoft still finds it difficult to get renewables at a fair price when drawing up long-term contracts with utilities, said Michelle Patron, the company’s director of sustainability. A customer of Microsoft’s size, she said, should support “the scale of demand, the certainty they need to bring on these larger renewable projects.”

Utilities aren’t opposed to investing in renewable power. But technology companies are demanding supplies in quantities that could disrupt the reliability of transmission systems, said Matt Mooren, an energy analyst with PA Consulting Group.

Electricity is notoriously hard to store, so for the most part, it must be used instantaneously. Solar and wind farms don’t work when the sun isn’t shining and wind isn’t blowing. That creates a juggling act for utilities that must maintain a steady flow of power to customers. Industry consultant Lazard estimates a grid can handle about 30 percent of its power coming from renewables. Beyond that, utilities need backup systems like batteries or conventional power plants.

Bypassing Utilities

Even so, the technology industry won’t let up on its demands, said Mark Mills, a senior fellow at the free-market think tank Manhattan Institute who authored the 2013 study “The Cloud Begins With Coal.” Improvements in the efficiency of servers have slowed just as demand for data has taken off, he said. Information stored in data centers globally will quintuple by 2020, according to Cisco Systems Inc.

Switch Inc., a Las Vegas data-center provider agreed to pay $27 million last year to leave its Nevada utility in a bet that the company could find cheaper renewable energy elsewhere. Microsoft paid almost $24 million to bypass a Washington utility and find power on its own.

In September, a group of tech firms including Adobe Systems Inc.  pressed Dominion Energy Inc. for more renewables in Virginia — a hot spot for data centers — noting that the companies represent the utility’s biggest source of future demand growth. Less than a month later, Dominion agreed to add clean power for a new  Facebook data center, paving a potential path for others.

The pressure on utilities to source more renewables is only going to increase as large companies strike deals like this, said John Powers, who works for a Schneider Electric unit providing clean energy products to businesses. The company pointed to one group as proof: The Employers for Renewable Energy describes itself as a coalition advocating for companies to move to states that don’t “stifle” their desire for clean energy.

Tech companies have a lot of leverage now over state governments and utilities that are “drooling” over the power use from data centers as demand from other industries flat-line, said Gary Cook, a senior analyst at Greenpeace who specializes in information technology.

And they’re not waiting on government to effect change.

In West Virginia — the heart of America’s Coal Country — potter Joy Bridy makes everything from mugs to sauerkraut crocks that she sells on Etsy. Her operation is powered by solar panels that Etsy helped her get.

Despite her state’s deep roots in coal, she backs the company’s fight for more renewable energy.

“That’s the way the ball’s rolling,” Bridy said. “The sooner we all get with the program, the better it will be.”