How Regulators Enticed Verizon to Sell Out Customers to the NSA

The telecompany's explanation for colluding with the FBI, FCC, DOD, etc.

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.