October 19, 2021

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Zoom’s China Ties Prompt National-Security Review – Tech News Briefing

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Zoe Thomas: This is your tech news briefing for Thursday, September 23rd. I’m Zoe Thomas for the Wall Street Journal. During the pandemic Zoom gave many of us, a lifeline to friends and family that we couldn’t see in person, but let’s face it. We’re all getting a bit tired of video calls. Zoom knows that and so the company is looking to expand its business by buying other smaller companies but now we report its plan to purchase a U.S. Software company could be held up on national security grounds. So what are those concerns on today’s show reporter Kate O’Keeffe who covers tech and national security for the journal joins us to discuss why the deal caught the attention of U.S. regulators that’s after these headlines.
The chief technology officer of Facebook, Mike Schroepfer is stepping down from the role which he’s held for 13 years. CEO, Mark Zuckerberg said Shrapnel will transition to a new job as the company’s first senior fellow, a part-time position. That’ll focus on recruiting and developing technical talent, improving project infrastructure and overseeing artificial intelligence development. The maker of video game Fortnite won’t be returning to Apple’s app store anytime soon. The CEO of Epic games, Tim Sweeney says Apple told his company their ability to release software on Apple platforms. Won’t be re-instated into litigation between the two companies is resolved. Earlier this month, as part of Epic’s lawsuit against Apple, a judge ordered Apple to loosen some of its app store restrictions but the judge also said apple was within its rights to boot Epic from the store for breach of contract. Epic says it plans to appeal the verdict and Apple lawyers said Epic’s account won’t be reinstated until appeals in the case have been exhausted.
The Chinese FinTech company Ant Group says it’ll share customer credit data with the Chinese government. Ant runs a popular consumer lending service in the country called Huabei that functions like a virtual credit card. Now Huabei is going to start asking users to let it share a certain credit information with the country central bank that’ll include things like when the accounts were set up and credit limits, but not information on individual transactions. Users who opt out won’t be able to use the service. Data from services like WABA is crucial to the Chinese central banks plan to develop a credit reporting and scoring system.
Similar to FICO scores in the U.S. Until recently, FinTech companies had resisted calls to feed their information into a national database. As we’ve told you about before Amazon, the company that appended brick and mortar retail is planning to enter the departments to our game. Now we’ve got more details on its plans. A big focus of those stores will be selling Amazon’s own line of apparel. The stores will also feature tech fueled dressing rooms for shoppers to try on items from Amazon’s private label and other clothing brands that sell on its website. Our Amazon reporter Sebastian Herrera says this is part of a wider strategy for the company.

Sebastian Herrera: I think with Amazon, anytime they think that there’s a way to introduce a new concept and technology into a new space. They’re not shy about trying it out. They try out numerous things and sometimes they don’t even work out. So I think what these stores are going to try to grow their brand recognition of their clothing, apparel items, and also they’ve been rolling out different types of physical store concepts and this is kind of like a next step in that. They’ve done grocery stores, they’ve done smaller sort of stores with different types of items like cookware. So apparel is the next thing that they’re trying and I think what we’ve seen from Amazon is that historically they care more about gaining market share in an industry than necessarily making profits.

Zoe Thomas: Amazon’s first department stores are slated to open near San Francisco and Columbus, Ohio possibly next year. All right, coming up. Why did a deal between two U.S. Companies raise national security concerns over the role of China? We’ll explain after the break.
Back in July Zoom announced plans to buy Five9. A company that provides customer service software, including cloud-based customer contact hotlines. Now zoom and Five9 are both based in Silicon valley. So you might not expect this kind of deal to raise national security concerns, but we report exclusively that a government panel led by the justice department, dubbed Team Telecom is investigating the deal for just that reason. So why all the scrutiny and what does it tell us about how far the U.S. Government will go to keep foreign influence out of the domestic telecom industry? Joining us to discuss all of this is our reporter Kate O’Keeffe. Hi Kate.

Kate O’Keeffe: Hi.

Zoe Thomas: So we know everybody is using Zoom less and that’s leading the company to look for new business lines. So why Five9 in particular?

Kate O’Keeffe: So I think Zoom was interested in five nine because they’re just trying to expand their offerings, both for business clients and regular consumers. This deal should enable Zoom to get into the $24 billion contact center market. For example, that’s what the companies were counting when they announced the deal.

Zoe Thomas: Okay. But now the company has run into this hurdle over Zooms ties to China. People are familiar with Zoom, but they might not be familiar with Zoom’s connections to China. What are those?

Kate O’Keeffe: Right? I mean, it’s a weird thing. This company, as you said, is based in Silicon valley, but it actually has significant operations in China and its CEO is an American citizen who was born in China and so there have occasionally been questions raised about both of those issues.

Zoe Thomas: But I mean, a lot of companies operate in China. They have to follow specific rules because of the Chinese government. So what is it about Zoom’s ties in particular that looked like red flags to this inter-agency group.

Kate O’Keeffe: Zoom has historically had a large portion of its engineers physically based in China and also security researchers discovered back in 2020 that Zoom had been sometimes storing encryption keys on servers, based in China. These keys are long strings of numbers and characters that can be used to access encoded communications and so that was considered a major security breach. The company has said that was a mistake, that it wouldn’t repeat, but there’s already been some evidence that these ties to China have led to issues that the justice department has already investigated.
In December last year we saw the DOJ charge, a Zoom executive who was based in China with working at the behest of the Chinese government to disrupt tenement square democracy protests commemorations that were being broadcast outside of China’s borders. And so there’s a free speech concern there, but also the issue is much broader when you think about how many sensitive business and other personal conversations people are having on Zoom. And so I think the concern that national security officials have here in the U.S. Is that if the Chinese government has leverage over Zoom as a company due to its operations in China, what does that mean for the security of communications that are occurring on this video chat platform?

Zoe Thomas: Team Telecom apart from having probably the coolest name for a government agency that I’ve heard, can you tell us what they are and why it exists?

Kate O’Keeffe: Great. So Team Telecom is an inter-agency panel that’s led by the justice department, but it also has a bunch of other national security officials, and they look at national security issues that can arise when companies are applying to get licenses from the federal communications commission. Which is the U.S. Telecom regulator. So if there’s no real national security issue and you want a license from the FCC, that can happen pretty smoothly, I think but if there could be a potential national security risk Team Telecom comes in and ask the FCC like, Hey, can you wait up a minute? We want to take a look at this. And then they make a recommendation to the FCC for how to proceed. The reason that this review is coming up to begin with is because Five9, the company that Zoom is buying has these FCC licenses and so if they’re acquired by Zoom, then Zoom will take over these FCC licenses. There’ll be a change control regarding the licenses specifically and that’s, what’s provided the regulatory hook here.

Zoe Thomas: And what happens if they decide that this deal does pose a risk to national security?

Kate O’Keeffe: Typically, if they have an issue, there can be discussions surrounding a national security agreement and so the regulators can go back and forth with the companies to figure out, is there a way to address our concerns? They could say, for example, Hey Zoom, we need you to store all your data in a particular place, or we need you to take, X step to encrypt your data. And then if the company agrees, then they sign this national security agreement and then Team Telecom may recommend that the FCC then approve the license transfer. However, there are cases where Team Telecom could say that, they’re just going to recommend against the license transfer because there’s not really a path forward to address their national security concerns.

Zoe Thomas: So, have we heard from Zoom or from Five9 about this review?

Kate O’Keeffe: Five9 did not comment on this current Team Telecom review Zoom though said, they’re working with officials on that and that they still expect this deal to be able to close soon.

Zoe Thomas: As we’ve been discussing the U.S. Government has had these rising concerns about China’s role in its telecommunications industry and globally the telecommunications industry. So what does this review tell us about their concerns more broadly and about the steps the Biden administration might take?

Kate O’Keeffe: Right? I mean, we’ve seen for the past several years now, beginning really with the Trump administration and then carrying through to the Biden administration a heightened concern about the national security risks involving telecommunications, especially with respect to China. So the FCC, the same entity, who’s going to be listening to Team Telecom on this Zoom recommendation. The FCC in previous years had given similar telecom licenses to all China’s state run telecom companies who had some operations here in the U.S. They’ve since moved to terminate those licenses and they realize that they’re no longer comfortable with that. And so I think the scrutiny we’re seeing now on Zoom, given their significant operations in China is sort of a natural outgrowth of this new posture but it’s interesting because at the same time that the U.S. Is taking more of a hard look at this kind of stuff. China is also being a lot more protective of its own companies data.

Zoe Thomas: Yeah, I guess that’s the elephant in the room we haven’t discussed yet. Do we know what China thinks of the inquiry into Zoom’s purchase of Five9?

Kate O’Keeffe: Given that this inquiry is going to lead to a lot more questions about Zoom’s interactions with the Chinese government? It just doesn’t seem ideal, I guess.

Zoe Thomas: Not ideal, indeed. All right. That was a reporter Kate O’Keeffe. Thanks for joining us, Kate.

Kate O’Keeffe: Thank you for having me.

Zoe Thomas: And that’s all for today’s tech news briefing. You can always check out more tech stories on our website, wsj.com. And if you like our show, please rate and review it. You can do that wherever you get your podcasts. I’m Zoe Thomas for the Wall Street Journal. Thanks for listening.

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