What do Jennifer Lawrence and JP Morgan have in common?
In case you hadn’t already guessed, the Hollywood star and the investment bank are both recent high-profile victims of cybercrime.
In the case of JP Morgan, hackers have stolen large amounts of customer data, including bank account details, which could be used by fraudsters.
As for the actress, she was one of more than a hundred film stars whose personal photographs were stolen and posted on the internet.
These breaches are distressing for those directly affected. But they also demonstrate that the threat to everyone’s online security is getting bigger.
That’s a worry for us all. But it’s also a huge opportunity for the companies providing online security. So how can you profit from this fast-growing sector?
The cloud is hugely convenient – but it has its risks
The hacking of Hollywood reveals just how rapidly the way in which we store our data has changed.
In the past, if you took a photo on a phone, it was only stored on that phone. To get at them, a hacker would have to find a way to break into each and every phone individually, which would be too time consuming and risky to be worth it.
However, newer smartphones back up the data on a remote server (what’s known as, ‘in the cloud’), sometimes without the user fully being aware of it.
“Cloud computing” has lots of advantages. It means we’re not tied to a physical hard drive. So even if one of our individual computers, or tablets, or phones is damaged or lost, we can still access all our files.
It’s even possible that in the future, home computers won’t need any storage at all. Everything will be stored in the cloud, and accessed via the web. Google has already made some steps towards that future with its Chrome laptops. And even if it doesn’t go that far, it’s clear that use of the cloud will only continue to grow.
The downside is that if we can access data remotely, a clever hacker can do it too. And if everyone’s data is stored in the same place, it becomes much easier – and far more attractive – to hack multiple accounts at once.
It’s not just the occasional crook or online creep that people have to beware of. There is strong evidence that governments are getting in on the act. too.
Online attacks are clearly less effective than bombs, bullets or ‘boots on the ground’ (although there have already been cases of drones being hacked). But properly targeted cyber-attacks can cause huge disruption to the economic and financial system. Some attacks may have effects on a par with sanctions and travel bans.
Even better for the governments that use them, the fact that such attacks are hard to trace mean they can credibly deny using them.
For example, security experts think Russia was behind the JP Morgan attack. Keith Alexander, former head of US security agency, the NSA, reckons it was put together by “a group with exceptional skills, or a nation-state backed group”.
If it was done at Vladimir Putin’s behest, “they just sent a real message: you’re vulnerable”. In effect, it was a digital equivalent of finding a horse’s head in the bed.
What’s more, this may be only the tip of the iceberg. After all, “if you can steal the data – if you can reach in that far and steal it – you can do anything else you want”.
Dumping digital for analogue is not the solution
One way to get around this problem is to ditch computers entirely. The German parliament recently revealed that it has considered bringing back manual typewriters. Not to be outdone, Russian government has already done so – buying special typewriters whose output can be traced to a specific machine.
However, giving up on the convenience of computers is not an option for most of us. Instead, banks and other big firms are increasing their spending on security.
Even before the latest attack, JP Morgan’s chairman had warned that attempts on its systems were becoming “increasingly complex and more dangerous”. As a result, he promised the bank would boost annual spending on security to $250m by the end of the year. He also signalled that this wouldn’t be a one-off – he expects spending to “grow exponentially over the years”.
As we pointed out in our cover story in March, cybersecurity is now a huge global market. Bank of America Merrill Lynch expects global spending to reach $120bn in less than three years’ time.
And it has the potential to be even bigger. The Center for Strategic and International Studies thinktank already puts the global cost of cybercrime at $500bn a year. With online commerce growing all the time, that figure is likely to keep rising.
How you can cash in
One company that should benefit from the growing concerns about online security is US-listed F5 Networks (Nasdaq: FFIV). F5 helps companies to run their networks better.
Tighter security is a key part of this, and F5 has been increasing its efforts in this area. It has also been changing its operations to focus more on the shift to cloud computing.
At the moment, sales continue to grow at a rapid rate of just under 20% a year. While it is doing very well in emerging markets, US growth is also strong. At the moment F5 trades at 23 times this year’s earnings, falling to 17 times by 2016.
For more on cybersecurity – as well as the more positive aspects of the huge technological changes we’re seeing right now – you should take a look at MoneyWeek’s Crowdpower report.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.
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On this day in history
On this day in 1882, Thomas Edison demonstrated the benefits of electric light to Wall Street bankers, ushering in the age of electricity.