Weekend: A Digital Pearl Harbor

Brian Hicks

Updated January 22, 2011

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

From Sun Tzu to “Stormin’ Norman” Schwarzkopf, the goal of every military commander has always been pretty simple: to kill people and break things.

Beat the other guy, and your name will find its way into the history books…

The only thing that changes is the technology. From the longbow to the ballistic missile, the arms race is one that never sleeps.

One of the fastest growing fronts in this struggle is in cyberspace. Today’s style of combat is geek versus geek.

But don’t believe for a second that it’s not just as dangerous…

Because while it doesn’t involve tanks or fighter squadrons, cyberwar’s ability to disrupt an enemy is just as effective, and often equally destructive.

It’s war by other means — one that focuses on using computer code to strike an enemy’s Achilles’ heel.

Full-scale cyberwar

The recent discovery of a computer worm called Stuxnet is a perfect example of the damage a hacker armed with code can create.

Using the “most advanced and aggressive malware in history,” cyberwarriors have now set Iran’s nuclear ambitions back by two years, according to most estimates. (Not surprisingly, Israel and the United States are at the top of the suspect list.)

The worm itself attacked controllers critical to operations at Natanz, a sprawling enrichment site in Iran’s desert. As operators stared blankly at their screens, the bug’s centrifuges spun wildly out of control, tearing systems apart.

“This was nearly as effective as a military strike, but even better since there are no fatalities and no full-blown war. From a military perspective, this was a huge success,” said Ralph Langer, a top German Security expert.

“It will take two years for Iran to get back on track.”

This is only the latest cyber skirmish…

Back in 2007, Estonia fell victim to what Wired Magazine dubbed “Web War One”.

Hounded by three weeks of digital assaults, Estonia’s electronic Maginot Line proved as feeble as the original. The country’s firewalls withered as a flood of data sent by the nation’s unknown opponents quickly crashed one system after another, crippling numerous vital public services.

Websites of government ministries, banks, and newspapers all fell victim.

And while the rest of the world watched the attacks with a combination of curiosity and indifference, military planners around the globe thought otherwise. They recognized that a long-awaited and long-predicted cyberwar had claimed its first victim.

As with like the Blitzkrieg of old, a new chapter in warfare had begun for all to see.

“We’ve been lucky to survive this,” said the Estonian defense minister.

“If an airport or state infrastructure is attacked by a missile, it’s clear war. But if the same result is done by computers, then what do you call it? Is it a state of war? These questions must be addressed.”

Cyberwarriors are just warming up

While there wasn’t what you’d call “normal” war carnage during the Estonian attack, governments around the world viewed the attacks with a more critical eye.

They knew full well what this series of cyber attacks showed about their own vulnerabilities — and that warfare of this nature could only get considerably worse, given our increasing dependence on the Internet. That wired backbone creates a rich set of targets of opportunity… not much different than any other wartime objective.

Like a digital Pearl Harbor, targets could include defense networks, the energy sector, emergency preparedness systems, financial services, telecommunications, even the agricultural sector…

In a coordinated cyber attack, no buildings have to fall to weaken us militarily, economically, or politically.

The U.S government takes these threats so seriously that the Department of Defense is prepared, based on the authority of the president, to launch either a cyber counterattack or an actual bombing of the source.

In fact in 2009, President Barack Obama declared America’s digital infrastructure to be a “strategic national asset,” and later appointed General Keith B. Alexander as head of the new U.S. Cyber Command (USCYBERCOM) to defend American military networks and attack other countries’ systems.

By all accounts, General Alexander has his hands full. According to the Pentagon, Department of Defense computers are probed 250,000 times a day, mostly by Chinese hackers.

Joint Chief Chairman Admiral Mike Mullen said earlier this week, “The threat from China is significant, it is an enormously complex and critical area that all of us need to understand a lot better and do a lot more about.”

He also warned the impact of a cyber attack on the United States was “substantial” and potentially devastating.

“It’s an area with no rules, there are no boundaries, it happens with the speed of light.”

Cybersecurity Stocks

Of course, these real-time threats have led to beefed-up budgets to combat them.

A report released in December by Input predicts federal investment in cybersecurity will reach $13.3 billion by 2015, up from $8.6 billion in 2010. That’s a compound annual growth rate of 9.1% — nearly twice the rate of other government IT spending.

This is going to create a money-making opportunity for investors, as public companies with security expertise begin to win big new government contracts.

In fact this trend is already beginning to take shape…

Take a look at some of the companies that have recently cashed in:

  • The FBI recently awarded ManTech International Corp (NASDAQ: MAN) a nearly $100 million contract for cybersecurity outsourcing.
  • In a similar deal, BAE Systems (BAESY.PK) was awarded a $40 million deal;
  • And just this week, Computer Sciences Corporation (NYSE:CSC) was awarded $30 million by the Air Force to provide additional cybersecurity.

For investors, those types of deals are going to become the norm — especially as these new threats continue to develop.

After all, war is not something we can simply wish away…

Your bargain-hunting analyst,

steve sig

Steve Christ
Editor, Wealth Daily

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