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Cyber Warfare: Investing in the Modern Battlefield


A look at the companies helping the military fend off an invisible enemy.


"There is a huge future threat and there is a considerable current threat [from cyber attacks]," Defense Secretary Robert Gates said in November at the Wall Street Journal's CEO Council. "That's just a reality we all face."

"The Internet, the cyber arena… this is a vastly growing area of information that can be used and abused in a number of ways… I've often said that I think the potential for the next Pearl Harbor could very well be a cyber attack," CIA Director Leon Panetta told the House Permanent Select Committee on Intelligence on February 10.

Thus, it likely came as little surprise when, a week ago, at the 2011 RSA Conference -- a yearly expo hosted by RSA Security, a division of the EMC Corporation (EMC) -- Deputy Defense Secretary William Lynn III said the DoD now recognizes cyberspace as "a new and official warfare domain," joining the ranks of air, land, sea, and space.

Secretary Lynn maintains that "The threat is moving up a ladder of escalation, from exploitation to disruption to destruction," and is fully aware that "a couple dozen talented programmers wearing flip-flops and drinking Red Bull can do a lot of damage," and that "we have to assume that if they have the means to strike, they will do so."

To counteract cyber attacks on military, infrastructure, and vital economic targets (which can be funded "for the cost of replacing a tank tread"), the United States Cyber Command -- a sub-unified command under the US Strategic Command -- was created and reached "initial operational capability" last May.

The Command's mission statement is spelled out along the inner ring of the logo: 9ec4c12949a4f31474f299058ce2b22a

The 32-character code is an MD5 "hash" or "message-digest" which, when translated, means:

USCYBERCOM plans, coordinates, integrates, synchronizes and conducts activities to: direct the operations and defense of specified Department of Defense information networks and; prepare to, and when directed, conduct full spectrum military cyberspace operations in order to enable actions in all domains, ensure US/Allied freedom of action in cyberspace and deny the same to our adversaries.

Some believe the threat is being overstated.

"There's quite a lot in it, but they're also extensively hyped," says Professor Peter Sommer of the London School of Economics on the warnings on cyber warfare. "In terms of the involvement of the big military companies, you have to realize that they are finding it extremely difficult to sell big, heavy equipment of the sort they are used to because the type of wars that we're involved in tend to be against insurgents. And so they are desperately looking for new product areas -- and the obvious product area, they think, is cyber warfare -- I'm not so sure about that."

Yes, the type of wars that we're involved in now and for the foreseeable future, do tend to involve insurgents against whom we fight asymmetrically. This obviously requires less of the traditional weaponry and more of what is now being developed to protect the country.

As for Sommer's claim that cyber warfare is a contrivance cooked up by "desperate" defense contractors?


"Every military district of the Peoples' Liberation Army runs a competition every spring," says Alan Paller of the non-profit SANS (SysAdmin, Audit, Network, Security) Institute outside Washington, DC, "and they search for kids who might have gotten caught hacking… [We found one of the winners] hacking into the Pentagon. So they find them, they train them, and they get them into operation very, very fast."

North Korea

A 2004 study by Lieutenant Christopher Brown of the Naval Postgraduate School titled "Developing a Reliable methodology for Assessing the Computer Network Operations Threat of North Korea," reads, in part:

The KCC (Korea Computer Center) was established in 1990 by Kim Il Sung to promote computerization in the DPRK. At its inception, the KCC employed approximately 800 employees whose average age was 26. Today Kim Jong Il's son, Kim Jong Nam -- who also heads North Korea's intelligence service, the State Security Agency (SSA) -- heads the KCC. He is also the chairman of North Korea's Computer Committee. In May 2001, the South Korean newspaper the Chosun Ilbo reported that Kim Jong Nam had moved the SSA's overseas intelligence gathering unit, which operates primarily by hacking and monitoring foreign communications, into the KCC building. In 2001, the South Korean media reported that the KCC was nothing less than the command center for Pyongyang's cyber warfare industry, masquerading as an innocuous, computer geek-filled software research facility.


Just ask Estonian defense minister Jaak Aaviksoo, who, in 2007, saw a cyber attack, allegedly originating within the Kremlin, paralyze his country's vital infrastructure.

"All major commercial banks, telcos, media outlets, and name servers -- the phone books of the Internet -- felt the impact, and this affected the majority of the Estonian population. This was the first time that a botnet threatened the national security of an entire nation," he told a reporter.

While White House cybersecurity czar Howard Schmidt may believe that "Cyber war is a terrible metaphor", whether or not that happens to be the case is germane to few people other than English professors and armchair linguists. McAfee (MFE) estimates that about 120 countries are using the Internet for state-sponsored information operations, primarily espionage, and the DARPA budget provides an idea of how many billions of dollars will be allocated to cyber defense in the years to come:

Click to enlarge

The challenge involved here requires an "all hands on deck" approach, which means, in Secretary Lynn's words, pursuing "several avenues of industry-government cooperation."

Noting that it takes the Pentagon 81 months to develop a new computer system while the iPhone (AAPL) was developed in 24 months, Lynn realizes this is "less time than it takes us to prepare a budget and receive Congressional approval for it. This means I get permission to start a project at the same time Steve Jobs is talking on his new iPhone. It's not a fair trade. We have to close this gap. Silicon Valley can help us," he said.

As can places like Hanover, Maryland; Fairfax, Virginia; and New York, New York.

Boeing (BA) and Lockheed (LMT) have been expanding their cyber warfare capabilities for some time now, but there are several smaller names that are purer IT defense plays.

ManTech International Corporation (MANT), a provider of cyber security for military, intelligence, and law enforcement, based in Fairfax, Virginia, announced Q4 and FY2010 results yesterday, which reflected the increasing importance of -- and subsequent spending increase in -- cyber defense: revenues for the quarter were $697.9 million, up 29% year-over-year, and revenues for the year were $2.60 billion, also up 29% compared to a year earlier.

The KEYW Holding Corporation (KEYW) of Hanover, Maryland, a cyber security firm which counts the NSA and the DoD among its many (and often classified) customers, reported earnings earlier in the month. It, too, enjoyed impressive revenues, generating $108.0 million for 2010, a 175% increase year-over-year, and $29.3 million in Q4 versus $12.1 million for the same period in 2009.

Other, similar names in the cyber warfare sector include CACI International (CACI), Kratos Defense and Security (KTOS), and SAIC Inc. (SAI).

Specifics range from classified to highly classified to this-doesn't-even-exist-I-have-no-idea-what-you're-talking-about, and the battle for hearts and minds is being waged alongside the more bellicose operations:

To those who doubt cyber attacks are a legitimate theater of war, it's not unimportant to consider that, Malcolm Gladwell's opinion aside, Facebook just helped topple Hosni Mubarak.

No, the revolution will not be televised. Rather, it'll be streamed on the Web.

No positions in stocks mentioned.
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