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NSA, price wars could rain on Microsoft's cloud

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Microsoft's big investment in cloud computing—a large part of its reinvention strategy—could be derailed by concerns about U.S. government snooping and an emerging price war among the big players.

Foreign cloud companies will win big from NSA spying revelations

"Microsoft has spent tens of billions on cloud and it's a necessary move in order for them to be a relative player in next generation data center," said Daniel Ives, managing director and senior analyst of FBR Capital Markets. "Cloud is the next big platform and it's the key to their success."

Microsoft's long-standing relationship with its enterprise customers and its Windows platform give it a leg up against such competitors as Amazon, Google and Oracle, Ives said.

"The whole company and whole product approach is going to be around the cloud," Ives said.

But he added, "one of the impediments of moving to cloud is security and data privacy." Since Edward Snowden's NSA revelations, every CIO at every international company worries intensely about data snooping, and U.S.-based companies are coming under extra scrutiny, Ives said.

Microsoft's own general counsel, Brad Smith, said in December that in the wake of the NSA leaks, many of the company's customers expressed serious concerns about the government's access to their data. Smith even went as to say that government snooping could be considered an "advanced persistent threat," along with malware and cyberattacks.

It's been estimated that the U.S. cloud industry could lose anywhere from $35 billion to $180 billion by 2016 because of lost business spurred by government spying. But Rajeev Chand, managing director and head of research at Rutberg & Company, thinks these concerns are overblown.

"On the data issue, we do not think this is a major effect. There is a lot of noise on this in this discussion, but we haven't seen a huge impact," Chand said. "There has been a delay in decision-making with some non-U.S. companies and a few instances when customers have gone with non-U.S. providers."

Also, most big companies assume that other countries are hacking into their data as well, Chand said.

A potentially bigger issue is that Microsoft is pushing cloud services just as a price war appears to be brewing.

Amazon and Google have been aggressively slashing prices for their cloud services, and on Monday Microsoft was forced to do the same

"It's going to be a brutal war from a pricing perspective. That's really their primary headwind," Chand said.

Microsoft responded: "We do not have anything new to share beyond our commitment to match Amazon pricing for commodity services. While price is an important factor, Microsoft believes that overall innovation and quality will prove to be more important than commoditization."

The company also says it is addressing the privacy issue by allowing clients the option of storing customers' information in data centers located outside the U.S. It has also implemented hybrid solutions, which allows customers to store part of their data in the cloud and more sensitive data on site. This offering has even given the company an edge against competitors, Ives said.

"Letting customers decide where their data resides, this is out of the mold for tech companies and is kind of a battleground topic because most tech companies decide where data is stored," he said.

"Microsoft needs to do everything in their power to facilitate companies moving to the cloud because their success is really going to center around their overall cloud strategy," he said.

By CNBC's Cadie Thompson.

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