Jan. 17 (Bloomberg) -- European governments, determined not to lose another technology battle to the U.S., are giving domestic companies a leg-up in the cloud.

France set up a venture in November with companies including France Telecom SA and Thales SA to offer on-demand rental of hardware, software and applications that are 'made in France.' The German government is working on stricter data- protection rules that would include as a criterion the location of servers that host often confidential and sensitive user data.

State intervention has picked up since Microsoft Corp. said last June that, as an American company, it must hand data to U.S. authorities under the Patriot Act if asked, even if its files are stored in Europe. At stake is a market valued at $47 billion in western Europe alone by 2015, according to Gartner Inc. France Telecom, Deutsche Telekom AG and Atos Origin are bidding against U.S. suppliers Hewlett-Packard Co. and International Business Machines Corp.

'It's the beginning of a fight between two giants,' Jean- Francois Audenard, Paris-based France Telecom's cloud-security adviser, said in an interview. 'It's extremely important to have the governments of Europe take care of this issue because if all the data of enterprises were going to be under the control of the U.S., it's not really good for the future of the European people.'

Europe's technology companies have fallen behind Google Inc., Facebook Inc. and Apple Inc. in Internet search, social- media and consumer electronics. Henning Kagermann, a former chief executive officer of Walldorf, Germany-based SAP AG, the largest maker of management-business software, said Europe needs to avoid the same fate in cloud computing.

Salesforce.com, IBM

'I can't imagine that Europe can afford to leave this field to the U.S.,' Kagermann, now president of Germany's National Academy of Science and Engineering, said in an interview in Berlin yesterday. 'This year will show whether we're serious about this.'

SAP, its archrival Oracle Corp., and companies such as IBM, Hewlett-Packard, Salesforce.com Inc., Amazon.com Inc. and Microsoft are promoting cloud computing as a secure way to outsource services and reduce the need for pricey servers.

In Europe, Deutsche Telekom's T-Systems unit and France Telecom are wooing clients with the vow to protect their data from the U.S. government. They cite legal provisions, including the Patriot Act, that allow authorities to request data without a court order and to force providers to keep quiet about it toward their customers.

'Level Playing Field'

The European Commission will this month present tighter data-protection rules to shield individuals from data loss on the Web while at the same time create a 'level playing field for companies' by smoothing out differences across European countries. EU Justice Commissioner Viviane Reding said last month that the reforms should inspire the U.S. to also strengthen its privacy regime.

Some governments have proposed measures that may be seen as protectionist. In September, Dutch Security and Justice Minister Ivo Opstelten told the parliament that U.S. companies will be excluded from bidding for IT services by his government because of fears that the U.S. Patriot Act may allow data to be compromised.

As more European clients may request to have data stored locally, U.S. cloud providers may increasingly have to divvy up contracts with local providers.

Royal Dutch Shell Plc, Europe's largest oil company and one of Microsoft's biggest clients in the region, last year decided to store its data in Germany with T-Systems while leaving Microsoft to run software applications. Jonathan French, a Shell spokesman, won't discuss why the company chose German servers.

Google Deal

This month, Google won its biggest enterprise contract to date, helping 110,000 employees at Spain's Banco Bilbao Vizcaya Argentaria SA access its Apps suite, which includes e-mail, calendar, data and Website creation tools.

That deal doesn't include storing 'more confidential' data about clients and the bank's business as the lender prefers keeping such files under its own control, said Carmen Lopez, director for BBVA's Innovation Observatory.

Sebastien Marotte, a vice president at Google Enterprise, said that the company would need 'strong justification' from U.S. authorities, like alleged crimes, before handing over data.

In the longer term, European companies won't be able to win global clients with business models based on local regulations, said Gartner analyst Frank Ridder.

'You always have to keep in mind that you're participating in a model that's geared toward global application,' he said. 'Governments need to understand that if they want to promote cloud computing they have to open up rather than dig in.'

As Big as the Web?

Europe is still a relatively small slice of the global cloud market, which may expand to $241 billion in 2020 from $40.7 billion last year, according to Forrester Research Inc. North American and Asian telecommunications companies last year outspent European peers on cloud assets, with the latter accounting for only 7 percent of the $13.5 billion investments globally, according to researcher Informa Plc.

The cloud will become as important as the Internet in maintaining U.S. competitiveness, according to a report that 71 of the nation's largest technology companies submitted in July to the Obama administration.

Patrik Edlund, a Hewlett-Packard spokesman, said the company's cloud products are certified to meet various levels of data protection. 'We welcome any initiatives to standardize rules and make them more transparent because that actually helps all parties do business.'

T-Systems Wins

IBM spokesman Joseph Hanley said the company makes sure it 'works with customers to architect solutions appropriate for their privacy and security needs.'

For now, the U.S. laws are helping Deutsche Telekom, in which the German government owns 32 percent, win cloud business, said Reinhard Clemens, CEO of the T-Systems unit. T-Systems last month added contracts from customers including Promotora de Informaciones SA, Spain's largest media company, Brazilian insurer Intermedica Sistema de Saude SA, and South African glass manufacturer Consol Ltd.

'The Americans say that no matter what happens, I'll release the data to the government if I'm forced to do so, from anywhere in the world,' Clemens told reporters on Sept. 12. 'That's why we're well-positioned if we can say we're a European provider in a European legal sphere and no American can get to them.'

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net