Climate of Fear

[R. A. Hettinga]

http://www.forbes.com/forbes/2002/0204/064_print.html

Climate of Fear
Elisa Williams, Forbes Magazine, 02.04.02


Anxiety about cyberterrorism has given Network Associates a new lease on
life, but its coziness with the government comes with baggage.
The residents of Manhattan are already on edge about terrorist attacks, but
have they considered what would happen if fanatics got hold of the
computers monitoring their water supply? Terry C. Vickers Benzel has, and
she's plenty worried.

"The 'what ifs' of a physical and cyberattack are many," Benzel intoned
darkly at a U.S. House Committee on Science hearing in October, at which
she also speculated about a similar catastrophic cyberattack on the
Northeast power grid. "We must prepare now to prevent this from happening."

Benzel is a vice president of a company, Network Associates (nasdaq: NETA -
news - people), that just happens to sell the software gadgets necessary to
prevent such cyberterrorism. In order to protect the country, Benzel told
the lawmakers, her company and others will need more federal funding for
counterterrorism, as well as other government help.

At least sevenbills related to computer security are bouncing around
Congress, including one, the Cyber Security Research & Development Act,
that would authorize $900 million of new spending on cybersecurity research.

Such proposals have excited investors about the prospects for cybersecurity
firms. Network Associates' stock has doubled since Sept. 11 to $29. Shares
of rival Symantec, which helped craft a pending House bill that would offer
generous tax breaks on the purchase of cybersecurity products, have climbed
77%.

This is an industry built on fear caused by threats both real and hyped.
Before Sept. 11 the bugaboo was Internet worms such as Code Red. "If the
bad guys stay as creative as they have been, this is about as great a
growth area as you could hope for," beams Network Associates President Gene
Hodges.

By the Numbers
Spoils of War
While the rest of the tech industry suffers, the computer-security sector
exploded after Sept. 11.
23%
The forecasted compound annual growth rate for spending on Internet
security software.
$2.5 billion
The amount the federal government will spend this year on computer-security
projects.
$11.8 billion
The antivirus industry's estimated cost of damage and downtime caused by a
recent outbreak of Internet worms.
Sources: IDC; the White House; Network Associates.Growth prospects are the
only way to explain the $4 billion market valuation for his firm. Lehman
Brothers expects a pro forma operating loss for 2001 of $4 million on sales
of $742 million. This follows another bad year. Network Associates in 2000
had a pro forma operating loss of $23 million and a net loss of $103
million, in part because aggressive accounting tactics backfired. "I can't
repeat some of the things the customers called me," says George Samenuk, a
22-year IBM veteran who took over as chief executive after his hard-driving
predecessor, William Larson, resigned under a cloud in December 2000 as the
stock sank to a low of $3.25.

Samenuk, a former Brown University football center, quickly tackled many of
the problems left over from the 45-some businesses acquired under Larson,
and plans to shave another $50 million in expenses this year. He is
refocusing the company on three areas: programs for network management, the
McAfee antivirus software and Magic Solutions help-desk software. (The
company also holds an 80% stake in McAfee.com, an Internet-based antivirus
service.)

Samenuk's greatest contribution may be in shaking the government money
tree. Much of the activity centers on the company's NAILabs in Glenwood,
Md., which receives a substantial part of its budget from the government
for projects that it ultimately tries to commercialize. The lab received
$18 million in grants last year, mostly from the Defense Advanced Research
Projects Agency, up from $10 million in 1999.

Darpawas so impressed with one NAILabs project, a system that protects a
computer network against intrusions by detecting unusual activity, that it
hired a company to develop a video that demonstrates how it works using
animated robots running through a network. Richard Clarke, President Bush's
new guru for cyberterrorism, plans a visit to the lab this year.

"I have 100 researchers who have been working with Darpa and the Department
of Defense in information security for 15 years,"Benzel brags. "We go to
meetings with top military brass all the time. We believe that we
understand the information warfare problem that the Department of Defense
faces."

But the symbiotic relationship with the government is a double-edged sword.
The company is still trying to stamp out reports from November that it had
assured the FBI that the agency's controversial Magic Lantern program could
slip through undetected by the firm's antivirus software. Magic Lantern
enables the government to track a computer user's keystrokes.

"There was absolutely no [communication] between the company and the FBI on
Magic Lantern," says an exasperated flack, who blames the dustup on an
inaccurate news report.

Before that, another controversy, over censorship. At 3 o'clock one morning
in September, federal cops and an agent knocked on the Wellman, Iowa, door
of Robin Rosenberger. Rosenberger, an Internet gadfly of the companies that
make computer protection software, was about to reveal on his Web site
Vmyths.com that Network Associates had advised the National Security
Council to shut down the entire Internet in September as a way of
eradicating the Nimda virus. The disclosure would have been potentially
embarrassing since it implied that the company's software wasn't working.

The agent was there to ask Rosenberger to kindly withhold posting the
information--or else--for vague purposes of "national security" following
the Sept. 11 terrorist attack. Rosenberger complied at the time, but later
recounted portions of the incident on various Internet sites without naming
the company.

At least that's the version of events from Rosenberger's camp. Says Network
Associates' Hodges: "Network Associates would never sponsor nor condone
attempts to censor anyone anywhere."

Hodges is even more incredulous at the accusation that federal agents were
acting on behalf of the company. "It's such an amazing thought that the
United States government would do the bidding of any company," he protests.

Do the bidding of private industry? Dole out billions in subsidies and tax
breaks?Perish the thought.






-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'



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