[Clips] Security Woes Don't Slow Reed's Push Into Data Collection

[R.A. Hettinga]

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Date: Thu, 2 Jun 2005 23:45:21 -0400
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From: "R.A. Hettinga" <rah at shipwright.com>
Subject: [Clips] Security Woes Don't Slow Reed's Push Into Data Collection
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<http://online.wsj.com/article_print/0,,SB111776210603150087,00.html>

The Wall Street Journal

 June 3, 2005
 HEARD ON THE STREET

Security Woes Don't Slow
 Reed's Push Into Data Collection

By DAVID PRINGLE
Staff Reporter of THE WALL STREET JOURNAL
June 3, 2005


LONDON -- News of security breaches at LexisNexis has thrust the
Internet-based data company's parent, publishing titan Reed Elsevier PLC,
into the spotlight and tossed around Reed's share price in the past few
months. Investors might want to prepare themselves for more of the same.

Far from backing off, Reed plans to push deeper into the business of
collecting personal data on individuals for sale to employers, banks,
lawyers and other clients -- the source of the problems at LexisNexis.

Reed's chief executive, Sir Crispin Davis, says he expects "significant"
opportunities to further expand the business in the U.S. in the next few
years. "It's a highly attractive, long-term growth opportunity," he says.
"This is a new, emerging industry, and it isn't, perhaps, too surprising
that we are facing these kinds of troubles."

Reed could soon be in the headlines again once investigators in the U.S.
determine how data brokers now owned by the London-based company allowed 59
security breaches, lifting such personal data as Social Security numbers,
addresses and driver's license records of 310,000 Americans over two years.

The Secret Service and the Federal Bureau of Investigation have searched
dozens of homes and computers as part of an investigation into the data
theft. Reed faces a suit seeking class-action status in federal court for
the Southern District of California that claims the company "trampled the
privacy interests and expectations of consumers."

But investors expect Reed to ride out this furor largely unscathed. Its
share price is up 11% in London this year, compared with a 6% rise in the
Dow Jones Stoxx 600 Media index for Europe. In 4 p.m. New York Stock
Exchange composite trading yesterday, Reed's American depositary receipts
were up 51 cents to $39.18, giving Reed a market capitalization of about
$23 billion.

Sir Crispin's push into the data-brokering market is part of his wider
strategy to turn the 125-year-old company into a high-tech business
offering database products covering everything from scientific papers to
industrial widgets to the academic performance of American schoolchildren.
Today, about 30% of the company's revenue comes from products that didn't
exist five years ago, almost all of them Internet-based. Sir Crispin wants
Internet operations to account for as much as 70% of revenue within five
years.

For investors in Reed, whose core business has long been publishing
thousands of scientific and business journals, this strategy means Reed is
becoming increasingly exposed to the risk of security breaches, technology
failures and regulatory intervention. It is telling that Reed hasn't
launched a data-brokering business in Europe, where the regulations
governing such activities are much tougher than in the U.S.

"It's a bit more risky," says Micha Zwaaf, an analyst with ABN Asset
Management in Amsterdam. Mr. Zwaaf, who recommends that ABN's funds buy
Reed stock, adds, "Those scientific journals have been around for 200
years, so the risk of something happening there is much smaller, but there
is no growth."

Mr. Zwaaf says he expects the investigation by U.S. law-enforcement
agencies to implicate weak security at some of Reed's customers rather than
problems at the company itself. At the same time, he argues that any move
by regulators to tighten restrictions on the sale of personal data would
give the industry more credibility and could actually be a boon to Reed.

Indeed, members of Congress are calling for laws mandating new security
measures in the wake of the LexisNexis thefts, as well as other recent
online security gaffes. Still, Chuck Richard, a New York-based analyst with
research firm Outsell Inc., says the people affected by these security
breaches aren't likely to have enough political clout to impose tough new
restrictions on Reed and others. "Controversial? Yes. Likely to be severely
curtailed? No," he says. Neither Outsell nor Mr. Richard owns Reed stock.
Mr. Richard doesn't rate the stock.

Investors' willingness to stick by the company will depend to a large
degree on their trust in Sir Crispin, a former Procter & Gamble Co.
executive who had no online experience before joining Reed. But in his six
years at the helm, he has transformed the company from an old-fashioned
publisher of magazines, such as the Lancet medical journal, into an
Internet powerhouse.

Nick Baker, Reed's chief strategy officer, acknowledges that Reed's
expansion into new markets is testing the company's resources. "We are
pretty stretched doing what we are doing. It isn't like we have got
hundreds of people sitting around saying: 'What is the next big
opportunity?' We are driving this organization pretty hard," he says.

In 2004, Reed's revenue rose 3%, after stripping out the impact of
acquisitions and adverse currency movements, to £4.81 billion ($8.71
billion). Sir Crispin is promising to deliver 5% growth each year for the
next three years. Reed's data-brokering business is growing at 20% a year,
thanks mainly to the $775 million acquisition last year of Seisint Inc., a
Boca Raton, Fla., company. However, most of the 59 security breaches were
intrusions into Seisint's databases.


-- 
-----------------
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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-- 
-----------------
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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