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Vultures circle Baltimore

Vultures circle Baltimore

Dwindling Internet security star Baltimore Technologies has just two days to prove itself.

With analysts estimating that Baltimore has a mere six to nine months to live on current cash reserves, the company needs to find some answers to some very difficult questions before it reports its second-quarter financial results on Wednesday.

The current slump in IT spending has made Baltimore's struggle to prove its business model harder than ever. The company is burning cash at a rate of about $22 million a quarter and has just 50 million pounds left in the bank. With profitability not forecast until 2003, Baltimore finds itself faced with the choice of either selling off cheaply some of the assets it spent so heavily on last year or else looking for a merger with a bigger company. A large software firm with a good marketing arm looks like the best fit, and analysts have mentioned Microsoft and Computer Associates as possible buyers. Baltimore currently has a market value of about 115 million pounds.

Analysts, and potential suitors, are looking for more drastic cost-cutting measures from Baltimore when it reports on Wednesday. With revenue forecast to fall to about 16.5 million pounds for the quarter from 23.7 million pounds in the first quarter of 2001, these could involve Baltimore laying off another 300-400 employees. Baltimore cut 250 of 1,400 jobs in May.

However, what Baltimore really needs is a complete new selling strategy. Last year's e-business hype sustained sales of Baltimore's core public key infrastructure products as the means to secure online corporate transactions. PKI technology, however, has proved to be expensive and difficult to integrate with back-end IT and banking systems, and seems to have no clear value proposition in the current e-business environment. Analyst firm Gartner has estimated that 80% of PKI implementations are abandoned at the pilot stage. Even high-value IT security installations that are easier to understand and complete than the typical PKI implementation are currently lingering in a 'not yet crucial' sign-off purgatory.

U.S. competitor Entrust is experiencing the same troubles as Dublin-based Baltimore, but because it didn't acquire as aggressively last year, it's in a more stable financial position. US PKI service provider VeriSign is doing well, but its business model of simply issuing PKI digital certificates on behalf of customers could have a finite life span, according to some analysts. The bigger direct threat to Baltimore comes from RSA Security, which has a broadening product portfolio, a patient approach to a developing market and long-standing expertise in encryption technologies.

When Microsoft started giving a free, if incomplete, version of PKI away with its Windows 2000 product, PKI as a concept was devalued. Given the cost and complexity of installing a PKI, what exactly are companies paying for when they buy one?

This is the crucial question that Baltimore must answer - and not just with marketing platitudes about "trusted e-commerce." Entrust is aggressively targeting the typical buyers of PKI: financial services companies with revenue of more than $10bn, or government organizations and health care firms with legal obligations to protect online exchanges of information. But Baltimore can't afford to patiently wait for any upturn in the market for PKI - which supplies 80% of its revenue - and needs a more radical solution.

Baltimore, along with other vendors of PKI, must adapt to a change in the way companies are implementing IT. Last year was all about e-business initiatives; this year is all about back-office IT installations that link internal corporate systems to suppliers and partners. This is why Baltimore, Entrust and RSA have all bought firms selling Web access control technologies over the past months: they are trying to predict where their customers will need products to fill the gaps in their IT security architectures.

The PKI vendor that finds a way to fit prepackaged but flexible PKI-enabled applications easily into firms' intranets and extranets will be the first to enjoy the fruits of any upturn in the market. If Baltimore can prove that it is overhauling its selling model for PKI products in this way, acquirers might be obliged to come in with bids sooner rather than later.

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