Check Point aims low with appliance

The company is hoping to use its dominance in the enterprise and telecommunications markets to branch out into smaller markets with a product called S-box. Not to be confused with Microsoft's Xbox game console, the S-box is an appliance that sells for about $300 and allows small businesses to use Check Point's firewall and VPN (Virtual Private Network) technology.

The plan goes something like this: Check Point, which already has a host of large customers, will sell its boxes to current customers that will hand them out to protect remote-office and home-office customers. Since the software syncs up, corporate IT departments will have more control over the network. Eventually, Check Point could target consumers through cable and telecom companies, which will use the S-box to sell for a monthly fee additional security services to customers.

"We've been pleasantly surprised with demand so far," Jerry Ungerman, president of Check Point, said in an interview with News.com last week.

The product, which launched in January, is an effort to expand Check Point's customer base. The company is among the largest of its peers in the security software market, but it has been facing slowing growth. For 2001, its revenue was up 24 percent--much less than the 40 percent to 50 percent growth rate in 2000, but still impressive given the economic slowdown.

The small-business move is a bid to juice Check Point's growth again. Ungerman said the company's growth will depend on the economy. Revenue will be flat if the economy slows down, up 10 percent if there's a moderate recovery and up 15 percent if there's a big pickup in IT spending. For 2003, Ungerman said Check Point could post sales growth of 25 percent to 35 percent.

"This is potentially significant," said Matthew Kovar, director of security and software services for the Yankee Group. "As networks keep expanding, Check Point has a lot of leverage because its customers see no value in switching."

Check Point said its boxes can be sold to untapped markets such as lawyers' and doctors' offices and other small establishments. To move the products, Ungerman said the company has formed partnerships with distributors such as Tech Data and smaller resellers.

"The S-box is part of a broader strategy to move down the market," Legg Mason analyst Todd Weller said. "Eventually it's possible that Check Point will be competing with antivirus software vendors, who are also adding in firewalls."

Potential challenges
Kovar said that Check Point's efforts are promising, but also that the company will face a few challenges. For starters, Check Point is reacting to encroachment from companies such as NetScreen and SonicWall, two companies that have similar appliances, analysts said.

Jeff Wenker, a spokesman at NetScreen, which recently went public, said that its NetScreen 5 appliance has seen strong demand with service providers, who can use it to more effectively manage networks. "We have high-end products, but can move down through the enterprise," he said.

Check Point's entry into the market is notable because the company dwarfs rivals in revenue and customers. According to Kaufman Brothers, Check Point's calendar-year revenue for 2002 is expected to be $534 million, compared with NetScreen's $151 million and SonicWall's $156 million. Even though Check Point isn't the first to the market, it is viewed as the 800-pound gorilla, with 100,000 customers and an army of network administrators, who may opt to operate under Check Point's software platform, which is dominant in the enterprise.

But the biggest challenge for Check Point may be branching out into hardware, where it could compete with its partners, Kovar said.

Ungerman played down any conflicts.

"We only made the boxes on our own to prime the market," said Ungerman. "We will be out of hardware in three to six months."

Ungerman said the company plans to sign up two to three partners who will take over the manufacturing of the boxes. Check Point's foray into hardware was mostly for proof of concept, since many of its partners were skeptical about an appliance, he said.

Of its major partners, Nokia can take over the box portion, allowing Check Point to provide the software. Other partners are likely to do the same. Ericsson is embedding Check Point software in its cable modems.

Analysts say the move by Check Point and others could usher in a slew of security services for home users. Ungerman and rival companies say most of their firewall and VPN services will be delivered through broadband providers, who in term will charge a monthly fee, similar to caller ID features provided by phone companies.

"That's the way we'll probably wind up in the retail market," said Ungerman.

He added, however, that the company isn't in any detailed talks with providers about what its take of such monthly services would be, noting that most revenue will continue to be in licensed software.

"It'll be interesting to see how all of this plays out and whether consumers will buy these services," Weller said. "It's yet to be seen how it will work out in the low-end market."