Commentary: Business model chink in Network Associates's armor

By Richard Stiennon and John Pescatore, Gartner Analysts

Top management changes at Network Associates will not alter the basic vulnerability of the company's business model.

The appointment of George Samenuk

	See news story: New Network Associates chief looks to bolster sales

as Network Associates' new chief executive officer comes 10 days after the company issued an earnings warning, appointed a new chairman, and announced a search for new executives including--besides the new CEO--a president and chief financial officer. Those events are probably symptomatic of the security market's resistance to a scattershot approach to developing and selling security products.

Through acquisitions, Network Associates has attempted to roll up diverse network and security products into one operating company:

• Pretty Good Privacy (PGP) for encryption software,

• McAfee for enterprise antivirus products,

• Gauntlet for firewalls,

• Secure Networks' Ballista for vulnerability assessment.

In Gartner's opinion, while those moves brought Network Associates increased revenue, the premiums paid for the acquisitions were likely based on the flawed assumption that the market position of the acquired products would benefit from the resources and capital of a holding company.

The rollup strategy of using funds from an initial public offering and highly valued stock is often employed in fast-moving industries to grab market share quickly. The difficulty with doing that in the Internet security arena is that most customers look for best-in-class products for firewalls, intrusion detection, virus scanning, and encryption. If the rollup does not include best-in-class products, a company's sales, marketing and product development will be handicapped.

Developing and maintaining technologically sophisticated products such as firewalls, sniffers, desktop management and encryption require huge amounts of capital and technical resources--which is one reason the market remains fragmented. Most Gartner clients still purchase products based on each product's individual merits and not on its association with a holding company, such as Network Associates or Symantec. Gartner believes that is the correct approach given the state of the market.

The security conglomerates will likely continue to fare poorly, but best-in-class security product companies will likely continue to succeed. The likes of Checkpoint Software Technologies, Internet Security Systems Group, Cisco Systems and Sophos Anti-Virus will likely eclipse Network Associates' market share in the markets in which the company competes.

Until security solutions become commoditized, which Gartner believes is not the trend, the Internet security rollup will have limited success as a business model. Management rollover and restructuring is a symptom of--not a solution to--that fundamental flaw.

(For related commentary on Network Associates, see TechRepublic.com--free registration required.)

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