Anti-Spyware Leader Unfazed by Microsoft

For millions of PC users, the privacy-snatching programs known as spyware have been nothing but a headache as they swipe personal information, slow systems to a crawl and crash computers. For Webroot Software Inc., the annoying programs have been the foundation of success.

Thanks to its market-leading anti-spyware software, Spy Sweeper, sales have soared 20-fold since 2002, and last year the privately held company raised an eye-popping $108 million in venture capital.

Though there's little chance of spyware ever going away, Webroot is facing a significant challenge in the coming years: Microsoft Corp.'s upcoming Windows Vista operating system will include its own spyware-squashing tools.

Vista could put Webroot in the same shoes as RealNetworks Inc., Netscape Communications Corp. and others whose businesses have suffered after Microsoft bundled more features into its ubiquitous operating system.

Still, Webroot CEO David Moll seems unfazed.

"The taking of a second-best product in this space is akin to locking half the doors in your house," he said. "Vista will not solve the spyware problem. It may change the vector of attack, but it will not solve this problem. And I'll bet the company on it."

Some analysts say the company should broaden its focus -- and Moll, without divulging details, said that's in the plans.

"Ultimately they need to offer more than just an anti-spyware package," Yankee Group senior analyst Andrew Jaquith said. "To do that, they need access to more money, or be part of a bigger company."

Moll said he expects 20 percent revenue growth this year, while Jaquith estimates current overall annual revenue at $75 million to $110 million. Jaquith said an initial public offering is more likely than a buyout because, he estimates, it could take $500 million to acquire the company -- a sum he figured few rivals would be willing to pay.

Although an initial public offering isn't imminent, Moll said, Webroot is implementing some of the financial controls required for public companies.

Even before Vista ships to businesses later this year and to consumers in early 2007, Webroot faces formidable competition.

Anti-spyware programs from companies like Tenebril Inc., Lavasoft AB, McAfee Inc. and others all target the software that gets downloaded and installed onto PCs -- often without users' knowledge -- to monitor keystrokes or capture personal data and send it back to a third party.

Some of the rival programs are free, while others are included with broader security programs. Webroot charges $29.95 for the software and a year of updates and customer support.

Spy Sweeper, which was first released in 2003, has received strong reviews and it had 75 percent of the U.S. retail market last year for anti-spyware, besting both McAfee and Computer Associates International Inc., according to the NPD Group Inc., a market research firm.

For its part, Microsoft said customers should choose spyware protection that works best for them. In fact, Vista users will be able to turn off Windows Defender, if they choose, said Mike Chan, senior product manager for the anti-spyware program.

Many anti-spyware vendors set traps, or "honey pots," with algorithms that do the screening. Webroot's differentiator is Phileas, a computer system that actively hunts down spyware with the aim of catching new threats the day they are released.

To spark further innovation, Webroot employees who think of ideas that earn patents get bonuses of up to $2,000. Every so often, the company holds the "Spyware Smackdown," a game in which researchers act as spyware writers trying to avoid Spy Sweeper.

The company also invested $500,000 on a usability lab, in which cameras monitor volunteers as they use Webroot's software. That research then goes into improving the software's interface.

Webroot's efforts have paid off. Besides huge revenue growth helped by the release of Spy Sweeper in 2003, the company has grown from about a dozen employees to 300 in a purple-walled headquarters that look out on the Rocky Mountains. Its conference rooms are named for dead rock stars such as Jerry Garcia.

Though Vista raises a cloud around Webroot's continued success, the company is no stranger to escaping threats.

The company was launched in 1997 by Steve Thomas and then-girlfriend Kristen Talley. Thomas was a state chess champion at age 10 who landed on an FBI watch list at age 14 after he hacked into a supercomputer at the National Center for Atmospheric Research, Moll said.

After the couple's relationship soured and sales plateaued at a few million dollars, Thomas and Talley in April 2002 hired Moll, a Duke University dropout who once worked at a screw machine factory in Cleveland to pay his way through night school.

At the time, Webroot sold a program for cleaning up unnecessary files on PCs, and revenues came evenly from Internet sales, AOL's Shop Direct and retail.

Just months after Moll joined, AOL went through a management change and strategy shift and it shut down sales through Shop Direct. Moll, Thomas and Talley stopped taking paychecks, but by then Webroot was developing Spy Sweeper. The program came to market in February 2003.

More than three years later, Moll is confronted with another major challenge.

"I really do not see consumers going out to buy a best-of-breed anti-spyware product when they're being handed it for free," said Natalie Lambert, a security analyst for Forrester Research Inc.

She said business customers may choose to stick with one vendor for all security software, so offering anti-viral software would be a natural move for Webroot.

Moll said Webroot soon will do just that.

"We don't see customers satisfied with all their vendors," he said. "That creates tremendous opportunity for us."


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