Can ZixIt Fix It?

Bill Gates, Michael Dell, and Jack Welch are backing David Cook's new plan to make e-commerce hacker-proof.

September 2000By Comments

David P. Cook is a reinventor. He has a knack for taking clunky, low-tech companies, spiffing them up with computer technology, and making barrelsful of money in the process. His best-known venture, Blockbuster Entertainment, which he co-founded with H. Wayne Huizenga, applied computerized inventory control and tracking of rentals to the old mom-and-pop video rental store and built a vast retail chain that transformed the business. Next, the Dallas entrepreneur took on one of the oldest businesses in the world, one that hadn’t changed much in 10,000 years: collecting roadside tolls. Cook’s Amtech Corporation created an electronic toll-road payment system that allowed motorists to affix a microchip tag to their windshield and automatically have their tolls billed to their credit cards without stopping. Toll roads in Dallas, Houston, Georgia, Kansas, Oklahoma, and Louisiana, as well as on San Francisco’s Golden Gate Bridge, all use Amtech’s toll-tag system. Now Cook is setting his sights even higher. Instead of reinventing a low-tech business, his new Dallas company, called ZixIt, is attempting to transform the Internet itself by solving the basic problem of security. That’s no small feat, considering that the Internet, from its inception as a Department of Defense project, was designed for fast, open communications and was never intended as a vehicle for commerce. And the wave of recent hacker attacks—to which even Microsoft’s Hotmail proved vulnerable—and viruses have made many e-mail users wary about sending or receiving anything sensitive over the Internet. There may be something to fear from our own government too. The FBI is now using an ingenious new system called Carnivore that can tap into an Internet service provider’s network and intercept private e-mail, including, say privacy advocates, that of people not suspected of any crimes. It’s not that the technology does not exist to make e-mails secure from prying eyes and hacker attacks. It’s that other privacy systems have proven expensive, unwieldy, or intrusive, violating the first unwritten rule of the Internet economy: It has to be simple and affordable or no one will use it.

But Cook, ZixIt’s chairman and chief executive officer, believes he can do just that, even for a large company with employees, suppliers, and customers scattered around the globe. ZixIt was born in early 1999 from the remnants of Amtech (which eventually sold its toll-tag business, leaving it with a business that supplied electronic access and security systems). In March of this year it unveiled its first product, ZixMail, which lets Internet users send secure messages and documents to other ZixMail users, track online deliveries, and issue certified-delivery receipts. In July the company released two follow-up products to make ZixMail available to all e-mail users. It offered an updated version of the software that lets ZixMail users send secure e-mail to anyone in the world, not just recipients who have ZixMail. And it opened an Internet secure-messaging portal called SecureDelivery.com, where e-mail users can go to send and retrieve protected messages without having to install special encryption software. Cook sees it becoming the central hub for safe messaging on the Internet, offering special features such as secure bulk e-mailing for bank statements or securities transaction confirmations. “E-mail is just like a postcard on the Internet,” says Doug Kramp, ZixMail.com’s chief executive officer. “We envision ZixMail becoming the envelope for messages and documents sent on the Internet.”

So do Microsoft’s Bill Gates, Texas PC magnate Michael Dell, and Jack Welch, the chairman of General Electric. They are part of an investor group led by Cook’s old colleague Huizenga—who owns the Miami Dolphins, founded the giant garbage hauler Waste Management, and is the chairman of car retailer AutoNation—that in April announced plans to invest $44 million in ZixIt. Huizenga and Cook are reunited again at the top; the former has become ZixIt’s vice chairman. With at least half a dozen companies marketing secure online-messaging products, why have so many heavy hitters decided to back Cook? E-commerce analysts say it’s simple: because ZixIt’s product has a better chance of becoming the Internet standard than anything else on the market.

Still, what the company is trying to pull off with ZixMail is massive in terms of sheer math: Its central data center in Dallas can provide keys to hundreds of millions of Internet users ensuring that their messages are hacker-proof by means of a highly complex process of encryption and decryption. ZixIt spent about $50 million on its World Wide Web security server operation, which has duplicate versions of everything to ensure the system never shuts down, uninterruptible power supplies, even access to a diesel generator in case of a power loss. The system has the capacity to handle more than 600 million e-mail addresses and the so-called public keys that encrypt messages. In simple terms, a message from one ZixMail user to another doesn’t get delivered to the recipient until identities are verified, and a system of public and private electronic keys locks the message at one end and unlocks it at the other. (ZixMail debuted three months before President Clinton signed a law allowing businesses and individuals to send all sorts of legally binding documents with electronic rather than handwritten signatures.)

ZixIt’s other big product, ZixCharge, offers secure online payment to online consumers. Cook, in essence, is going back to his electronic toll-tag reading system for the concept: allow a consumer to complete a transaction using a unique digital identity linked to a credit card or other form of payment. Thus, ZixCharge would let consumers electronically “sign” a charge slip on the Internet with a digital signature. (Because of a lawsuit ZixIt filed accusing competitor Visa of waging a smear campaign to undermine the fledgling company, ZixCharge has not been released yet.)

Cook’s new company is dangling a big incentive to use its e-mail security services: This year they’re being given away free. Early next year ZixIt will begin charging users $1 per e-mail address per month. The company also is considering offering a free version of SecureDelivery.com that would pay its way with banner advertising.

How can the company make money by giving away its flagship product and then charging such a cheap price? It’s all part of Cook’s plan to become the dominant provider of e-mail security. And, considering that one billion e-mail addresses are expected to exist by year’s end, “you don’t need a whole lot of market penetration to get some very sizable numbers,” Kramp says. Analysts agree. “The idea is to price it so low that you can basically become the universal standard,” says David Weinstein, an analyst with Joseph Charles and Associates in Boca Raton, Florida. “It’s very similar to what Bill Gates did with Windows. Give it away, get customers acclimated, and then, when they feel they can’t live without the product, charge ‘em.” Gary R. Craft, an e-finance analyst with Deutsche Banc Alex Brown in San Francisco, calls it a “brilliant” strategy. “It’s a means to an end,” Craft says. “It’s designed to go out and gain ubiquity. It’s what we need out there because there are lots of disparate systems and designs. Until someone gains critical mass, there’s really no standard. “

ZixIt has already signed up a number of big-name customers, including 7-Eleven, the Houston law firm of Fulbright and Jaworski, Conoco, and the Perot Group. Weinstein says it’s likely that General Electric will become a user. Other targets are industries that rely heavily on secure documents, such as banking, online brokerage services, insurance, legal services, and health care. To address concerns about viruses, ZixIt employs virus-scanning software from McAfee.com to use with ZixMail and SecureDelivery.com.

In spite of its promise, ZixIt has had a rough ride so far, made worse by the fact that Cook, a private man who rarely gives interviews to the media, has been conservative, cautious, and tight-lipped about ZixIt until recently. Short-sellers—who bet that the price of a stock will go down—have held a large position in ZixIt, and analysts say they have spread rumors and trashed the company and its products in online chat rooms, calling it a “sham” and a “fraud.” The fact that the company didn’t have revenues last year and lost more than $11 million in the first quarter added to the negative buzz.

The result is that ZixIt stock has been one of the most volatile technology stocks traded on Nasdaq this year. Its stock chart looks like the silhouette of the Grand Tetons. ZixIt shares traded at less than $30 last fall, then rose to more than $60 before year-end, then fell again, rose to a 52-week high of $96.50 this spring, got clobbered in the Nasdaq dive, were down to a low of $21.50 in May, and then were back up to around $40 by early August. “The short-sellers in this case were about the most vicious I’ve seen,” Weinstein says. Still, he’s bullish on the company as a long-term investment and expects revenues and profits to grow starting next year. He predicts the company will have 12 million users, revenues of $287.8 million, and profits of $169.9 million by 2004 based solely on the ZixMail product. And he believes his estimates are conservative. “What the company is undertaking is so enormous that if they pull it off, the stock could go to any number,” Weinstein adds.

Until then, ZixIt has plenty of battles to fight, including its lawsuit against Visa. The suit, filed in Dallas County district court, accuses Visa of sabotaging the company by posting disparaging comments on an Internet message board. It claims that Paul Guthrie, a key technology executive at Visa, used aliases like “stockerama” and “pluribus_unum” to transmit more than four hundred intentionally harmful messages about ZixIt’s management and products to Yahoo!’s ZixIt message board. Among them: “Cook is toast,” “Zix doesn’t have jack,” and one that said the company was the “result of a big April fool’s joke by Cook, or perhaps the outcome of a three day tequila binge.” ZixIt shareholders who posted their own messages on the Yahoo! board were called “Bonehead,” “moron,” “a pair of inbred West Virginia hillbillies,” and “Butthead.” The suit notes that Visa and MasterCard—which are defendants in a multibillion-dollar antitrust suit charging that they tried to use their power to dominate the debit-card industry—backed a rival encryption system called Secure Electronic Transaction that has not been well received. Visa denies ZixIt’s claims. Weinstein says he thinks Cook is after a settlement before launching ZixCharge because Visa and MasterCard have affiliations with so many banks and control so much of the electronic-transaction market. “He doesn’t want money; he wants backing,” the analyst says. “And I think he’ll get it.” If he does, the controversial ZixIt might be able to silence some of the naysayers—and Cook might have yet another blockbuster.

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