Entrust Shakes Up ID Security Market

The company's plan to sell a $5 product turns up the heat on rivals RSA Security and Vasco.
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The market for security hardware tokens just got a jolt.

Entrust

(ENTU)

launched a $5, one-time-password hardware token on Jan. 30, in a move that could lead to pricing pressure and erode market share for rivals

RSA Security

and

Vasco Data Security International

(VDSI)

.

Hardware tokens that display a constantly changing set of numbers are popular among companies that use it for user authentication, in addition to the typical username/password combination, for increased security.

Though having stronger authentication has been a target for many businesses, including financial services and banks, the tokens market has been stymied by expensive products.

Many companies are unwilling to budget in the often-prohibitive costs of providing tokens for their employees.

That's why the move from Addison, Texas-based Entrust is big news for the $500 million hardware-tokens business.

"We have been looking for lower pricing for years," says Ray Wagner, managing vice president at research firm Gartner. "The tokens business has been looking for that inflection point, and this could be it."

A $5 Entrust token could change the economics of the market, Wagner believes. Rival RSA's token costs about $20, and Vasco's token comes at an average price of $8.

"There's an infrastructure cost, but at $5 a pop, I do think there will be some effect on uptake in enterprises," says Wagner.

Eye on E-Commerce

Entrust's cheaper tokens may also entice banks or e-commerce Web sites to use them to secure customer identification.

Already,

eBay

(EBAY) - Get Report

has said it will offer the hardware keys for $5 for personal PayPal accounts, and free of charge for business accounts through a deal with

VeriSign

(VRSN) - Get Report

.

Entrust already resells Vasco tokens, but the company says it is taking a direct-sales-model approach to cut out the 30% to 40% premium that customers have to pay otherwise.

"Tokens can be an effective authentication method, but they have always had a prohibitively high price tag," says Entrust CEO Bill Conner. "We are the first to declare this space being commoditized and open enough for the consumer market."

Though its partnership with Vasco will continue, Entrust says the-soon-to-be-launched line of tokens, called IdentityGuard, is independently being produced for it in China.

In addition to Entrust's new product further eating into rival RSA's market share, it will turn up the heat on Vasco, which grew rapidly on the strength of its tokens being much cheaper than those of RSA. (In June, storage company

EMC

(EMC)

bought RSA Security for $2.1 billion.)

Vasco, which reports fourth-quarter earnings on Feb. 20, said that third-quarter fiscal 2006 revenue grew 41% to $18.71 million from $13.27 for the same period the year before. Vasco posted net income of $3.29 million, or 9 cents a share, against expectations $2.73 million, or 7 cents a share.

Shares of Vasco, which were trading up 16 cents to $15.75 Friday,

have been up 34% since the beginning of the year, and up 73% in the six months since Aug. 2.

Entrust's latest maneuver, insists Vasco CEO Ken Hunt,

won't put the brakes on Vasco. "We can sell well under $5 and do a good profit, especially if we sell to large banks," he says.

Hunt says Vasco only charges $8 a token when the company sells in small quantities -- about 500 or less. For larger orders, the price ranges from $6 to $7 a token, he says.

Vasco also offers users the choice of cheaper software tokens; for hardware tokens, instead of outright purchases, the company also lets users opt for subscription payments or a license over multiple years.

So far, software tokens are well under 10% of the company's total annual revenue.

Hunt adds that Entrust isn't exactly in the tokens business, whereas Vasco is.

Earlier this week, Entrust reported fourth-quarter revenue of $28 million, an increase of 13% from the same period the year before, but $1 million less than Street expectations.

Also, the company posted a loss of $1.6 million, compared with earnings of $3.4 million last year.

For the full year of 2007, Entrust is targeting revenue between $115 million and $120 million, compared with analyst expectations of $116.7 million.

Entrust, hoping the tokens will the low-priced tokens could help revive its fortunes, has already signed up Expedia as its first customer. The tokens will be available in the second quarter of 2007.