nCipher grabs NeoScale for $1.9M

Key management vendor scoops up foundering tape encryption startup to bolster "holistic approach" to enterprise encryption.

Enterprise security vendor nCipher Corp. picked up the assets and intellectual property of storage encryption startup NeoScale Systems Inc. today for $1.9 million.

nCipher will continue to sell NeoScale's CryptoStor Tape encryption appliances but not CryptoStor Disk, according to Richard Moulds, nCipher vice president of product development. He also said that NeoScale's KeyVault key management technology will be used in nCipher's keyAuthority key management product. nCipher will keep NeoScale's Milpitas, Calif., office and has hired at least 10 NeoScale employees, including some who were laid off in October when the startup's financial problems came to light.

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NeoScale put itself up for sale after it failed to secure venture funding earlier this year. The October layoff included its entire sales force and close to half of its roughly 40 employees. NeoScale had a total of $43 million in funding, but its last round came in March 2005.

Although it had close to 300 customers, Moulds said tape encryption could not drive enough revenue to sustain NeoScale because it is only one piece of the encryption puzzle. nCipher handles key management for a variety of encryption devices.

"We're approaching this from a bigger perspective," Moulds said. "Encryption is popping up everywhere -- in databases, applications, everywhere in the enterprise. These days companies are taking a holistic enterprise view around key management. They want one unified approach, not six different encryption approaches."

Moulds said nCipher has been looking to add storage encryption to its portfolio to compete with the likes of EMC Corp.'s RSA Security and had been interested in acquiring NeoScale for years.

"We don't have any expertise in the storage space," he said. "We've had conversations with NeoScale over the years, and we had customers who asked us to integrate with NeoScale products. When we became aware the company was struggling and their assets were up for grabs, it was a quick decision."

According to market research firm The InfoPro, use of tape encryption has been barely inching up in the enterprise. The most recent round of The InfoPro interviews with Fortune 1000 customers found that 21% said they were using tape encryption, up from 18% last year and 19% six months ago. Only 2% said they were using NeoScale, compared to 7% for Network Appliance Inc. (NetApp), which acquired NeoScale competitor Decru Inc. in 2005. But corporations have many more solutions to choose from than appliances dedicated to tape encryption. Tape vendors IBM and Sun Microsystems Inc., and software vendors Symantec Corp., CA Inc. and Microsoft also showed up on the list, along with EMC and switch vendor Cisco Systems Inc.

According to TIP's managing director of storage Rob Stevenson, NeoScale's enterprise customers considered NeoScale's size a negative. "Customers' relationships with storage suppliers are strongly tied to which products they buy," he said. "They're looking to Symantec, they're looking to IBM, they're looking to Sun, they're not looking to NeoScale. They're saying, 'I'm not going to trust my most secure assets to a company one-tenth our size.'"

He said customers may be more willing to trust nCipher, which is a profitable public company.

Moulds said customers want to encrypt tape but not disk, and that's why nCipher will drop NeoScale's disk encryption. With LTO-4 tape drives supporting encryption, it might be just a matter of time before add-on devices to support tape are no longer necessary either.

That's fine with nCipher, as long as there are keys to manage. "Our history is partnering with encryption companies," Moulds said. "In most cases, we manage keys for somebody else's products."

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