http://www.oaklandtribune.com/Stories/0,1413,82~1865~2182212,00.html

With e-voting, Diebold treads where IBM wouldn't

Company staying in voting business despite lessons of corporate giant

By Ian Hoffman, STAFF WRITER

A corporate giant making solid profit selling computers to banks and government once gambled on a new venture -- computerized voting machines.

In less than four years, the voting-machine business produced a little income but virtually all of the corporation's bad publicity, full of suggestions that the firm's otherwise reputable computers couldn't count, were unreliable or being manipulated secretly for political purposes.

The firm was IBM, California was the place that battered its reputation and the year was 1969. Big Blue got out of the voting business and never looked back. Overwhelmingly, the accusations leveled at its voting systems were wrong, but IBM's image was too valuable to risk.

"Even though it was my job, I agreed: For IBM, this was not the place to be," said Robert P. Varni, former western regional sales manager for IBM's Votomatics. "The business was too risky for their reputation to continue."

The same tale, compressed into two years, could easily be that of Diebold Inc., the 149-year-old maker of safes that is now an industry leader in ATMs and touch-screen voting machines.

Elections experts say IBM's past increasingly looks like Diebold's future -- bad news, paltry profit and an unforgiving elections market drag down a corporation's reputation and stock price until the choice is obvious: Cut loose the voting business.

"It's sounding more and more like IBM," said Kimball Brace, president of Election Data Services, a voting and elections consultant in Washington, D.C.

By most indicators, Diebold Inc.'s aggressive push into voting computers took a faster turn for the worse than IBM ever experienced. But Diebold is staying in the elections business because, analysts say, the market and the potential profits are vastly more alluring than the market IBM faced in the late 1960s.

By 2006, Diebold executives estimate their voting subsidiary will control 48 percent of the U.S. elections market, its products touching voters at every step from registration to vote tabulation. Getting there could be an uphill battle.

In that last 11 months, Diebold lost control of its proprietary voting software and the secret that it contained the same password -- "111" -- and encryption keys that allow administrator-level access to tens of thousands of touch screens nationwide.

Since then, all four public studies of Diebold's e-voting system panned its security, worrying Maryland officials enough that they withheld almost half of one report as a state secret. In California, Diebold was found to have supplied uncertified and, in some cases never tested, software in all 17 of its then-clients.

In the March primary, Diebold touch screens performed almost flawlessly, with less than one percent failure rates. But thousands of morning voters in Diebold's two largest California counties couldn't use them because another Diebold device broke down in massive numbers.

In Alameda and San Diego counties, elections officials have found that the company's core vote-tabulating software inexplicably gives thousands of votes to the wrong candidates.

Unlike IBM Votomatic in the late 1960s, Diebold Elections Systems Inc. is in its second year of declining revenue and will be fortunate to break even in 2004. It faces several lawsuits, a criminal investigation, huge costs to upgrade or replace its electronic voting machines and eroded trust among state and some local elections officials, at least in California.

Its elections division, headquartered in McKinney, Texas, is producing less than 3 percent of Diebold Inc.'s income. Yet the negative publicity generated by its headlong rush for market share and the banning of its latest touch-screen machines in California sent Diebold Inc.'s stock price tumbling 17 percent since November, draining almost $345 million out of its market capital.

Yet Diebold executives and some industry analysts are upbeat about Diebold's future in the elections business.

"We stepped out in the open here, and we've taken a lot of incoming (criticism)," Diebold CEO Walden O'Dell told investors recently. "But let me tell you, we're doing the right thing, we're working hard to do the right thing. And when the rhetoric comes down and the country decides to continue moving forward after the November election, I'm sure that Diebold will play a very, very important and a very, very successful role in helping America vote securely and accurately."

About $37 million in California sales are in jeopardy. Diebold is renegotiating to save its largest contract, for $31 million with San Diego County, but it lost a $4.1 million contract in Solano County last week, the first U.S. county to abandon the firm.

"I don't trust Diebold, and I don't like the way they do business," said Solano County Supervisor Barbara Kondylis.

Alameda County is leaning toward riding out the November election with Diebold but also hasn't ruled out suing the firm and signing a competitor.

"They're still in improvement mode," said Alameda County Counsel Richard Winnie. "Our main focus is to get our contractor to perform."

In Ohio, Diebold's home state, 31 counties were encouraged by state officials to buy Diebold touch-screen machines for November, but at least 22 are opting to wait instead.

With November looming, sales have almost stopped, and Diebold mostly faces expenses for the rest of the year. But stock analysts say they expect Diebold to keep selling electronic voting machines, both to repair its reputation and make money, as the dominant player in an expanding market.

"I think there's still a lot of business to be had," said Kartik Mehta, a stock analyst at Midwest Research.

Donald Taylor, manager of the Franklin Rising Dividends Fund, one of the top holders of Diebold stock, says the voting machine business is a disappointment, and Diebold should get out of it. His firm, Franklin Resources Inc., reduced its Diebold holdings by nearly 700,000 shares this year.

By dollars alone, the elections market has never been more flush.

The fledgling U.S. Election Assistance Commission is about to churn already frenzied waters by releasing $2.3 billion to states for purchasing new voting systems.

The money is the largest chunk yet of $3.9 billion from the 2002 Help American Vote Act, or HAVA, and about $1.5 billion is solely for vote-tabulation systems such as Diebold's.

By January 2007, HAVA requires at least one handicapped-accessible voting machine, such as the touch-screens that Diebold makes, in all of the hundreds of thousands of U.S. polling places.

With very low rates of human and machine error -- to the extent that computer error can be ascertained without an independent, backup record -- some form of electronic voting is likely to be a staple of U.S. elections for the foreseeable future.

But selling voting computers is only part of the reason Diebold will stay in voting systems. The other major reason is a plan to supply every electronic piece of elections, from the moment a voter registers to recording and counting the ballots.

Despite declining sales of touch screens in 2003 and 2004, Diebold Election Systems' revenue from managing registration and running elections is climbing and expected to ramp up in coming years, as states face a federal requirement to modernize their voter-registration systems.

Diebold already has purchased Data Information Management Systems, one of two firms that have a dominant role in managing voter-registration lists in California and other states.

"The long-term goal here is to introduce a seamless voting solution, all the way from voter registration to (vote) tabulation," said Tom Swidarski, Diebold senior vice president for strategic development.

Regardless of Diebold's future, a host of competitors -- from voting-systems giant Election Systems & Software and Oakland-based Sequoia Voting Systems to a dozen smaller e-voting firms -- face a market reshaped by Diebold's experience.

No voting vendor has lent more fuel to demands for a printed backup copy of electronic ballots for voters to check and verify their choices were recorded accurately, and that debate will continue, with or without Diebold.

"These types of questions are going to remain," said Rishi Sood, a principal analyst at Gartner, a technology research firm. "All of these issues about paper trail and security apply to all of them. And the mind-set of the vendors is starting to change."

Contact Ian Hoffman at ihoffman@angnewspapers.com

©2004 by MediaNews Group, Inc. and ANG Newspapers

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