Troubled Encryption Vendor NeoScale Snapped Up

NeoScale, a Milpitas, Calif.-based developer of in-line data encryption appliances, in mid-November stopped selling maintenance contracts for its data encryption appliance, and by last week had stopped selling the appliance itself.

Former employees of NeoScale said the company's encryption appliance business started unraveling in mid-October when MTI Technology, a Tustin, Calif.-based storage solution provider, declared Chapter 11 bankruptcy, owing NeoScale about $800,000.

nCipher, a London, England-based developer of security and encryption key management technology with U.S. headquarters in Boston, on Tuesday said it acquired the remainder of NeoScale for $1.95 million. However, it did not acquire any of NeoScale's liabilities.

Richard Moulds, vice president of marketing and product management at nCipher, said that his company plans to re-open sales of the NeoScale CryptoStor encryption appliance and offer customer support. Moulds said that nCipher has a couple of months worth of inventory on hand, and is working with NeoScale's contract manufacturer to restart manufacturing.

Gordon Nyquist, a partner at Mercury Storage, a Southfield, Mich.-based solution provider who worked with NeoScale until the vendor closed its doors last month, was relieved to hear it had been acquired.

"You're a bearer of good tidings," Nyquist said when told by a CMP Channel reporter about the acquisition. "I'm relieved relieved that a suitor has been named, and I look forward to doing investigative work on the company."

nCipher's primary business is encryption key management. NeoScale also had a widely-accepted encryption key management technology. However, said Moulds, unlike NeoScale's focus on the storage industry, nCipher looks at managing encryption keys across the enterprise.

"Company's like NeoScale and Decru started with encryption and then moved into key management," he said. "We started with key management, and then moved into encryption."

NeoScale's primary competitor, Sunnyvale, Calif.-based Network Appliance, got into the business with the acquisition of Decru in June of 2005.

As a result, nCipher has no plans to continue working with NeoScale's encryption key management technology.

nCipher will sell the CryptoStor to customers who want to do in-line data encryption, and to help them and other customers to learn best practices for encryption. But over the long term, the future of NeoScale's encryption appliances will be increasingly uncertain, Moulds said.

"We partner with companies that build encryption into tape drives," he said. "We're not setting ourselves up to compete with drive vendors. Over time, all such devices will do encryption natively. In-line appliances arose because there was no other way to do it before. In-line appliances will go away, but that's three to five years away. Native encryption is still immature. But customers are adopting key management. They want choices about how to encrypt data."

Even though Mercury Storage has a good business selling the CryptoStor appliances, Nyquist said Moulds' prediction about the future of in-line encryption appliances is logical. "We're all about data availability, and data safekeeping," he said. "I could see this touching various platforms."

Nyquist said he is also looking forward to talking to nCipher about partnering with the vendor, a hope that falls in line with the vendor's plans to expand its U.S. channels using NeoScale's solution provider base.

Currently, all nCipher sales in Asia go through indirect channels, as do most of its European sales. However, that number drops to between 10 percent and 15 percent, Moulds said.

"The acquisition of NeoScale is also a chance to get into the U.S. channel," he said. "We have started reaching out to U.S. channel partners. Many have a good pipeline for the product, and have been waiting to see who will take over."

With the acquisition, nCipher has brought about 10 of NeoScale's employees back to work in their Milpitas office, which nCipher plans to continue using. The company plans to continue development of the CryptoStor appliance, including integrating it with nCipher's other products, Moulds said. nCipher will also look at bringing out a higher-performance version in the near future, he said.