Anti-spam market braces for shakeout

With the onslaught of vendors jumping on the spam-fighting bandwagon, choosing the right anti-spam product can be almost as tedious as wading through an in-box of junk mail. But signs are pointing to a shakeout in the anti-spam market over the next year or two that will eliminate many of today's players.

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By most counts there are about 70 anti-spam vendors, although The Radicati Group pins the number of companies selling any type of spam filter at about 300. As with other hot technology categories before it, the anti-spam market will shake down to a few significant players, as smaller companies that cannot distinguish their products are gobbled up or perish, observers say. This should come as good news to IT managers who will have fewer options to wade through and can look forward to building relationships with large, sustainable vendors.

As evidence of the frenzy, Meta Group analyst Matt Cain says at least $150 million of venture capital has been invested in anti-spam companies over the past six months. "There will be a heck of a lot of dissatisfied [venture capitalists] because not all of these companies will make it," he says. "We see the market expanding through 2004 and expect in 2005 there will be a severe contraction and market consolidation characterized by vendor failure and very aggressive merger and acquisition activity."

In the short term, pricing for anti-spam products will decline as competition remains strong, Cain continues, but once market players establish themselves, companies can expect to pay more. "Over the next two years, once we see consolidation down to 10, then maybe five vendors, we expect to see prices escalate. However, the products will mature and functionality will expand, so you'll be paying more but you'll be getting more," he says.

No one expects the market to contract just yet, although signs of consolidation are beginning to emerge. E-mail services company IronPort last week announced the acquisition of anti-spam community and blacklist maintainer SpamCop, with plans to integrate SpamCop's feedback on spammers into its e-mail rating system. Other moves include anti-virus vendor Sophos' acquisition of spam filter maker ActiveState and security company Network Associates' purchase of anti-spam software developer Deersoft.

Nonetheless, with only about 30 percent of all corporations employing spam filters today, there are still plenty of opportunities for vendors. "The market is so big that lots of [anti-spam] companies are doing well," says Doug Carlisle, managing director of Menlo Ventures, a venture capital firm that has investments in anti-spam players IronPort and MailFrontier. "But we will end up with around 10 companies that provide functionality at the high and low end, and that can differentiate their products and services."

So many vendors are rushing to provide spam filters because corporations recently have realized just how strategic e-mail communication is to their organization and are looking for ways to protect it. "Business is undergoing a huge transformation from phone-based conversations to [Simple Mail Transfer Protocol]-based conversations, be it through e-mail or attached messages," Carlisle says. "Big companies are waking up around the world saying 'we run our business on SMTP' but didn't really realize that they don't have an industrial-strength solution in place."

At the same time, companies do not want to tie all their e-mail security products together themselves, so anti-spam vendors will be forced to expand into other areas such as anti-virus protection - as many have - and content filtering and policy management, while e-mail security companies add spam filters to their offerings.

"Secure messaging is still a highly fragmented market . . . but I think all vendors recognize what were once products and became markets will turn into features, especially as customers require more integration," says Chris Christiansen, an analyst at IDC. "Quite a few smaller vendors who are highly specialized will be pushed to be sold or merge. It's quite clear . . . many of these [larger] companies could go public in the near future."

While it's evident the anti-spam market will consolidate, what is not as obvious is which vendors will survive the shakeout. Large, public security companies such as Network Associates and Symantec are marching into the anti-spam market and are natural dominators because of their success in related areas such as anti-virus. Still, a few companies that have dedicated themselves to spam protection, such as Brightmail and Postini, stand a chance because of their anti-spam expertise.

"Over the next two years some of these [anti-spam] companies will clearly get traction, and either those companies will go public and get currency, or be acquired and have the currency of [the acquiring company]," says Bud Colligan, a partner with venture capital firm Accel Partners, which invested in Brightmail five years ago. "The other companies won't scale as rapidly, and their investors will start saying 'There's no place for a ninth or 10th player in this market.' Everyone will try to find a dance partner before the music stops."

Until then, IT departments will continue to have to sort out the anti-spam frenzy on their own. "It's going to be a lot of hard work for IT managers for the next two or three years, as they'll be bombarded with possible solutions," says Sara Radicati, an analyst at The Radicati Group.