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June 30, 2000 VOL. 29 NO. 25 | SEARCH ASIAWEEK

Cheryl Sheridan
Steve Chang, the head of Trend Micro, feels vindicated at last

A Shot in the Arm for the e-Doctor
The Love Bug wasn't bad for everyone. It's taken Steve Chang and his virus- busting software firm to new heights, after years of struggling to be noticed

It was just after 3 p.m. one early May afternoon when Trend Micro's Manila office received the e-mail alert. The Japan-based software firm keeps a large research and development office and a rapid deployment force of "virus busters" in the Philippine capital. Now it was being called on to do something about the cruelly deceptive "ILOVEYOU!" messages that were wiping out huge swathes of computer data around the world. Software engineers in Europe, Asia and the U.S. got to work immediately, and within 20 minutes produced a "bandage solution" that allowed infected networks and PCs to be restarted. Less than two hours later, the team had cracked the virus's code and sent customers a program to put an end to the most destructive round of computer germ warfare to date.

From his office in Taipei, where he spends much of his time, Trend Micro's Taiwanese founder, Steve Chang Ming-Jang, can't help but feel satisfied. His company has proven itself a force among the handful of firms who compete in the anti-virus software field - including big American names like Computer Associates, Network Associates', and Symantec, maker of Norton utilities. More than anything though, Chang feels vindicated. Five years ago, he virtually bet his company's future on a single prediction: that computer viruses would spread mainly through the Internet, not through shared diskettes or even local networks. "An anti-virus company must address the virus problem at the Internet gateway, whether it is through ISPs or large corporate e-mail servers," says Chang. Now more than ever, it seems clear he bet right. Analysts estimate the Love Bug helped boost Trend Micro's first quarter sales by at least 50%. Its stock gained 22% on Nasdaq within hours of the outbreak.

As the 46-year-old software engineer tells it, he got into the anti-virus business almost by accident. His first company, a small venture that made Chinese-language databases, was so crippled by software pirates that in 1988 he and his wife set up Trend Micro to produce anti-piracy software. Working from a garage outside Los Angeles, he developed P-Lock, an anti-piracy program for Macintosh computers, which he eventually sold to a California company called Rainbow Technology for $125,000.

About that time, he realized that viruses were getting to be really infectious. "I knew PCs were becoming popular and I just multiplied in my head how much money I could make if I could cure 1% of the PCs that had a virus." With the Rainbow proceeds, he set about refocusing Trend Micro. He collected viruses - of which he now has 30,000 locked in a vault in Taiwan - and came up with a vaccine called PC-cillin. Today, it's one of the most popular desktop anti-virus programs. But back in 1989, he couldn't get anyone to pay attention to it. "I was just a software engineer and the U.S. is a huge market. You need a brand name, a distribution network and after-sales technical support," he says.

By 1991, the Rainbow money had run out, and Chang was down to his last $2,500. The era of free-flowing venture capital was still years away. No one in the U.S. wanted to fund a Taiwanese guy they had never heard of. But Chang kept knocking on doors and eventually got a break when he pitched an anti-virus program for local area networks to chipmaker Intel, which was diversifying into network management then. Intel agreed to take exclusive U.S. and European rights to the product for five years. In return, Chang got 17% royalties, which provided a steady revenue stream of about $4 million a year. "Everyone tells me I signed away the U.S. and Europe rights for almost nothing," he says. "But at that time I didn't even have money for a lawyer to go over the fine print. I sat in the Intel office and signed and signed many papers without reading anything."

The U.S. and Europe were off limits but Chang was still allowed to sell in Asia. In 1993, he decided that's where he needed to be. The biggest computer market was Japan, so he and his wife moved there. But once again, breaking in was tough. "We had two problems," recalls Chang. "First we couldn't hire the best talent because few top-class graduates wanted to work for a foreign company, irrespective of how good the pay or perks might be. Secondly, the market was still not mature." There was also a huge language barrier: Chang didn't speak Japanese. He had to pitch his products to businesses and retailers by communicating in written kanji characters. "I would scribble something on a piece of paper and the Japanese executives would shake their heads. I didn't understand whether that was good or bad or they just didn't understand what I was saying," he recalls.

But the tide turned when he met Son Masayoshi, the founder of Softbank, the leading distributor of packaged software in Japan. Son spoke English and encouraged Chang, especially once the Internet began to catch on in the mid-'90s. Chang's wife wrote an ad campaign, Trend Micro began to get customers, and the two families became friends. "Son was always talking about technology, the Internet, the new paradigm and how the world was changing," says Chang. "There were very few people in Japan who could talk like that."

In 1996, Softbank bought a 35% stake in Trend Micro through a $35 million capital injection. It also subscribed to a subsequent $35-million rights issue. Son urged Chang to take Trend Micro public on Tokyo's over-the-counter market and the company quickly became one of the top three OTC stocks by market capitalization. The listing diluted Softbank's stake, but until last year the Japanese company still held 25% of Trend Micro. Since then, Softbank has gradually unloaded all of its shares, realizing capital gains of nearly $1.3 billion. "I am happy that he made some money by helping me," says Chang.

With the exclusive Intel contract now expired, a solid reputation in Asia and a market cap of $10 billion, Trend Micro is taking on the rest of the world. For the past 18 months, it has been distributing its products in the U.S. and Europe and today commands more than 25% of the global anti-virus software market. High-end customers like Sprint, PSINet, BT, Cable & Wireless and Singapore Telecom have helped make Trend Micro's net margin 50% higher than that of rival Symantec, which targets the retail segment. Competitors still have stronger brand names and larger distribution networks in many markets, but Chang hopes to counter all that with a specialist strategy. "They are [like] department stores selling, among other things, anti-virus software. And within that range they have an Internet security product," he explains. "I want to be the Kentucky Fried Chicken of the Internet anti-virus business. We want to have a very focused - or as Kentucky people will tell you - 'best of breed' anti-virus solution."

Chang predicts his vision will drive 80%-100% annual growth for Trend Micro in the next three years in North America and Europe. Analysts expect revenues to double from $127 million last year to $240 million next year. Beyond that, the company is already devising ways to protect mobile phones and personal digital assistants. And e-commerce security presents another area of potential expansion. If Trend Micro software is at the Internet gate stopping bugs, it can stop trespassers too. It seems as long as evil forces exist in the world - and who can imagine it any other way? - Steve Chang will have his hands full.

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