Rainbow Technologies’ Price Rises as Software Anti-Piracy Device Catches On

Rainbow Technologies, a small Irvine company that makes a computer software anti-piracy device, has seen its stock price shoot up from $4 a share in late November to $6.25 at the close of trading Friday.

Jeffrey Foster, a broker with Van Kasper & Co. in San Francisco, said that no single event can explain the recent upward movement of Rainbow. But he said the company’s lone product, a hardware “key” that plugs into the back of a PC, is gaining wider recognition.

“The renewed interest, in my opinion, can be explained by the realization that although Rainbow is a small company, they are definitely on track for their revenue projections and by the increased acceptance in the software market of their product,” Foster said.

Rainbow, which went public in September, 1987, has enjoyed mushrooming sales and profits since the company was created 4 years ago to develop and market its product, called the SentinelPro.

In 1986, Rainbow had sales of $1.1 million. In 1987, sales jumped to $2.8 million, and in 1988, analysts and the company expect sales to hit $6 million to $7 million. The company estimated it will have sales of $12 million to $15 million the following year.

Net income rose from $113,000 in 1986 to $370,000 in 1987. For the first 9 months of 1988, the company has earned $714,349.

A multimillion-dollar contract signed in July with Microsoft, the country’s largest software maker, has been a major boost to sales and profits this year.

Microsoft plans to incorporate the device in copies of its MS-DOS software destined for foreign markets, where large-scale software pirating operations have become a particular problem for American software manufacturers. MS-DOS is the operating system used to control the basic functions of IBM and IBM-compatible personal computers.

So far, the device is being included in software packages sold to Middle Eastern markets. The device adds about $25 to the cost of a software package.

“Microsoft wishes to grow in foreign markets; however, we must demonstrate that we are able to protect our investment in those markets,” Microsoft’s Richard Hevron said in a July issue of Reseller News, a computer industry newsletter.

“It is useless to dump thousands and thousands of dollars into research only to lose it all to software piracy,” said Hevron, an international development manager for Microsoft.

The contract marked a big departure for Rainbow. Previously, most of its business had been for specialized, high-cost software, such as engineering packages, which account for 30% of Rainbow sales.

Because the sales volume of such products is low and prices are high, any unauthorized copies of programs can be fatal to profits.

A smaller but still hefty proportion of sales comes from large corporations that have designed their own internal software systems, said Linda Dahl, director of marketing for Rainbow.

These companies, which include General Electric, McDonald’s and Coca-Cola, do not want their employees walking off with copies of programs.

To move into the European and Middle Eastern market, Rainbow opened a sales office in London earlier this year. Foster said the company can expect to see “tremendous growth” in its foreign business and its business with American software companies that sell overseas.

The big question for Rainbow is whether large U.S. software manufacturers will start buying the device for domestic use.

Unauthorized copying has become widespread among many consumer software packages. An earlier technique of copy protection involving codes embedded on floppy disks has been widely abandoned because of glitches when used with IBM-compatible machines.