Testimony from June 15, 1999

Prepared Testimony from William Larson, Network Associates

Before I begin, I would also like to thank the members of the Committee for the great work of the last
Congress on behalf of the high tech industry. Your efforts in the areas of H1B visas, intellectual property
protection, and uniform standards for securities litigation are vital to our industry, and are greatly
appreciated.

Network Associates is a member of the Business Software Alliance (BSA), which represents the world's
leading software developers. I am in Washington today as part BSA's 4th annual CEO Forum, during
which we will meet with Congressional leaders and the Administration to discuss policy issues of
particular importance to the U.S. software industry. Tomorrow we will release the results of a new study
commissioned by the BSA detailing our industry's impressive contributions to the economy, particularly in
terms of the number of high-skilled, high wage jobs we create in the United States.

BSA's policy agenda this year focuses on promoting the continued, rapid growth of electronic commerce;
ensuring strong copyright protection, both in the United States and internationally; creating increased
opportunities through trade liberalization; and a number of related priorities currently before the Congress,
including the need for strong American encryption technology; solutions to resolve the Y2K challenge;
and ensuring America's leadership role in innovation.

Many of you may not be familiar with the name of Network Associates, but you are familiar with our
products. Network Associates makes McAfee VirusScan, Pretty Good Privacy encryption, Gauntlet
firewalls, and the CyberCop line of intrusion detection products. Many of these products are being used
right now in your offices here on Capitol Hill. We are the third largest software company in the world,
and the world's largest maker of security software. Last year we had revenues totaling one billion dollars,
and we employ over 3000 people in 44 locations around the globe.

Today my colleagues and I are talking about the key role that software companies play in the U.S.
economy. The facts are hard to dispute. Our industry creates jobs: better, higher paying jobs than other
manufacturers. And, we are continuing to grow and to employ. Our industry now employs over 800,000
people, and that employment is growing at an annual rate of over 13 percent- compared to a total private
industry rate of 2.5 percent. At this rate, there will be 1.3 million workers in the software industry by the
year 2008.The U.S. software industry is dominant globally. Our industry alone created a $13 billion trade
surplus in 1997. However, in one very important sector- security software -- that dominance is threatened
by misguided U.S. policies.

The security software market is booming, exceeding 50 percent (that's five-zero) growth annually. In
1999, the non-U.S, market for security software is projected to be over $1 billion.
This growth in a relatively new market sector emphasizes the fact that security is an essential element to
the continued development of the information infrastructure and to the growth of e-commerce, and
potential customers worldwide are recognizing this. Without robust security systems, consumers and
businesses will not develop the trust necessary for the transition from traditional commercial activities to
electronic commerce and online communication. Our customers, including financial institutions,
manufacturers, governments and other organizations have recognized this reality, and are now procuring
the technology necessary to ensure that their networks are secure. This technology includes firewalls,
virtual private networks (VPNs), intrusion detection systems, and desktop encryption. To promote the
U.S. software industry's lead in these important technologies, it is essential that U.S. export controls on
encryption products be reevaluated. Here are some real life examples of how U.S. companies like
Network Associates are losing sales of these key products to foreign competitors due to U.S. export
controls.

- Network Associates had secured a deal with Chrysler Corporation for desktop encryption products prior
to the acquisition of Chrysler by Daimler Benz. U.S. laws allow more liberal exports to foreign offices of
U.S.-owned companies, but not to foreign-owned companies. Daimler- Chrysler is now looking to
German company Utimaco, which can supply encryption to all its offices, and its suppliers worldwide.
This is a seven-figure deal that could be lost.

- Network Associates is in competition with Checkpoint - an Israeli software company - for a contract
worth about half a million dollars with the Orient Overseas Container Line Ltd. (Hong Kong). However,
the customer is looking for a strong encryption VPN, which we cannot provide due to export regulations.
For these and other international customers, choosing a security solution is somewhat like installing
plumbing in a building under construction: once customers select foreign security systems and build
networks around them, there will be no opportunity for U.S. companies to regain that market leadership.
The time to act is now, as companies and organizations are building and rebuilding their networks to
enable online communications and e-commerce.

In our surveys of the market, we have found over 750 international products that compete directly with
U.S. security products. This number is growing because U.S. companies are being forced to cede the
market to these competitors.I would like to leave the Committee with one thought. We have discussed
how important the software industry is to the U.S. economy, and how important security software is to
the growth of e-commerce and the information infrastructure. Wouldn't it be better for all of us if U.S.
companies, such as those represented at this table, be the dominant force in the international market for
these key technologies? Or is it preferable for U.S. companies to cede this strategic market to their foreign
competitors, leaving U.S. companies and government agencies reliant upon foreign-made encryption
products to meet their security needs?

I thank the Committee again for the opportunity to come before you today, and I look forward to your
questions.