Diebold Learns What Edison Knew: Voting Machine Sales Are Tough

Sept. 1 (Bloomberg) Diebold Inc. got off to a fast start in the voting machine industry. After almost 150 years of making safes, bank vaults, jailhouse doors and, more recently, automated teller machines, Diebold bought Global Election Systems Inc. and its AccuVote line of computerized voting terminals in 2002.

In a little more than three months, Diebold snared the biggest U.S. voting machine contract ever: a $54 million deal with the state of Georgia. ``It was successful beyond our wildest dreams, initially,'' says Diebold Chief Executive Officer Walden O'Dell, 59.

As the 2004 elections near, the euphoria has faded. Computer security experts at Johns Hopkins University in Baltimore and Rice University in Houston say Diebold's touch-screen voting machines are vulnerable to vote rigging; security concerns and operating flaws have led to a ban on their use in November in parts of California and Ohio.

Diebold's election system sales are headed for a second straight , to a company forecast of $75 million to $85 million, from $100 million in 2003 and $111 million in 2002.

Diebold, based in North Canton, Ohio, learned that it's tough in the U.S. to profit from elections a market that has bedeviled entrepreneurs since Thomas Edison tinkered with vote- counting machinery in the 1860s. ``We walked into a minefield,'' O'Dell says.

After mangled punch-card ballots from outmoded voting machines in Florida threw the 2000 U.S. presidential election into chaos, Congress planned to spend almost $4 billion for election improvements.

Dell and Microsoft

Some of the biggest U.S. companies were among dozens angling for new products, partners or investments: Unisys Corp. had forged a voting machine partnership with Dell Inc. and Microsoft Corp. Cisco Systems Inc. and Compaq Computer Corp. invested in the development of an Internet voting system.

Yet Diebold, a Standard & Poor's Midcap 400 Index company with an often-mispronounced name (DEE-bold, not DIE-bold) and about $2 billion of annual sales, had gotten a jump on them all.

Diebold is still waiting to be paid $38 million by San Diego and two other California counties that bought touch-screen voting machines, according to an August company filing with the U.S. Securities and Exchange Commission.

Those bills may have to be written off after California Secretary of State Kevin Shelley barred the use of Diebold machines in the November balloting, the filing says.

In the March primary, about a third of 1,600 polling places in San Diego County opened late because batteries in Diebold machines ran low, Shelley said in a news release.

Wrong Ballots

Diebold voting machines in Orange and Alameda counties caused hundreds of voters to get the wrong ballots because so- called smart cards, which are composed of computer chips and software, were coded incorrectly, Shelley said.

Ohio officials have also sidelined Diebold's machines in some counties after at least five private and government- sponsored studies raised questions about whether software in its touch-screen voting systems can be rigged to fix outcomes.

More than 20 states share a concern voiced by election officials in California and Ohio: that touch-screen voting machines work without any paper or ballot receipt, leaving no tangible trail for an audit or recount after an election.

The states say they might require paper trails for all voting machines. Shelley withdrew state certification of touch- screen systems by all manufacturers pending security upgrades, and he sought a state criminal investigation of whether Diebold used uncertified software on some of its machines. The company denies wrongdoing.

Shares Decline

Diebold shares have fallen 9.2 percent this year, compared with a 0.1 percent gain for the S&P Midcap 400. The decline came even though ATM sales and services, which account for 70 percent of Diebold's revenue, rose 16 percent during the first half of 2004.

Share prices didn't fall because of the company's financial performance, says Don Taylor, who manages $1.8 billion, including 524,000 Diebold shares, in the Franklin Rising Dividends Fund in Fort Lee, New Jersey. Investors are selling Diebold shares because the company makes touch-screen voting machines, he says.

``The voting machine business has been a disappointment since they got into it,'' Taylor says. ``I'd like to see them sell the business, personally, though I highly doubt that's going to happen.''

`A Crisis'

O'Dell, known as Wally, says he has no intention of selling the unit. He says he wants to help the U.S. solve a serious problem, not to help mischief makers fix elections. ``The country had a crisis,'' O'Dell says, sporting a navy blue tie spotted with U.S. flags.

``It was instantly apparent to me that we could help, that there was going to be money spent on the problem and that it was synergistic with what we were doing,'' he says. Diebold plans to stick with the voting machine unit regardless of profit, O'Dell says.

``They got more than they bargained for,'' says Kimball Brace, president of Election Data Services Inc., a Washington, D.C.-based consultant on voting equipment. ``A lot of people suddenly came into this market thinking, `Hey, let's get some of all this federal money they're going to spend.' And they found out this is a very demanding business.''

Profits from a hoped-for boom in voting machine sales after the 2000 election crisis have been elusive at other companies as well.

No U.S. Sales

De La Rue Plc, which paid $23 million in May 2002 for 85 percent of Sequoia Voting Systems Inc. of Oakland, California, reported that its election unit lost more than $8 million in the two years ended on March 27. Unisys and its partners haven't sold any voting machines in the U.S., says Bill Batcher, director of election services at Blue Bell, Pennsylvania-based Unisys.

AccuPoll Holding Corp., based in Tustin, California, is a startup that's designing an electronic balloting machine. The company has tallied no revenue from voting machines, according to its SEC filings.

Diebold's woes started, it turns out, because of the record- setting Georgia contract. The company made a copy of its voting machine software publicly accessible on an Internet site so technicians in Georgia could get Diebold machines up and running for the 2002 election.

The software was reviewed by computer security experts at Johns Hopkins and Rice, including a team that had made headlines in 2001 by cracking the encryption method that protects wireless computer networks.

Fraud Is Easier

Aviel Rubin, 36, technical director of Johns Hopkins's Information Security Institute, says computerized voting presents security threats more significant than the traditional notion of a cigar-chomping ward boss stuffing a ballot box.

While mechanical voting machines, in use for more than a century, leave no paper record either, rigging the results means changing vote counts on each machine. When computers do the counting, it raises the prospect that malicious software may be able to simultaneously manipulate totals from many terminals.

``If someone knows what they're doing, fraud's a lot easier with computerized voting machines,'' Rubin says. ``It's possible to program a machine to cheat and not leave behind any evidence.''

Rubin, a self-described sports nut who says he spends as much time as he can at the pool table in his living room, produced a report citing what he called basic security shortcomings with Diebold touch-screen machines.

Password Quirk

One was that the password for access by election workers was permanently set at 1111 on every Diebold machine, a quirk that the company has fixed.

While based on the same technology as ATMs, touch-screen voting machines present different security issues because banking transactions produce detailed records for banks and their customers describing what's happened. Voting, in contrast, is anonymous, leaving nothing that can identify voters or confirm their intentions, Rubin says.

Politics got into the volatile mix because O'Dell is a Republican Pioneer, meaning he has raised at least $100,000 for President George W. Bush. In a fund-raising letter he sent in August 2003, O'Dell said he was ``committed to helping Ohio deliver its electoral votes to the president.''

O'Dell says he should have been more aware of potential objections to his political activities, which predate his company's entry into voting machines. ``I might have been a little slow in realizing that I needed to withdraw from that,'' he says.

`Sorry Diebold'

O'Dell has sworn off any partisan contributions and fund raising, and Diebold's board has imposed restrictions on political activities by top executives.

Diebold which built its company name on trust, making vaults for U.S. Federal Reserve banks and the security system that protects the Smithsonian Institution's 45-carat Hope diamond faces questions from former Vermont Governor Howard Dean's Democracy for America group about whether its voting machines could be rigged to favor the CEO's political pals.

Entering the word Diebold on Google in August brought up a paid advertising link to that group.

``The head of the largest e-voting machine company who is a major contributor to George Bush and has promised to deliver Ohio to him asks that we just trust him,'' the Democracy for America Web page says. ``Sorry Diebold. Americans want to count every vote.''

Rubin says he hasn't found evidence that Diebold's software was designed to manipulate elections only that the security precautions are lax enough to create vulnerabilities.

`Incompetence and Not Malice'

``All I've ever talked about is capabilities, not that anybody's actually tried to do it,'' Rubin says. ``It's our impression we were dealing with incompetence and not malice.''

O'Dell says that his company isn't incompetent and that Rubin focused too much attention on hypothetical weaknesses that could be exploited with unhindered access to voting computers.

He says his critics don't take into account the strict ballot security measures that election authorities have used for decades to protect ballot boxes from unauthorized people.

Because touch-screen voting machines don't leave a paper trail, voters must trust that the terminal and its software have correctly recorded their vote. With Democrats still seething over the disputed vote that brought Bush the presidency four years ago, trust in a voting machine has been a tough sell.

In the 2000 presidential election, Democrat Al Gore won the popular vote by about 325,000 votes out of 103 million cast, but the election was deadlocked for 36 days as Florida counties attempted to recount 60,000 ballots.

ComputerAteMyVote.org

Finally, the U.S. Supreme Court voted 5-4 to stop the Florida recount, allowing Bush to win Florida and the presidency.

``There definitely is this fear that people are being disenfranchised,'' says Ben Cohen, 53, co-founder of South Burlington, Vermont-based ice cream company Ben & Jerry's Homemade Inc. and an activist for liberal causes.

Cohen started the ComputerAteMyVote.org Web site to raise money for a campaign to require electronic voting machines to produce paper receipts.

``What they're trying to foist on the public in terms of voting machines, it's absurd,'' Cohen says. ``This technology is essentially the same as an ATM, and they wouldn't do a transaction on an ATM without a receipt. In business, the first rule is that there has to be an auditable paper trail.''

Paper Backstop

Cohen doesn't accuse Diebold of trying to rig elections. He says the campaign for a paper backstop to computer voting machines would be needed regardless of what company makes the machines. ``It's been one of the more popular issues that we've embarked on,'' he says. ``People understand it very well.''

Before the Florida debacle, voting machines were a niche market controlled by small companies.

In 1997, competition for voting machines had dwindled to the point that the U.S. Justice Department voiced antitrust concerns when American Information Systems Inc. of Omaha, Nebraska, sought to buy the voting machine assets of Dallas-based BRC Holdings Inc. for about $47 million a move that would have left only two companies making vote-counting scanners that read marks on ballots.

After a yearlong investigation, the government withdrew objections when BRC agreed to preserve more competition by licensing the rights to an optical-scan voting system to Sequoia, then a subsidiary of Ireland's Jefferson Smurfit Group Plc.

American Information changed its name to Election Systems & Software Inc., known as ES&S.

Less Than $200 Million

Going into the 2000 election, the field's other top competitors were Global Election Systems in McKinney, Texas; Hart InterCivic Inc. of Austin, Texas; and Sequoia, in a market estimated by Massachusetts Institute of Technology political science professor Stephen Ansolabehere to be valued at less than $200 million a year.

The market for voting machines is limited because government election agencies are the only buyers and they may go decades between purchases. When they do buy, contracts go to low bidders, and margins are slim.

Voting machines are dusted off for use a couple of times a year at most; like streetlights and storm sewers, they're utilities that are noticed only when they don't work right.

After the 2000 election, the prospect of a surge in voting machine purchases to replace punch-card devices and even more outdated lever-operated mechanical voting booths drew enthusiasm from companies and investors.

Share-Price Surges

``We're looking at probably a multibillion-dollar market,'' Steve Hagan, then Unisys's elections practice director, said on Jan. 11, 2001, when the company announced its alliance with Dell and Microsoft to market voting services. That day, Unisys shares surged 14.4 percent to $17.38, Dell jumped 7 percent and Microsoft rose 4 percent.

In an industry in which Global Election Systems, the biggest stand-alone public company, had a market value of less than $25 million, the Jan. 11 gains added almost $16 billion to the three companies' combined market capitalization.

Hamilton, Bermuda-based Accenture Ltd., formerly known as Andersen Consulting, created an election unit and won a $22 million contract to run a U.S. Defense Department pilot program on Internet voting by armed-service members stationed abroad.

After Rubin led a group that produced a report questioning the security of Internet voting, the Pentagon canceled Accenture's pilot program last year.

Cisco and Compaq were among investors in Votehere.net Inc., another company targeting the Internet-voting future. De La Rue, a British printer of bank notes, bought its Sequoia stake. Maximus Inc., a consulting company in Reston, Virginia, was hired to train poll workers on voting machines made by Hart InterCivic.

`Business is Horrible'

Entrepreneurs were drawn to the business, too. Western International Pizza Inc., an inactive shell company, became AccuPoll when former Electronic Data Systems Corp. employees took it over in 2002.

This year, Ludlum Construction Co. of Palm City, Florida, became Vote Power Corp. to pursue election fortune.

Large and small, companies looking for voting machine profits discovered what industry predecessors had learned the hard way over more than 100 years.

``The public-sector voting business is horrible,'' says Dale Miller, who in 1998 co-founded an Internet voting enterprise in Bothell, Washington, known as EBallot.net Inc. ``It's low margin. It's really a fractured market. It's highly competitive.''

After several name changes, EBallot.net has morphed into Election Trust LLC, which sells balloting services for union and private votes. ``It's just very hard to make money on public elections,'' Miller says.

Thomas Edison's Patent

The notion of automating voting machines goes back to at least Oct. 13, 1868, when 21-year-old Boston telegraph operator Thomas Edison signed a patent application for a battery-operated electrographic vote recorder that instantaneously tallied votes.

When patent No. 90,646 was granted, it would be the first of 1,093 U.S. patents for the father of the phonograph and the light bulb.

For all of Edison's technical brilliance, the vote counter stymied him in a way that haunts some voting machine makers to this day: He couldn't profit from it. Edison envisioned selling the device to Congress and state legislatures to end tedious roll- call votes.

Efficiency, he learned, was the last thing politicians wanted: Roll calls were often designed to stall while one side twisted arms or negotiated compromises. Edison's total vote counter sales: zero.

Commercial Failure

The commercial failure left such an impression on Edison that it guided the rest of his career, the inventor told Success magazine in 1898. ``It taught me something: to be sure of the practical need of, and demand for, a machine before expending time and energy on it,'' he said.

More than a century later, Cisco Systems Chief Executive Officer John Chambers, during a January 2000 speech, said he saw promise in adapting new technologies to elections.

``In the year 2004, the next presidential campaign after this one, you will find, in my opinion, the vast majority of states will already have Internet voting,'' Chambers predicted during a Cisco-sponsored seminar on the Web and democracy.

After the Diebold setbacks and concerns about computer unreliability, the number of U.S. citizens who will cast ballots via the Web in November's presidential vote is zero.

Ballot boxes remain behind the technological times. The word ballot comes from the Italian ballotta, or small ball, recalling a practice of voting with different-colored spheres, including the dreaded black ball, which was a no vote. By the 19th century, paper ballots were in use.

Voting the Ticket

Until the practice of using government-printed ballots listing all candidates reached North America from Australia in the 1880s, U.S. voters wrote the names of preferred candidates on slips of paper.

They also used tickets handed out by political parties to let people vote a so-called straight ticket, for only one party's nominees.

The industrial age introduced mechanical voting machines. Those are the booths in which voters click levers to make their ions. After New York State amended its constitution in the 1890s to permit the debut of the lever-action machines, faith in new technology helped drive their acceptance.

``Should the tally of voters who entered the booth kept by the election inspectors and poll clerks not agree with the machine, the conclusion would be that fallible man was mistaken, and that the machine's record was accurate,'' Scientific American magazine reported on Nov. 24, 1894.

Punch-Card Ballots

Computers came onto the scene in the 1960s, after Joseph Harris, a political science at the University of California in Berkeley, came up with the idea of a voting machine that put holes in punch-card ballots that could be counted automatically.

The Harris Votomatic was first used in 1964 in California, Georgia and Oregon, according to a 1980 oral history interview with Harris, who died in 1985. International Business Machines Corp., which developed the punch card for other computer uses, bought the Votomatic company and stayed in the field only briefly.

It sold the rights in 1969 because voting machine makers were inherently targets of controversy and complaint, Harris said. ``All candidates believe that they are going to win, and if a new system is tried out, they will explain their failure to be elected by saying it was because the machine failed to function properly,'' he said.

Hit Both Buttons

The specter of partisan politics hanging over voting machines has been a concern for other executives. Microsoft CEO Steve Ballmer was on stage during an April 2000 computer conference in Washington, D.C., watching a demonstration of a voting terminal for the disabled, when he remarked that the demonstrator needed to be mindful of which hypothetical ions were being made.

``You'd better hit the Democrat button, too, or we're going to look partisan,'' said Ballmer, 48.

In an inherently political business, there are enough connections and potential conflicts in the voting machine industry to keep the conspiracy-minded up all night.

Before he was first elected in 1996, U.S. Senator Chuck Hagel, 57, a Republican from Nebraska, was chairman of American Information Systems, which made voting machines used in Nebraska.

Bev Harris, a suburban Seattle activist against touch-screen voting systems, questions whether Hagel's ties are a conflict of interest. Lou Ann Linehan, Hagel's chief of staff, calls such concern unfounded.

Political Connections

Douglas Wilder, 73, the Democratic governor of Virginia from 1990 to 1994 and a candidate for his party's presidential nomination in 1992, is chairman of Diversified Dynamics Inc., which owns an electronic voting vendor, IPaper LLC. The company licensed its system to Northrop Grumman Corp. in 2002.

Maximus, which pursues voting contracts in partnership with Hart InterCivic, has a board that includes former Republican Governor Jim Thompson, 68, of Illinois and former Denver Mayor Wellington Webb, 63, a Democrat.

Tony Coelho, 62, a former U.S. representative from California who was a leader of Democrat Al Gore's 2000 presidential campaign organization, is a director at Election Services Corp. of New York. He's also on an advisory board, along with former Republican Secretary of Defense Frank Carlucci, for voting machine developer Populex Corp.

The prospect of profit in vote counting has lured enough people into the different aspects of the industry that potential conflicts have dogged efforts by states and computer experts to resolve questions about the security and accuracy of computer election equipment.

Mrs. O'Leary's Cow

Rubin, the Johns Hopkins computer scientist, had signed on to an advisory board for Votehere.net and had received stock options in the San Francisco company, which was marketing its own election software. Rubin, who says he forgot about the relationship, returned the options and resigned from the advisory group.

In Diebold's case, questions about the reliability of its voting machines have cut to the heart of a company whose main products are secure banking systems.

German immigrant Charles Diebold started the company in 1859 to make safes and bank vaults. Mrs. O'Leary's cow, the legendary source of the great Chicago fire of 1871, made Diebold's fortune. When the smoke cleared, 878 Diebold safes were recovered from the smoldering rubble with their contents intact.

Within a year, Diebold's sales were booming enough that he had to move into more spacious quarters near Canton, Ohio.

Jailhouse Doors

Profiting from protection, Diebold made jailhouse doors, timed vault locks and armor plating for military tanks. The man who epitomized incorruptibility retired federal agent Eliot Ness, leader of the Untouchables, who brought down Prohibition- era gangster Al Capone signed on as Diebold's chairman in 1944.

At the National Archives in Washington, Diebold vaults protect the U.S. Constitution, the Bill of Rights and the Declaration of Independence.

Still, questions about Diebold's voting machines have created competitive challenges. In the company's home state of Ohio, election officials in Licking County, east of Columbus, decided in January to buy 700 machines from Sequoia, even though Diebold was the low bidder.

``The recent publicity has certainly had an impact when we go in to talk with prospective customers,'' Diebold spokesman Mike Jacobsen says. ``The guys in election systems are doing their best to get around those questions.''

Georgia Contract

Diebold entered the U.S. market in January 2002 by spending $23.5 million to acquire Global Election Systems, which made machines certified under U.S. Federal Election Commission guidelines. Diebold won its $54 million contract with the state of Georgia three months later for 19,000 AccuVote-TS computer balloting machines.

Security questions brought Diebold and other voting machine companies back to earth. Instead of the crush of more than $100 million in new U.S. contracts forecast in early 2004, Diebold's election unit brought in $42 million in the first half of the year, most of that from a $36 million order from Brazil.

By July, Diebold told investors to expect a 15 percent to 25 percent decline in 2004.

Amid the disappointment and controversy, O'Dell says Diebold plans to stick with voting machines, if for no other reason than to help the U.S. preserve integrity in its election process.

``When I look at the voting business and how we're doing in this space, there's a lot I feel good about,'' O'Dell says. ``We're serving a very important need. After the election, cooler heads will prevail.''

Behind Schedule

When the U.S. decides what kind of safeguards it needs in its election equipment, Diebold will build what the country wants, he says.

The federal Election Assistance Commission, which Congress established in a 2002 law to write standards for voting machines, didn't have any commissioners until December 2003 about 10 months behind schedule. The commission still has no comprehensive set of election machine guidelines.

More than 25 percent of U.S. voters still will cast ballots in November on punch-card or mechanical-lever machines, according to Election Data Services. ``America's going to be voting again on all this disenfranchising equipment,'' O'Dell says.

O'Dell may be right that citizens want new voting machines, but one thing that hasn't changed since Thomas Edison invented his vote counter is that it's tough to make voting in a democracy more efficient and make a profit doing it.