VIChallenge LOCK DavidSwartz

7/30/2019 VIChallenge LOCK DavidSwartz

1/57

2013 Value Ivesig Callege Fialis

Short on LifeLock (Lock:US)By David Swartz, Pacific West Land

CH ALLENGEBROUGHTTOYOUBYFACTSET


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CH ALLENGEBROUGHTT

OYOUBYFACTSET

2d Aual Valu ivsg callg Ws

tavs cSouthpaw Capital

tavis Ccke as ve seve yeas f public make ivesme expeiece icludig e yea as a

pfli maage wi cmplee ivesme discei f a pi f e public equiy pfli

f a family ffice. Pi cfudig Supaw Capial LLC, e was a Pfli Maage a Faey

Maageme Cp., ad Aalys a Asceda Adviss LLC. M. Ccke jied Asceda i 2009 as a

geealis eseac aalys. M. Ccke als ieed a e texas teaces reieme Sysem, a $100

billi public pesi fud, i e summe f 2008, ad ieed a omega Adviss, a $6+ billi lg/

s fud based i nYC. M. Ccke eceived a BBA i Fiace fm texas A&M Uivesiy.

Dal W. LawElmrox Investment Group

Daiel W. Lawece is Maagig Pae ad Fude f Elmx Ivesme Gup (EIG). EIG is a

ivesme paesip fcused capial pesevai ad supei isk-adjused eus a lks

f igly idisycaic, asymmeic ppuiies usig a cceaed appac ve a muli-yea

iz. Pi fudig Elmx Ivesme Gup i 2013, M. Lawece was a Maagig Diec

ad c-fude f talaa Capial Maageme. Peviusly, M. Lawece was a Sei Aalys aCiadel Ivesme Gup. M. Lawece bega is caee as a ivesme bakig aalys ad equiy

deivaives aalys f Meill Lyc & C. M. Lawece is als Fude ad Picipal owe f Elmx

Media LLC, a glbal ce fim ageig 18 34 yea lds. I addii, M. Lawece as seved e

Bad f Diecs f SUS sice 2009. M. Lawece eaed a B.S. i Cmmece fm e McIie Scl

f Cmmece a e Uivesiy f Vigiia. he as sice bee a gues fiace lecue a e Uivesiy

ad paicipaes i UVa?s Gala Cee f Eepeeusip.

Davd Swaz

Pacific West Land, LLC

David Swaz is a fiacial aalys a Pacific Wes Lad, LLC. Fuded i 1981, PWL is a Seale-based eal

esae ivesme fim wi me a $100 milli i asses ude maageme. David Swaz assiss

PWL CEo Buce Gallway wi equiy ivesmes. David Swaz as peviusly wked as a equiy

aalys ad fud maage f ee edge fuds. he as a B.A. i ecmics fm U.C. Bekeley ad a

M.A. i ecmics fm Yale Uivesiy.

www.ValueIvesigCallege.cm


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Short on LIFELoCK (LoCK:US)

cbu: David Swartz

tl: Analyst

fm: Pacic West Land

fm typ: Family Ofce

La: Bainbridge Island, WA

P emplys:Kingsford Capital, Presidio Management, JDNCapital, UBS

t: LOCK:US

rmmda: Short

expd tmam: 1 to 2 Years

cuy: United States

Sua: Other

caalyss: Regulatory Change, Litigation

Ma cap: $1,100mm

Da rmmda: 7/09/13

rmmda P: $11.15

tag P: $5.00

CH ALLENGEBROUGHTT

OYOUBYFACTSET

www.ValueIvesigCallege.cm


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Summary:LifeLock(LOCK)isa$1.1billion(marketcapitalization)companywith

risksfarbeyondthosedisclosedinthefilings.Ibelievethatitisacompellingshort

ideaduetoseverelegalrisksfromregulatorynoncompliance,weakbusiness

model,increasingcompetition,disreputablemanagement,andpoorfinances.I

believethatthestockisworthlessthan$5/share.

Introduction:LifeLockclaimstoprovideprotectionagainstidentitytheftby

monitoringtheuseofpersonalinformation.Itchargesamonthlyorannualfeefor

thisservice.LOCKclaimstohave2.6millionpayingmembersandstronggrowth.

LOCKscurrentEVpersubscriberisapproximately$360.LOCKcompleteditsIPO

at$9/shareonOctober3,2012.Thelockuponinsidersshareshasexpired.

Note:Thereportwaspreparedwithsourcesbelievedtobereliable,includingSEC

filings,courtdocuments,newspaperandmagazinearticles,publicstatements,

andindustryreports.Ihaveprovidedlinkstosome,butnotall,ofthesesources

withinthereport.

TheFTCOrder

IbeginbyexplainingwhatLOCKisnotsupposedtodo.TheFTCbroughta

deceptiveadvertisingjudgmentagainstLOCK,CEOToddDavis,andformerCOO

RobertMaynard,Jr.,in2010.ThecasearosefromlawsuitsfiledagainstLOCKby


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attorneysgeneralof35states.TheFTCsummarizedthecaseintheseterms:The

FTCand35stateshavechargedLifeLockwithdeceptiveadvertising.Accordingto

thelawsuit,LifeLockclaimeditsservicewouldprotectconsumersagainstallforms

ofidentitytheft,when,infact,LifeLockofferedonlylimitedprotectionagainst

onlysomeformsofIDtheft.Thecasewassettled.Thesettlementcanbefound

here:

http://www.ftc.gov/os/caselist/0723069/index.shtm

LOCKprovidesminimaldisclosureofthisjudgmentinitsfilings.Inpublic

statements,Davishastriedtospintherulingaspositive.Wewelcomefederal

andstateeffortstoregulateourindustry,becausedoingsohelpstoprotect

consumersfromtherisksofidentitytheft,DavissaidinaLifeLockpressrelease

issuedaftertheFTCjudgment.Itappearstome,however,thatLOCKisin

violationoftheFTCorder.SinceLOCKsfilingsgivefewdetails,letslookatthe

FTCorder.Accordingtotheorder,LOCKispermanentlyrestrainedandenjoined

from:

in connection with the advertising, distributing, promoting, offering for sale, or

sale of any product, service, or program designed for the purpose of preventing, mitigating,

or

recovering from any form of identity theft as defined in 18 U.S.C. 1028, misrepresenting in

any manner, expressly or by implication:

1. that such product, service, or program provides complete protection


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against all forms of identity theft by making customers' personal

information useless to identity thieves;

2. that such product, service, or program prevents unauthorized changes to customers

address information

3. that such product, service, or program constantly monitors activity on each of itscustomers consumer reports

4. that such product, service, or program ensures that a customer will always

receive a phone call from a potential creditor before a new credit account is opened in the

customers name

5. the means, methods, procedures, effects, effectiveness, coverage, or scope

of such product, service, or program;

6. the risk of identity theft to consumers;

7. whether a particular consumer has become or is likely to become a victim

of identity theft; and/or

8. the opinions, beliefs, findings, or experiences of an individual or group of

consumers related in any way to any such product, service, or program.

Such products, services, or programs include, but are not limited to, the placement of fraud alerts

on behalf of consumers, searching the internet for consumers' personal data, monitoring

commercial transactions for consumers' personal data, identity theft protection for minors, and

guarantees of any such products, services, or programs.

Now,notethesimilaritybetweentheFTCprohibitionandadescriptionofLOCKs

operationsfromitsIPOprospectus:

We are a leading provider of proactive identity theft protection services for consumers and

identity risk assessment and fraud protection services for enterprises. We protect our consumer

subscribers, whom we refer to as our members, by constantly monitoring identity-related events,

such as new account openings and credit-related applications. If we detect that a members

personally identifiable information is being used, we offer near real-time, actionable alerts that

provide our members peace of mind that we are monitoring use of their identity and allow our

members to confirm valid or unauthorized identity use. If a member confirms that the use of his or


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her identity is unauthorized, we can stop the transaction or otherwise rapidly take actions

designed to protect the members identity.

LOCKsmanyInternet,radio,andTVadsclaimthatthecompanyprotects

againstidentitytheft.HerearesomedirectquotestakenfromLOCKswebsites

andads:

themostcomprehensiveidentitytheftprotectionserviceavailable

LifeLockoffersalevelofprotectionandmemberservicethatnooneelsecan

protectmembersfromidentitytheftBEFOREithappensandbacksitupwith

a$1MillionTotalServiceGuarantee

So,threeyearsaftertheFTCOrder,LOCKclaimstohavethebestID

protectionserviceonEarth.RecallthattheFTCOrderwasapermanent

injunction.LOCKspre-andpost-2010adsarenearlyidentical.Themain

differenceisthatLOCKchangedpreventtoprotect.DespitetakingLOCKto

Federalcourt,theFTCseeminglyneverbotheredtoenforceitsownruling.The

FTC,infact,didntevencollect$24millionofthe$35millionjudgment(LOCK

pleadpoverty).ThereisalsoaneasilyoverlookedsecondparttotheFTCOrder.

ThejudgmentstatesthatLOCKispermanentlyprohibitedfrom:

B. misrepresenting in any manner, expressly or by implication, the manner or extentto which they maintain and protect the privacy, confidentiality, or security of any personal


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information collected from or about consumers.

TheFTCfoundthatLOCKfailedtoencryptpersonalinformationonits

customersandthattheinformationwasavailabletomorethanjustauthorized

employees.Inotherwords,LOCKexposeditsowncustomerstopotentialidentity

thieves.LOCKremainsboundbytheFTCOrder.ThecompanyandDavisare

requiredtosubmitannualcompliancereportstotheFTC.AccordingtoLOCKs10-

K,theFTChasnotacceptedorapprovedthem.

TheExperianLawsuit

AfederaljudgeruledinMayof2009thatLOCKsmainservice(atthetime)

wasillegal.NotethatthiscaseisseparatefromtheFTCcase.LOCKwassuedby

creditbureau(andcompetitor)Experianforfraudin2008.Experiansuedbecause

LOCKwasplacingnearlyperpetualfraudalertswiththecreditbureausforallof

itsclients.Accordingtothesuit,LOCKwasplacingthousandsofcallsperdayto

Experiantoplacefraudalerts.Accordingtosection605AoftheFairCredit

ReportingAct(FCRA),afraudalertcanbeplacedwhenthereisasuspicionthat

theconsumerhasbeenorisabouttobecomeavictimoffraudorrelatedcrime,

includingidentitytheftLOCKwasplacingfraudalertsforclientswhereno

suspicionexisted.JudgeAndrewGuilfordruledthatLOCKdidnothavethe

authoritytoplacefraudalertsforitsclients.Thecasewassettledinlate2009.As


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partofthesettlement,LOCKagreedtoceaseplacingcreditalertswiththecredit

bureaus.ItisremarkablethatLOCKscustomersdidnotfleeindrovesafter

LOCKsprimaryservicewasshutdown.Ipresumethatmostofthemdidnotknow

whattheywerepayingforinthefirstplace.

MoreinformationonExperianlawsuit:

http://news.consumerreports.org/money/2009/07/fraud-alert-services-

dinosaurs-lifelock-experian-transunion-debix-identitysecure-credit-bureau-fair-

credit-reporting-act.html

http://media.phoenixnewtimes.com/1915273.0.pdf

TheExperiansuitexposedtheflimsybasisofLOCKsbusiness.Until2009,

LOCKwasessentiallyinthebusinessofplacingrobo-callstocreditbureaus.LOCK

wasmerelyplacingfraudalertsthatanyonehasthelegalrighttoplaceforfree.

Moreover,accordingtoExperianscomplaint,DavisandLOCKweregreatly

overstatingtheprotectionprovidedbythesefraudalerts.Thecomplaintcites

numerousexaggerationsinLOCKsadvertisingandstatementsfromDavis.The

complaintalsomakestheclaimthatLifeLockhasplacedfraudalertswith

ExperianbydisguisingitsidentityandfraudulentlymisrepresentingtoExperian

thatitwastheconsumer.Isntthatironic?

WhatDoesLOCKDo?


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TheservicesprovidedbyLOCKdonotappeartobeproprietary.Asweveseen,

LOCKwasprohibitedfromplacingfraudalertswithcreditreportingagenciesin

2009.In2010,itwasprohibitedfromadvertisingitselfasacompanythatcan

preventidentitytheft.Lookingatitsservicesin2013,itsamazingthatanyone

pays$120-$275/yearforthem.TheotherwisebullishanalystatCanaccord

Genuitysumsitupinhis11/7/2012report:Itiscompletelyfairtosaythata

consumercoulddomanyofthethingsthatLifeLockprovides.LOCK,inother

words,isprimarilyaservicesbusiness.HerearetheservicesprovidedwithLOCKs

basicservice(fromitswebsite):

Notificationofcreditandnoncreditthreatswithinourextensivenetwork

Monitoringofknowncriminalwebsitesforillegaltradingofpersonal

information

Stolenorlostwalletremediationservices

Directaccesstofraudresolutionteamswithinourextensivenetwork

Anybodywithaccesstotheinternetandtenfreeminutescandosimplethings

likeaskforacreditreport(annualcreditreport.com)andendunsolicitedcredit

cardmailings(optoutprescreen.com).LetslookatsomeofLOCKspurportedly

proprietaryservices:


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LOCKclaimstomonitormorethan10,000blackmarketwebsiteson

whichpersonalinformationisboughtandsold.Letssaythatthisistrueso

what?LOCKisnttheFBIorInterpol.IfacriminalganginUkrainepostsmycredit

cardnumberonawebsite,LOCKcannotdoanythingaboutit.Itcannotshutdown

thesiteorfixtheproblem.Mycreditcardnumberhasalreadybeenstolen.At

best,LOCKcannotifymetocancelthecard.IthinkitsmorelikelythatIwould

seeboguschargesonthecardlongbeforeLOCKswatchdogsspotthem.

LOCKswalletremediationservice,impressivelycalledWalletLock,isa

serviceinwhichsomeoneatLOCKcallsyourbanks,creditcardissuers,etc.,ifyour

walletislostorstolen.LOCKdoesexactlywhatanyonewoulddowhenhisorher

walletislost.LOCKdoesnotreimburseforlostcashorothervaluablesorprovide

reimbursementforanyfeesincurredingettingnewcards.

ThethreatnotificationserviceisthereasonthatmostpeoplepayforLOCK.

Hereisabasicdescriptionfromtheprospectus:Weprotectourconsumer

subscribers,whomwerefertoasourmembers,byconstantlymonitoring

identity-relatedevents,suchasnewaccountopeningsandcredit-related


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applications.Ifwedetectthatamemberspersonallyidentifiableinformationis

beingused,weoffernearreal-time,actionablealertsTakenoteoftheword

ifinthisdescription.ThedescriptionindicatesthatLOCKprimarilyfocuseson

fraudulentnewaccountopenings.UnfortunatelyforLOCKsenrollees,theFTC

saysthatnewaccountfraudwasresponsibleforonly18.5%ofidentitytheftcases

in2012.Aswillbeexplained,therearelotsofpotentialthreatsthatLOCKdoesnt

cover.EvenintheareasthatLOCKdoescover,thereisnoguaranteethatLOCK

willactuallycatchanything.Onitswebsite,LOCKclaimstomonitorforthreats

againstyouridentitywithinournetwork.LOCKdoesnotdiscloseitsnetworkto

thepublic.Thereisalsothisdisclaimer:Notalltransactionsarecoveredand

scopemayvary.TherealityisthatLOCKisdependentonreceivingcreditalerts

fromothercompanies.Amongtheriskfactorsintheprospectusis:Ourbusiness

dependsonourabilitytoutilizeintellectualproperty,technology,andcontent

ownedbythirdparties,thelossofwhichwouldharmourbusiness.Despitethe

limitationsinitsservices,LOCKiswell-knownforofferingaguaranteetoits

clients.

The$1MillionGuarantee

LOCKmakesabigdealaboutits$1millionguaranteeinitsadvertisingand

onitswebsite.Whatdoesitmean?Well,IsuspectthatLOCKscustomersthink


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thatitmeansthatLOCKinsuresthemagainstasmuchas$1millioninlossesdue

toidentitytheft.Itdoesntmeanthatatall.Itsactuallymoreofareallyweak

warranty.Accordingtotheactualpolicy,LOCKguaranteestopayupto$1million

inlegalcosts,remediation,servicecosts,andcasemanagementcostsifan

identitytheftoccurs.Thereis,however,noguaranteethatyouwillactually

receivethishelp.FromLOCKswebsite(emphasismine):

RemediationServiceCosts.Theamountof reasonableandnecessary expensespaidto

investigatorsandotherthird-partybusinessproviders thatareretainedbyLifeLock and

involvedinanyservicesthatare reasonablynecessary,viewedinthecontextofLifeLock's

businessandMembershipPrograms ,torestoreyourgoodnameandidentity,orto recover

yourLossesinaccordancewithanyMembershipProgram.

Inotherwords,LOCKwillnotpayforanylegalhelpunlessitdecidesthatthat

customerslosseswereduetodeficienciesinLOCKsservices.SinceLOCKdoes

notprotectagainstmanytypesofcrime,itcaneasilyclaimthattheallegedfraud

isnotcovered.Moreover,LOCK(notthecustomer)determineswhetherornot

legalaidisactuallynecessary.Asifthatwasntbadenoughthevictimhastodo

allofthework!Theactualpolicyhasalonglistofactionsthatthefraudvictimhas

totakeinordertobecoveredbyLOCKspolicy.Herearejustafewofthe

requirements(fromtheMasterPolicy):

vi. In the event of a Stolen Funds Loss, you shall:


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Take all reasonable steps to obtain reimbursement for the StolenFunds Loss from the Financial Institution which holds the

Account; Promptly give notice to us of the Stolen Funds Loss and detailed

information regarding the Stolen Funds Loss, including without

limitation, the type, dates, and amount of Stolen Funds Loss. Send to us at our request, a signed, sworn proof of Stolen Funds

Loss, or affidavit containing the information we request to

investigate the Stolen Funds Loss. We shall supply you with thenecessary forms for this purpose, which you shall complete,

execute and return to us within sixty (60) days of our request. Provide us with a complete description of your efforts to obtain

reimbursement from the Financial Institution that holds theAccount and stated reasons why full or partial reimbursement was

not provided; and Provide any other reasonable information or documentation that

we may request.

So,thevictimmaynotgetanymoneyfromLOCK,butheorshewillhavetofill

outplentyofpaperwork.Therearenumerousotherprovisionsthatcanbefound

onLOCKswebsite.Thebottomlineisthatitisamarketinggimmick.

LOCKadmitsthatvirtuallynobodygetsanythingfromitsguarantee.LOCK

hashadmillionsofmemberscoveredbyit,butDavishastoldinvestorsthat

fewerthan5,000peoplehaveinvokedtheguarantee.Hehasnotsaidhow

manyactualclaimshavebeenpaid.LOCKsfilingsstatethatamountspaidto

customersundertheguaranteearenotmaterial.Thelamenessoftheso-called

guaranteewasoneofthemajorfactorsinthecasesbroughtbythestate

attorneysandtheFTCin2009-10.Onceagain,LOCKseemstohavekepttheFTC

offitsbacks(sofar)bymakingafewcosmeticchangesinitsmarketing.

DoesLOCKActuallyWork?


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LOCKsclaimsofcomprehensiveIDprotectioncannotbecorroborated.

LOCKhasthreelevelsofservice:basic($10/month),CommandCenter($15/

month),andUltimate($25/month).MostofLOCKscustomershavethebasic

service.Iestimatethat73%ofLOCKsubscribershavethebasicservice,9%have

CommandCenter,and18%haveUltimate.LOCKdoesnotactivelypromote

CommandCenteranymore.Approximatelytwo-thirdsofLOCKsnewcustomers

subscribetothebasicproduct,whileone-thirdsubscribetoUltimate.As

suggestedbythelargepricedifferential,theUltimateproductcoversmoreareas

thanthebasicproduct.AllofLOCKsproductsarelimitedbythebreadthofits

network.LOCKdoesnot,forexample,protectagainsttax-andwage-related

fraud.ThesesortsoffraudsarelistedbytheFTCasthetwomostcommontypes

ofidentitytheft.LOCKalsodoesnotmonitorvehicleregistrationsandinsurance

information.EvenintheareasthatLOCKdoesmonitor,thecompanysabilityto

serveitscustomersisverylimited.TheprimaryflawisthatLOCKsservicesare

notendorsedbyanybankorcreditbureau.Thecompanyhas,therefore,only

limitedaccesstothedatanecessarytoprotectitsenrollees.

http://www.ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2012.pdf

https://www.truthinadvertising.org/lifelocks-protection-leaves-much-to-be-

desired/


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IndustrysourcescontendthatLOCKsbasicserviceisnearlyworthless.

LOCKsbasicservicedoesnotincludealertsfromthethreecreditbureausand

banks.Inotherwords,LOCKdoesnotmonitorcheckingandsavingsaccountsand

creditcardsforenrolleesinthebasicproduct.Aproductwithoutcreditbureau

informationisnotreallyacreditprotectionproductatall.ManyofLOCKs

competitorsdonotevenofferaproductwithoutcreditbureauinformationas

theyknowthatitwouldbeuseless.TheUltimateproductdoesincludecredit

bureaumonitoring,butitisstillverylimited.SinceLOCKhasnopartnerwith

directaccesstofinancialinformation,itdoesnotreallycontrolitsowndata.LOCK

doesnot,forexample,haveanyabilitytomonitorpaperforms.LOCKsproducts

haveverylimitedfeaturesandnooperationaloversightorcustomization.Despite

thecompanysclaims,thereiszeroevidencethatanyofLOCKsproductsactually

work.

LOCKhasneverofferedanyquantitativeevidencethatitsproductsactually

protectanyonesidentity.LOCKswebsiteincludesagrandtotaloffour

testimonials,butnopertinentdataontheeffectivenessoftheservice.Itnotable

thateventheself-selectedtestimonialsdonotoffermuchproofofLOCKsutility.

HereisadirectquotefromKristinaE.stestimonial:"Acreditcollectorcalledme

andclaimedthatIowedthemmoneyandIimmediatelycalledLifeLockIn


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otherwords,LOCKcompletelymissedthefraudandhadtobenotifiedbythe

subscriber.Theotherthreetestimonialsaresimilarinthatthesubscriberalready

knewaboutanidentitytheftissuebeforespeakingwithLOCK.Althoughitis

difficulttofindsatisfiedLOCKsubscribers,itiseasytofindcomplaintsfrom

disgruntledex-customersonvariouswebsites.Hereisalinktooneofthesesites:

http://www.consumeraffairs.com/privacy/lifelock.html

Finally,aMarch,2013,specialreportonLOCKfromKTVU-TVinOakland,

CA,isdefinitelyworthwatching.Thereportgoesintosomedetailaboutthegaps

inLOCKsnetworkandhowitavoidsresponsibilityforIDtheftincidents.Thelink:

http://www.ktvu.com/news/news/special-reports/industry-leader-identity-theft-

protection-recently/nWf9P/

http://www.lifelock.com/services/testimonials/

Competition

LOCKprovidesservicesbasedonmanpowerandoutsidetechnology.These

servicesareeasilyreplicated.Morethan50%oftheconsumersthatpayfor

identityprotectionareusingservicesprovidedbybanks(WellsFargo,Chase,etc.).

Therearealsonumerousprivatecompaniesandsubsidiariesoflargercompanies

thatoffertheseservices.Asproof,Iofferalistof20suchfirms:AllClearID,CSID,

EquifaxIDPatrol,IDArmor,IdentityForce,IdentityHawk,IdentityGuard


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(Intersections),IDTheftProtect,IdentityTruth,InteliusIDWatch,IDWatchdog,

ProtectMyID(Experian),TrustedID,IDFreeze(FairIsaac),PrivacyGuard,Privacy

Matters,SmarterCredit,LexisNexis,IdentitySecure(Affinion),andIdentityTheft

Shield(Kroll).IBISWorldhasissuedareportontheidentityprotectionindustry.In

thereport,IBISWorldidentifies79(!)marketparticipants.Allofthesefirmspretty

muchmakethesameclaimsaboutidentitytheftprotection,offerthesame

services,andchargethesameprices($10-$25/month).LOCKismerelyoneplayer

inaverycrowdedmarket.

Theidentityprotectionfirmsareoftenusingthesamesoftwareandgetting

theirdatafromthesamesources.Theyallrelyoninformationfromthecredit

bureaus,banks,andcreditissuers.CreditbureauTransUnion,forexample,serves

asafulfillmentpartnertoLOCKandmanyotherIDtheftcompanies.Early

WarningServicesisanotheroneofLOCKsfulfillmentpartners.Itisownedbya

groupofmajorbanksandprovidesbankfraudprotectiontoawidevarietyof

financialinstitutions.IDAnalytics,nowownedbyLOCK,providessoftwareto

severalfirmsintheindustry.Austin-basedCSIDclaimsthatmorethan70%ofthe

retailidentityprotectionindustry(includingLOCK)usesitsfrauddetection

software.Itisnotablethat,accordingtomanagementatIntersections,severalof

thedataprovidershaverecentlyraisedprices.Sinceanybodycanbuyaccessto


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thedatasources,therearenobarrierstoentryintheindustry.CSIDevenoffersa

whitelabelidentityprotectionplatform,allowinganyfirmtoofferserviceswith

noinvestmentintechnology.Theentireindustryhasbecomecommoditized.

LOCKspotentialmarketismuchsmallerthaniswidelybelieved.OntheQ1

2013conferencecall,CFOChrisPowerclaimedthat,Weareintheearlystagesof

abigmarketopportunityTherealityisthat,accordingtoIBISWorld,the

identityprotectionindustryisexpectedtoexperiencegrowthofonly4.2%in

2013,downfrom4.6%growthin2012.Itisinterestingtonotethatthese

numbershavedropped.Asrecentlyastwoyearsago,IBISWorldwasforecasting

growthinthe7%-9%/yearrange.Estimatesofthecurrentmarketsizevaryfrom

$3.5-$4.0billion,implyingthatLOCKhasabout7%dollarmarketshare.

Accordingtoa2012articleinConsumerReports,approximately50million

Americanspaidforidentitytheftprotectionin2010.Initspresentations,LOCK

claimsthattheaddressablemarketis78millionAmericans.Assumingthatthis

numberisaccurate,abouttwo-thirdsofthepotentialbuyersarealreadypaying

forsometypeofprotection.TheDeutscheBankanalystthatfollowsLOCK

estimatesthatLOCKwillhave4.5millionmembersand$534millioninconsumer

revenuesin2017.LOCKwouldneedtoincreaseitssingle-digitmarketshareto

achievetheseestimates,whichseemsunlikelyinacrowdedmarketinwhichfirms


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arepracticallyinterchangeable.Nonetheless,LOCKhaseffectivelyportrayeditself

astheleaderinidentitytheftprotection.AnyonewhoknowsLOCKshistoryhas

toviewthisasanincredibleaccomplishment.

TheFounders

LifeLockscorporatehistoryissounsightlythatitisastonishingthatthe

companystillexists.RobertJ.Maynard,Jr.,andRichardToddDavisaretheofficial

co-foundersofthefirm.MaynarddoesnotworkforLOCKanymore,butDavis

remainsCEO.Onhispersonalwebsite,Maynardexplainsthathe...inventedthe

conceptforLifeLock,builttheinitialsystemsandfoundagreatpartnerinTodd

Davis.AccordingtothestorythatbothDavisandMaynardgaveinnumerous

interviews,thegenesisofLifeLockwasanincidentinwhichMaynardwasavictim

ofidentitytheft.Maynardclaimedthathewaserroneouslyjailedforsevendays

in2003aftersomeonestolehisidentity.Maynardwasreleased,butheclaimed

thathespentmorethan$20,000andmanyhoursinclearinghisgoodname.This

harrowingexperienceconvincedMaynardthatpeopleneededaservicetoprotect

themfromidentitytheft.Itsafinestory,butitisonlypartlytrue.Maynardwas

actuallyjailed,buthewasnotavictimofidentitytheft.Thepolicearrestedhim

becauseheskippedoutona$15,000markerfromaLasVegascasino.Thisis


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consideredtheftunderNevadalaw.Itisalsojustoneofmanyblackmarkson

Maynardsresume.

LOCKdoesnotwantinvestorstoknowaboutitssordidpast.Eventhough

hecreatedthefirm,MaynardsnamedoesnotappearintheIPOprospectus.The

detailsofhislonghistoryoffinancialimproprietycanbefoundinaseriesof

articlesinthePhoenixNewTimesandWired.Herearelinkstotwoofthem:

http://www.phoenixnewtimes.com/2007-05-31/news/what-happened-in-vegas/

http://www.phoenixnewtimes.com/2010-05-13/news/cracking-life-lock-even-

after-a-12-million-penalty-for-deceptive-advertising-the-tempe-company-can-t-

be-honest-about-its-identity-theft-protection-service/

Ihaveusedthesearticlesassourcesforthissection.Thestoriesaretoolongand

ridiculoustorepeathere,butIwillpresentthehighlights,startingwiththeorigin

story.TheNewTimesdiscoveredthatthecasinohadacopyofMaynardsdrivers

license.Therewasneveranyquestionofidentity.Thenewspaperpresented

evidenceofMaynardsdeceptiontoDavisinMayof2007.Davis,accordingtothe

newspaper,stonewalledthereporterandevencontinuedtotellthefictional

originstory.ThecontroversydidleadtoMaynardsseparationfromLOCKsort

of.AfterMaynardlefthisChiefMarketingposition,Davishiredhimasamarketing


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consultanttodotheexactsamework.ItisnotablethatLOCKcompletedtwo

roundsofpreferredstocksalestomajorinstitutionalinvestorswhileMaynard

wasstillatopexecutive.Onemightthinkthattheseinvestorswouldhavebeen

scaredawaybyhisbackground.Afterall,bythetimethatLOCKwasfounded,

Maynardhaddeclaredbankruptcythreetimes,drivenatleasttwocompaniesinto

insolvency,beenforcedoutasCEOofInternetAmerica,andlostadefamation

suitafterfalselyclaimingtohavebeencyber-stalked.Mostsignificantly,hehad

alsoagreedtoalifetimebanfromthecreditindustry.

Maynardhadanuglyexperienceinthecreditmonitoringbusinessbefore

heco-foundedLOCK.Inthemid-1990s,Maynardranacreditrepairbusiness

calledNationalCreditFoundation.ThebusinesswastargetedbyboththeFederal

TradeCommission(FTC)andtheattorneygeneralofArizonafornumerous

violations.Amongtheseviolations,accordingtofederalcourtrecords,the

company,innumerousinstanceswithdrewfundsfromcustomerschecking

accountswithoutauthorization.Ex-employeesatNationalCreditreportedthat

distraughtclientscalledandaskedforhelpwithunauthorized$300charges-not

knowingthatNationalCredithadbeentheonewhochargedthem!Maynardwas

slappedwithalifetimebanonadvertising,promoting,offeringforsale,selling,

performing,ordistributinganyproductorservicerelatingtocreditimprovement


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services.LifeLock,youllrecall,claimstoprotectpeoplefromcreditcardscams

andotherfinancialcrimes.WhenconfrontedwiththisinformationbyNewTimes,

Daviswasunsurprisedandunconcerned.Heclaimedthatthecompanysattorney

hadprovidedanopinionthatMaynardwaslegallyallowedtoworkforLOCK.He

didntseemtocarethatLOCKissupposedtoprotectitscustomersfrompeople

exactlylikeRobertJ.Maynard,Jr.

Moreinformation/references:

http://articles.latimes.com/2007/jun/12/business/fi-lifelock12

http://www.ftc.gov/opa/1997/04/ncf-4.shtm

LifeLockclaimstoprotectitscustomersfrompeoplewhowishtovictimize

them,yetToddDavisapparentlydidnotevennoticeorcarethathisownpartner

wasuntrustworthy.Maynard,whoblamesmostofhisproblemsonbeingbipolar,

isevenallegedtohaveengagedinidentitytheft.TheNewTimesreportedthat

MaynardfraudulentlyobtainedanAmericanExpresscardinhisfathers

(Maynard,Sr.)nameandranup$154,000incharges.Maynardwasapparently

boughtoutofhis10%equityownershipinLOCKinoraround2009.Afterleaving

LOCK,MaynardtookhisspecialbrandofentrepreneurshiptoHawaiiandfounded

anoceanadventurecompanycalledKandoo!Island.Itwassupposedtobesome


24/57

kindofgiantactivitycatamaranforfamilies.Itwas,notsurprisingly,atotalfiasco.

Maynardhadtroublegettinginsurance,troublewiththeCoastGuard,and

bouncedpaychecksalloverthePacific.Thecompanywentbrokeaftertwoweeks

ofoperations.Intheaftermath,Maynardwassuedforfailingtopayoffthe

promissorynotesthehesignedtopayfortheboatsandequipment.

http://www.bizjournals.com/pacific/stories/2009/10/12/daily52.html

LetsnowtakealookatMaynardsformerpartnerandlongtimeapologist,

ToddDavis,whohaspulledoffoneofthemostsuccessfuladvertisinghoaxesin

recentmemory.ManypeoplehaveheardofLifeLockforjustonereason:Davis

puthisSocialSecuritynumberinthecompanysads.Itwasanaudaciousmove.

SocialSecuritynumbersareusedinallsortsoffinancialtransactions.By

displayinghisSSNinfrontofmillionsofpotentialcrooks,Davisshowedabsolute

faithinLOCKsabilitytoprotecthisidentity.Hisfaithwasmisplaced.TheFTC/

attorneysgeneralinvestigationintoLOCKdeterminedthatDavisSSNhadbeen

usedbysomeoneinFt.Worth,TX,tofraudulentlytakeoutapaydayloanfor

$500.Althoughtheincidentwaswell-publicized,Davishassuccessfully

downplayeditasisolatedandunpreventable.TheLOCKanalystatCanaccord

evencallsitanurbanmythinhis10/28/2012report.LOCKsstoryisthatthe


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paydaylenderdidnotprocesstheloanproperly,soLOCKcouldnothavecaught

it.OnemightoverlookoneisolatedfailuretoprotectDavisidentity.Itsabit

moredifficult,however,tooverlookthefactthatDavisidentityhasactuallybeen

stolenatleast13times.

LifeLockprovedtobecompletelyunabletoprotectitsownCEOfrom

financialfraud.TheNewTimesreportedin2010thatDavisSSNwasused

fraudulentlyinatleast13separateinstances,crimesthatcametolightwhena

LOCKemployeefiledapolicereportonDavisbehalf.Inonecase,someoneused

DavisSSNtoopenacellphoneaccountwithAT&T.Thatcaseresultedinan

unpaidbillof$2,390.OthercrimesusingDavisinformationincludedthe

purchaseofagiftbasketatSwissColonyandtheopeningabankaccountatBank

One.Inseveraloftheinstances,theunpaidbillswenttocollectionagencies

beforeLOCKorDavisknewaboutthem.TheexactnumberoftimesthatDavis

SSNhasbeenfraudulentlyusedisunknownsinceDavishasnotreleasedhiscredit

recordstothepublic.Hehas,however,continuedtopromoteLOCKasanexpert

inidentityprotection.

DavisSSNpublicitystuntexposesLOCKasacompanywithoutsubstance.

Besidesfailingtoprotecthisidentity,itcouldnotevencleanupthemesses.


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LOCKsstaffhasnorealauthoritytodealwithidentitytheft.Likeanyoneelse,the

companycanonlyreportallegedcrimesandcontactaffectedparties.Davisdid

getpersonallyinvolvedinoneofhisownidentitytheftcases,buttheresultwas

ratherunfortunate.AsreportedinWiredmagazine,DavisinvolvementInthe

Texaspaydayloancaseallowedthesuspecttoavoidprosecution.Accordingtoa

FortWorthpolicesergeant,Daviswaswarnedtostayawayfromthesuspectin

thecaseastheinvestigationwasongoing.Instead,Davisandacameracrew

yelledathim(thesuspect)andbrowbeathimintosigningaconfessionthat

theyhadalreadytypedout.Davistoldthementallydisabledsuspectthatifhe

didnotsigntheconfession,thepolicewouldarresthim.Aftertheyheardabout

thecoercedconfession,theFortWorthpolicedroppedthecase.Inoneinterview

ontheincident,Davisclaimed,Wedidntcoercehim.Butwewantcriminalsto

know,ifyoumesswithanyLifeLockmember,thereneedstobeconsequences.I

reallydontthinkthatthecriminalsgotthemessage,though,sinceLOCKdid

nothingandtheguygotawaywithit.ThemessagethatIgetisifthatLOCK

couldntevenprotectitsownCEO,thenits2.6millionanonymousmembers

shouldntexpectanythingbetter.

http://www.wired.com/threatlevel/2007/07/police-say-life/


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LOCKisacompanydrivenbyadvertising.Priortohisinvolvementwith

LOCK,DaviswasasalesmanatDellandworkedatafewstart-ups.Itseemsthat

thesestart-upswerentverysuccessfulasDavisfiledforbankruptcyin2000.In

2002,DaviscreatedamarketingfirmcalledMarketingChampions,LLC.According

toPhoenixBusinessJournal,hebecameinvolvedwithLOCKwhenhiredto

generatepublicity.Davishasbeenonapublicitytoureversince.Oneofthe

gimmicksemployedbyLOCKistohostfreeIdentityTheftSummitsforlaw

enforcementofficials.LOCKpartnerswithagroupcalledFBI-LEEDAtosponsor

theseseminars.LOCK,bynocoincidence,isthelargest(DiamondLevel)sponsor

forFBI-LEEDAsannualconference.Giventhelimitedtrainingbudgetsofmany

policeagencies,thesefreeseminarsarepopularandgeneratelotsofpublicityfor

LOCK.Hereisatypicalheadlinefromawebsite:FBIPartnerswithLifeLockto

ProtectIdentityTheft.Itsaniceheadline,butitsinaccurate.Despiteitsname,

FBI-LEEDAisnotpartoftheFBIoractingonbehalfoftheFBI.Theseminarsare

justonewayinwhichLOCKusesitsmarketingdollarstocraftastory.

AmericasMayorLifeLocksShill?

AcurrentadcampaignillustrateshowLOCKexaggeratesitsexpertisein

identityprotection.InNovember,2012,LOCKannouncedthatformerNewYork


28/57

mayorandfederalprosecutorRudyGiulianihadbeenhiredasastrategic

consultant.LOCKdidnotdisclosehispaymentorexactrole.Withindaysofthe

pressrelease,GiulianibegantomentionLOCKininterviewsaboutpersonal

security.Inearly2013,GiulianibegantoappearininfomercialsforLOCK.Inone

ofthese,GiulianiidentifieshimselfaLOCKmemberanddiscussesidentitythieves

whofilefalsetaxreturns.Theaddramatizesasituationinwhichayoungwoman

stealsinformationfromamanscomputertoclaimataxrefund.Thead

misleadinglyimpliesthatLOCKprotectsagainststolentaxrefunds.Therealityis

thattheInternalRevenueService(IRS)isnotpartofLOCKsdatanetwork.LOCK

doesnothaveanyabilitytomonitortaxreturnsoridentifyfraudulenttaxrefunds.

TheIRSdoeshaveaunittocombatidentitytheft.Accordingtothisreport,theIRS

appearstobemakingsignificantprogress:

http://www.sun-sentinel.com/business/fl-id-theft-20130321,0,4654021.story

ItisobviousthatLOCKhiredGiulianiduetohisreputationasacrime

fighter.HemayalsoappealtoLOCKsprimarydemographic(Caucasianmale

seniors).Davis,forone,appearstobeafan.AccordingtotheFederalElection

Commission,hedonatedmoneytoGiulianis2008Presidentialcampaign.Itmay

seemoddthatGiulianiwouldtakemoneyfromLOCK,buthehasahistoryof


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takingmoneyfromquestionablesources.AccordingtoarticlesinForbesand

VanityFair,Giulianiandhispartnershavebeenpaidmillionsofdollarsto

promotetheinterestsofdubiouscompanies.Inseveralcases,Giulianiusedhis

celebrityandaccesstothemediatopromotehisclientsinterests.

http://www.vanityfair.com/politics/features/2008/01/giuliani200801

http://www.forbes.com/forbes/2006/1113/138.html

TheRichardsonLawsuit

OngoinglitigationrevealsabitmoreaboutLOCKsmarketingpractices.

LOCKsSECfilingsprovidebriefmentionofalawsuitfiledagainstLOCKandDavis

byawomannamedDeniseRichardson.Inthesuit,Richardsonclaimsthatshewas

improperlypaidasanindependentcontractorratherthanasanemployee.The

suitclaimsthatsheisowedatleast$250,000incompensationanddamages.On

thesurface,thisappearstobeabanalcompensationdisputefiledbyanex-

employee.Itturnsout,however,thatRichardsonhadaratherunusualmarketing

roleatLOCK.Onherwebsite,shedescribesherrelationshipwithLOCK(not

named)intheseterms:August2006throughFebruary2012IdentityTheft

EducationSpecialist,Speaker,Spokesperson,Blogger,ConsumerLiaisonand

ConsumerAdvocatefosteringbusinessdevelopmentforanationallyknown


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identitytheftprotectioncompany.Inotherwords,LOCKpaidhertopromotethe

companyallovertheinternet.

Asimplesearchrevealsdozensofpositivecomments,blogs,andnews

articlesthatRichardsonhaspostedaboutLOCK.Ifyoulookupanegativenews

storyaboutLOCK,thereisagoodchancethatRichardsonrepliedtoitwitha

lengthydefenseofthecompanyandDavis.Inmostcases,shedidnotdiscloseany

associationwithLOCK.Afewtimes,however,shepostedadisclaimersuchasthis:

LifeLockhaspaidmetospeakattheirseminarsasoneoftheirCertified

IdentityTheftRiskManagementSpecialists.Tobeclear,Igetpaidtotalkabout

identitytheft,butIdontgetpaidtopromoteLifeLock.Well,Richardsonsown

lawsuitprovesthatshewasgettingpaidtodoexactlythat.Thewholesituationis

quiteironic.ShestaunchlydefendedtheintegrityofDavisandLOCKforyears,but

nowsheissuingthemforallegedlyrippingheroff.Itappearsthatherviewshave

changed.Thiscommentappearsonhersite:AsofJulyof2012,Inolongerwork

withorendorsethisparticularIDtheftprotectioncompany(LifeLock).Asalways,

doyourhomeworkonIDtheftprotectionservicestohelpensureyouonlydeal

withcompaniesthatpracticethebestidentitytheftprotectionpractices.That

maybegoodadvice,butitsabithardtoidentifythosecompaniessincethe

internetisfloodedwithfalseinformation.


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http://news.cnet.com/8301-27080_3-10466741-245.html

LOCKpayspeopletopromotethecompanyinashadymanner.LOCKoffers

anAffiliateprograminwhichpeoplecreatewebsiteswithlinkstolifelock.com.

TheAffiliatesreceive$40-$60foreverypersonthatsubscribestotheservice

throughtheselinks.ADecember,2010,articleinaMainenewspaperdescribes

howtheAffiliatesgeneratetraffic:AGooglesearchforLifeLockbringsup

thousandsofhitsforblogs,supposednewssitesandreviews.Mostshowerthe

companywithpraiseandprovidelinkstobuyitsservices.However,mostorall

areoperatedbyaffiliateswhoreceivea30percentcommissiononeachsale

generatedbytheirsiteorreview.Hereisoneofthesereviewsthatcanbe

easilyfoundwithGoogle:

Pros: This service is excellent and continues to get better.

Cons: We found no weaknesses with this service.

The Verdict: It's hard to find better hands to put your identity in than this service.

Thesitealsoincludesalinktolifelock.comandthisbanner:PreventIdentity

TheftwithLifeLock

http://identity-theft-protection-services-review.toptenreviews.com/lifelock-

p2533-video-1.html


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ManyoftheAffiliatessitesmakeassertionsaboutLOCKsservicesthatwouldbe

prohibitedbytheFTCOrderifLOCKmadethem.LOCKwouldlikelyclaimthatit

hasnodirectcontrolovertheAffiliatessites.Inmyopinion,theAffiliates

programisjustonepartofLOCKsmisinformationcampaign.

http://www.sunjournal.com/our-view/story/950469

TheFastest-GrowingCrimeThatIsntGrowing

ThethreatofIDtheftisgreatlyexaggeratedbytheIDprotectionindustry.

Theindustryincessantlypromotestheideathatidentitytheftisamajorriskand

thatthreatisgrowing.HeresatypicalquotefromLOCKswebsite:Identitytheft

isoneofthefastestgrowingcrimesinthenation.Thenumbers,however,

indicatethatitisntgrowingatall:

AnnualLossesfromIDTheft(in$billions)-Source:JavelinResearch

2004:$47.0 2007:$24.7 2010:$19.9

2005:$32.0 2008:$28.9 2011:$18.0

2006:$28.7 2009:$31.4 2012:$20.9


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So,lossesfromIDtheftintheU.S.fellby55.6%inthepasteightyearsand33.4%

inthepastthreeyears.Thenumberofvictims,accordingtheJavelin,hasbeen

steady:theeight-yearaverageof11.6millionperyearisequaltothe2011

number.Theincidencerateis,therefore,onlyabout4%peryear.LOCKandits

competitorsobviouslydonotwantpeopletoknowthat96%ofthemarepaying

$120-$300thisyearfornoreason.Onecouldargue,however,thatidentity

protectionisworththepriceifitreducesriskofloss.Thereisevidence,however,

thatitdoesnotevendothat.

Theentireidentityprotectionindustryisprobablyawasteofmoneyfor

consumers.LOCKdeservescredit(orblame)forhelpingtocreateanindustryin

whichpeoplepayforunnecessaryandfreeservices.A2012ConsumerReports

articleexplains:consumerswhobuythisprotectionfromtheirbanksare

helpingtofootthebillforservicesthatfinancialinstitutionsareobligatedto

providebyfederallawtoshieldtheircustomersfromlossesstemmingfrom

credit-cardandbank-accountfraud.Ifyouuseacreditcard,youhaveprobably

noticedthatthecardissuersandbanksarebecomingmuchmoreproactivein

freezingaccountswhensomethingappearsunusual.Astheabovenumbersshow,

theaveragelosspervictimhasfallendramaticallyinthepastdecade.Again,from

ConsumerReports:identityfraudisdownbecausefinancialinstitutionsare


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doingabetterjobpreventingit.Andconsumershavebeenmoreeagle-eyed

abouttheirownaccounts,withouttheneedforapaidsubscriptionservice.

Javelinfoundthat83%ofIDtheftisuncoveredbyself-detection(50%)orbanks

andcreditcardproviders(33%).Moreover,Javelinfoundthatpeoplewho

discoveredfraudbyreviewingtheirpaperstatementshadsignificantlylessmoney

stolenthanvictimswhowerenotifiedbyanidentityprotectionservice.

Thevictimsofidentitytheftdonotsuffersignificanthardship.Consumers

have,accordingtoaWellsFargoexecutive,essentiallyzeroliabilityforexisting

accountfraud.AccordingtoJavelin,ofthe12.6millionvictimsin2012,80%did

notsufferanyconsumercosts(medianout-of-pocketcoststoconsumersof$0)at

all.Javelinalsofoundthat,morethanhalfofallvictimsspentthreehoursor

lessresolvingfraudincidentswiththeirproviders.Javelinsbottomlineestimate

isthattheaveragevictimofidentitytheftsuffersalossof$365(includinglost

wages).Heressomesimplemath:

Expectedloss/year=4%(incidencerate)*$365(avg.loss)=$14.60

So,theexpectedlossperyearfromIDtheftislessthanthecostofonemonths

membershipinLifeLockUltimate.LOCKsmarketingstrategyisbasedonparanoia,

notreality.


35/57

http://www.consumerreports.org/cro/2012/02/debunking-the-hype-over-id-

theft/index.htm

https://www.javelinstrategy.com/

TheuseofthetermidentitytheftisamajorpartofLOCKsfear-

mongeringmarketingstrategy.Thetermimpliesthatunknownpeopleare

committingcrimesbystealingsomebodysentirelife.LOCKsmarketingportrays

identitytheftasanewandsophisticatedtypeofcyber-crime.Inreality,alotof

thecrimeclassifiedasidentitytheftissimplecreditcardfraud.Theresnothing

newaboutitatall.Moreover,manyoftheidentitythievesarenotunknown

people,butpeopleknowntothevictim.ANewYorkTimesheadlineproclaims:

IdentityThiefisOftenFoundinFamilyPhoto.Indeed,JavelinandtheFTChave

foundthatinhalfofcasesinwhichtheperpetratorwasidentified,theidentity

thiefwasafamilymember,friend,neighbor,orin-homeemployee.LOCKknows

thatitcannotdoanythingtopreventthistypeofcrime.Itsguarantee

specificallystatesthatfraudulentwithdrawalsbyfamilymembersarenot

covered.LOCKtriestoscarepeopleintopayingforaservicethatdoesnotwork

andthattheydonotactuallyneed.


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LOCKslatestmarketingschemeistofrightenparentsintopayingforID

protectionfortheirchildren.OntheQ12013conferencecall,Davisdiscussedthe

femaleprotectormarket.ManyofLOCKscurrentinternetadsportraychildren

aspotentialvictims.LOCKhasofferedaproductforminorssince2011,buthas

recentlyre-brandeditasLifeLockJuniorandraisedthepricefrom$2.50/month

to$5.99/month.LOCKsmarketingpromotestheideathatIDtheftisamajor

problemamongchildren.HereisoneastoundingclaimfromLOCKswebsite:

10.2%ofthechildreninthereporthadsomeoneelseusingtheirSocialSecurity

numberthats51timeshigherthantherateforadultsinthesamepopulation.

Thisstatementisbasedonanon-scientificstudythatwascommissionedbyone

ofLOCKscompetitors.Inablatantcaseofselectionbias,theauthorofthisreport

usedasampleofchildrenwhohadalreadybeennotifiedthattheirdatahadbeen

breached.Moreover,theauthoradmitsthathissampleincludesmorethanone

thousandeventscausedbymistakesinreporting,notfraud.Heincludedthese

eventsinhisdata.TheIdentityTheftAssistanceCenter(ITAC)commissionedits

ownreportonchildIDtheft.ThisreportfoundthattheincidenceofchildIDtheft

isactually0.85%/year,aboutone-sixththerateforadults.Thereportfoundthat

theaverageconsumerlossfromthecrimeis$165.Heresanothersimple

equation:


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Expectedloss/year=0.85%(incidencerate)*$165(averageloss)=$1.40

So,theexpectedlossfromchildIDtheftis2%oftheannualcostofLOCKschild

protectionproduct.

http://www.cylab.cmu.edu/files/pdfs/reports/2011/child-identity-theft.pdf

http://www.lifelock.com/education/articles/children/childrens-identity/

http://www.identitytheftassistance.org/promo/2012_Child_Identity_Fraud_Repo

rt/2012_Child_Identity_Fraud_Report.html

ItishighlydoubtfulthatLOCKcanprotectchildrenagainstIDtheft.LOCKs

numerousinternetadsforLifeLockJuniorportraysmilingchildrenasvictimsof

(literally)facelessthieves.Inreality,childIDtheftisoftencommittedbysomeone

closetothechild.TheIATCstudyfoundthatmorethan70%ofreportedchild

identityfraudiscommittedbyafamilyfriendorrelative.Inmanycases,the

perpetratorisactuallytheparentofthechild.Acommonscenarioisthatanadult

withpoorcreditwillusehisorherchildsSSNtoobtainacreditcardorapplyfora

loan.TheIATCreportfoundthat50%ofchildIDtheftcasesoccurredwithina

householdwithannualincomebelow$35,000.Aspreviouslymentioned,LOCKs

guaranteedoesnotapplywhentheidentitytheftiscommittedbyafamily


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member.LifeLockJuniorisjustthelatestonalonglistofdeceptiveadcampaigns

bythecompany.ItalmostgoeswithoutsayingthatLOCKhasneverproduceda

shredofquantitativeorqualitativeevidencethatithassuccessfullyprotecteda

childfromidentitytheft.

TheBustedIPO

LOCKsIPO,completedonOctober3,2012,wasicecoldfromthevery

beginning.Theinitialpricerangewas$9.50-$11.50,buttheIPOpricewas$9.00.

TheleadunderwriterswereMerrillLynch,GoldmanSachs(amajorshareholder),

andDeutscheBank.Thestockpricefell7.1%onthedayoftheIPOanddrifted

downwardsfromthere.Iteventuallyhitalowof$6.80onDecember21,2012.

ThelowerthanexpectedIPOpricewasnegativeforseveralreasons.LOCKraised

about$30millionlessthanexpected,selling15.5millionsharesforabout$126

million.Aboutone-halfoftheproceeds($62.6mil.)wereimmediatelyusedtopay

offloansfromMerrillandRBC,twooftheunderwriters.ThelowIPOprice

triggeredprovisionsinsomeofthepreviouslyissuedpreferredshares.LOCKwas

requiredtopay$10.7millionincashtoholdersofsomepreferredsharesand

covertsomepreferredsharesintoanunexpectedlyhighnumberofcommon


39/57

shares(20.5million).LOCKisnowexpectedtohave98millionsharesoutstanding

bytheendof2013.

LOCKblamedthebustedIPOoninvestorsperceptionofitasaservices

company.Davisandtheanalystswantinvestorstoevaluateitasahigh-growth

technologycompany.Ibelievethatitisabusinessthatchargesfeesforfree

services.Atanyrate,LOCKandtheanalystswentintofullpublicitymodetobring

thestockpricebackfromthedepths.Thepublicitycampaign,alongwiththeQ4

results,pushedthestockhigher.Thisrallyinthesharepriceiscertainlygood

newsfortheearlyinvestors,includingGoldmanSachsandseveralventurecapital

firms.

IDAnalyticsAcquisition

LOCKacquiredprivately-heldIDAnalyticsinMarchof2012.BruceHansen

foundedIDAnalyticsinSanDiegoin2002.HansenhadbeenPresidentatMHC

SoftwareuntilitwasacquiredbyFairIsaac.IDAnalyticsmainbusinessisto

provideidentificationservicestoenterprises.IDAnalytics,forexample,helps

businessestoauthenticatetheidentitiesofcreditcardusers.UsersofID

Analyticsservicespayfeesonapertransactionbasis.HeresabrieflookatID

AnalyticsfinancialsfromLOCKsfilingsandanalystsreports:


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2010 2011 2012E 2013E

Revenue(in$mil.) $22.9 26.9 27.0 27.5-30.5

EnterpriseTransactions(mil.) 184.0 227.0

Attheendof2011(priortotheacquisition),IDAnalyticshadanaccumulated

deficitof$28.7million.Netincomeforthecompanyin2011was$2.0million.

Revenuepertransactionfellfromapproximately14.6centsin2011to

approximately11.9centsin2012.Asaresult,IDAnalyticsshowednegligibleyear-

overyeargrowthfor2012.TheStreetanalystsforecastgrowthof10%orsofor

thissegmentfor2013.So,howmuchdidLOCKpayforthecompany?LOCKpaid

$186million!ThisdealvaluedIDAnalyticsatapproximately7times2011sales

and93times2011netincome.AsIDAnalyticsliabilitiesexceededitsassets,

LOCKaccountedfortheacquisitionbyrecognizing$129.4millioningoodwilland

$57.5millioninintangibleassets.ItsfairtosaythatLOCKisnotavalueinvestor.

LOCKpaidaveryhighpricetobuyIDAnalytics.Asidefromitsenterprise

business,thecompanyprovidesidentityverificationtoolstoLOCKandanumber

ofitscompetitors.ItisamajorpartofLOCKsstrategytoportrayitselfto

investorsasahigh-growthtechcompanyratherthanaservicesbusiness.Sofar,

however,theresnoindicationthatIDAnalyticsisactuallygrowingorbenefitting


41/57

LOCKsconsumerbusiness.Moreover,itappearsthatIDAnalyticsbusinessis

gettingworse.LOCKsenterprisebusinessreportedoperatinglossesof$5.7

millionfor2012and$3.3millionforQ12013.IDAnalyticswassupposedly

(slightly)profitablepriortotheacquisition.LOCKitself,bytheway,represented

16.1%ofIDAnalyticsrevenuesfor2012.ItappearsthatLOCKsplanforID

Analyticsisalreadyintrouble.

http://www.idanalytics.com/

TheFTCAgain

IDAnalyticsisinvolvedinanFTCinquiry.InDecember,2012,IDAnalytics

wasoneofninecompaniescontactedbytheFTCinaninvestigationofdata

brokers.TheFTCdemandedthatthecompaniesturnoverinformationonhow

theycollectdataonconsumersandhowtheyuseit.TheFTCisconcernedthat

companiesarecollectingandsellingdatawithoutcomplyingwithconsumer

protectionsrequiredbylaw.UndertheFairCreditReportingAct(FCRA),for

example,consumersmustbegiventheopportunitytocorrectinaccurate

informationintheircredithistories.InJune,2012,theFTCleviedafineof

$800,000againstacompanycalledSpokeoforviolationsofconsumer

protections.Spokeoprovidespersonalfinancialinformationtoemployersfor


42/57

backgroundscreeningsonprospectiveemployees.Thecompanysdatawas

riddledwitherrorsandconsumershadnoabilitytoreviewit.Spokeo,bytheway,

wasalsoaccusedofusingitsownemployeestopostfakereviewsand

recommendationsonwebsites.IDAnalyticsmaybeatriskiftheFTCdetermines

thatitissellingpersonaldatatobusinesses.

http://www.latimes.com/business/technology/la-fi-tn-federal-trade-commission-

to-data-brokers-show-us-your-data-20121217,0,3071455.story

TheIDAnalyticsdealappearstobeallaboutperception.Ininvestor

meetings,DavisoftencomparesLOCKtoexpensivesoftwarestockslike

salesforce.comandNetSuite.IDAnalyticswassupposedtooperateassemi-

independenttechnologydeveloper.Thisstatementappearedinthepressrelease

announcingtheacquisition:IDAnalyticswillcontinuetooperateindependently

asawhollyownedsubsidiaryofLifeLockandwillcontinuetooperateunderthe

leadershipofitscurrentCEO,BruceHansen,whowillreporttoToddDavis.Alas,

HansenleftIDAnalyticsassoonastheinkwasdryonthedeal.Hewasreplaced

asCEObyLarryMcIntosh,IDAnalyticsformerChiefMarketingOfficer.McIntosh

doesnotappeartobeanykindoftechexpert.Hehasabackgroundinmarketing

andadvertising,includingmanyyearsatPepsi/FritoLay.IDAnalyticswillneed


43/57

newtechnologyasitfacesincreasingcompetition.Experiansrecentlyexpanded

PreciseIDproduct,forexample,competesdirectlywithIDAnalytics.Itis

interestingthatLOCKonlyattributed$29.4millionofIDAnalyticsintangible

assetstoacquiredtechnology,16%ofthepurchaseprice.IsuspectthatLOCK

mainlypurchasedIDAnalyticstoachieveahighervaluationfrominvestors.

http://www.experian.com/decision-analytics/identity-and-fraud/fraud-detection-

and-prevention.html

Valuation

LifeLockhasthevaluationofahigh-growthtechnologyfirm.Herearesome

ofthekeyfinancials:

Totalrevenue: 2012: $276.4million(excl.2.5monthsofIDAnalytics)

Q12013: $82.1million

Adj.netincome: 2012: $22.0million(incl.$13.7mil.taxbenefit)

Q12013: $573,000

Adj.EBITDA: 2012: $30.3million

Q12013: $1.9million


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FCF: 2012: $40.9million

Q12013: $11.5million

TangibleBV: $39.9million

TangibleBV/Share: $0.41

InitsQ12013earningsrelease,LOCKguidedtothefollowingfor2013:

Totalrevenue: $347$355million

Adj.netincome/share: $0.32-$0.36

Totalshares: 98million

Adj.EBITDA: $38-$42million

FCF: $43-$48million

Themarketcapitalizationisapproximately$1.1billion.LOCKendedQ1

2013with$145.3millionincash,soEVisapproximately$950million.Thestockis

tradingat25Xtangiblebookvalue.UsingLOCKsestimates,thestocktradesat

forwardmultiplesofapproximately:23XEV/EBITDA,32XP/E,20XEV/FCF,and

2.6Xrevenue.So,canLOCKachievethekindofgrowthin2013andbeyondthatit

needstojustifythesemultiples?Thereareindicationsthatitcannot.


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LOCKisspendinghugeamountofmoneytoattractnewcustomers.Despite

itsmanyproblems,thecompanyreports2.6millionmembers.LOCKachievedthis

levelbyraisingalotofmoneyfrominvestorsandspendingitonadvertising.LOCK

hasabout100millionsharesoutstandingbecauseitrepeatedlysoldpreferred

stockasaprivatecompanytofundits(unprofitable)growth.Thisadspendinghas

acceleratedinthepastthreeyears.

Annualsalesandmarketingexpenses: Advertisingspending:

2008:$80.9mil. 2010:$42.7mil.

2009:$77.8mil. 2011:$54.6mil.(+27.9%y-o-y)

2010:$78.8mil. 2012:$66.0mil.(+20.9%y-o-y)

2011:$91.2mil.(+15.7%y-o-y)

2012:$123.0mil.(+34.9%y-o-y)

Q12013:$41.8mil.(+37.7%y-o-y)

So,LOCKssalesandmarketingexpenseforjustthefirsthalfof2013will

likelyexceedsalesandmarketingexpenseforallof2010.LOCKprovidesstatistics

ontheaveragecostofacquiringanewmember.Averagecostofacquiringa

member:


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2008:$82 2011:$130

2009:$126 2012:$150

2010:$152 Q12013:$156

LOCKsnumbersshowthatthecostofacquiringanewmemberhasnearly

doubledoverthepastfiveyears.

Letslookatyear-over-yearcomparisonsforgrossnewmembersforthe

pastthreequarters:

June,2011:180,000 June,2012:169,000 (-11,000)

September,2011:173,000 September,2012:187,000 (+14,000)

December,2011:205,000 December,2012:198,000 (-7,000)

March,2012:208,000 March,2013:249,000 (+41,000)

LOCKsmembershipgrowthinQ12013waslikelyaidedbythelaunchof

theGiulianiadcampaign.LOCKprovidesthenumbersoftotalmembersandgross

newmembers.Thesenumberscanbeusedtocalculatenetnewmembersand

droppedmembers.Letsnowlookatmembership(inmil.):

2008 2009 2010 2011 2012 Q113

TotalMembers(inmil.) 1.331 1.621 1.748 2.075 2.480 2.636


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GrossNew(in1000s) 924 618 517 704 762 249

NetAdds(in1000s) +290 +127 +327 +405 +156

Dropped(in1000s) 328 390 377 357 93

Y-O-YGrowth(%) 21.8 7.8 18.7 19.5 19.5

Duration(years) 4.5 4.3 5.1 6.4 6.9

MemberDuration=(avg.#membersforperiod)/(#droppedmembers)

Asthetableshows,LOCKloses350K400Kmembersperyear.LOCKmust

increaseitstotalmembershipbyapproximately500Kperyearinordertomeet

analystsestimates.LOCKaveragedabout287Knetadditionsperyearfrom2009-

2012.

LOCKisspendingmillionsofdollarstoattractcustomersthatmayneverbe

profitable.Itmakesabigdealoutofitsmemberretentionrate(87.2%atQ113),

butthisstatisticisnotveryuseful.Accordingtothe10-K:Wedefinemember

retentionrateasthepercentageofmembersonthelastdayoftheprioryearwho

remainmembersonthelastdayofthecurrentyearItisnotameasureofthe

annualrenewalrate.Italsodoesnotcapturepeoplewhosubscribebythemonth

butcancelinlessthanoneyear.Inanycase,thecurrentmemberretentionrateis

actuallylowerthanitwasin2008(89.8%).LOCKneedsitsmemberstorenewin


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largenumbers.Basedonrevenueandexpensenumbers,wecanestimatethe

paybackperiodofanewmember.

2010 2011 2012 Q12013

Monthlyrev./member$7.94$8.54 $9.28 $9.80

Acquisitioncost/member $152 $130 $150 $156

Grossmargin% 68.3% 67.7% 71.1% 71.0%

Paybackongrossprofit(inmos.) 28 22 23 22

Op.profit%ex.sales/marketing 40.8% 49.5% 49.2% 46.1%

Paybackonop.profitex.s&m(mos.) 47 31 33 35

So,basedonthecurrentnumbers,acustomerbecomesprofitableonan

operatingbasisafterslightlylessthanthreeyearsofmembership.Ibelieve,

however,thatthisnumberismisleadinglylowbecauseLOCKcouldnotactually

operateitsbusinesswithzerosalesandmarketingexpense.LOCKmustspend

enoughmoneyonsalesandmarketingtoreplacedroppedmembers.Ican

estimatethiscostandcalculateanewpaybackperiod:

2010 2011 2012 Q113

Monthlyrev./member $7.94 $8.54 $9.28 $9.80

Acquisitioncost/member $152 $130 $150 $156


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Droppedmembers (in1000s) 390 377 357 93

Marketingtoreplacedropped(in$millions) $59.3 $49.0 $53.6 $14.5

Op.profit%ex.sales&marketing 7.8% 24.2% 29.8% 28.5%

butincl.replacementmarketing

Paybackperiod(inmonths) 245 63 54 56

So,basedontheQ12013numbers,thepaybackperiodonanewmemberrisesto

4.7yearswhenthemarketingexpensetoreplacedroppedmembersisincluded.

LOCKneedstobealotmoreefficienttomeetprofitexpectations.The

(bullish)analystsforecastsfor2014operatingmarginsrangefrom7.5%to

12.25%.LOCKsoperatingincomewasonly$13.1millionin2012,4.7%of

revenues.Inordertomeetlong-termestimates,LOCKmustaddmillionsofnew

memberswhilereducingitscosts.Idonotbelievethatthisispossible.Nobody

elseinthisindustryspendsasmuchmoneyondirect-to-consumeradsasLOCK.

BythetimethatitcompleteditsIPO,LOCKhadanaccumulateddeficitofmore

than$200million.LOCKreportedoperatinglossesofmorethan$55millionin

both2008and2009.LOCKhadtospendhundredsofmillionsofdollarson

marketingtoachieveitscurrentmarketshareofapproximately7%.LOCKneeds

rapidgrowthtojustifyitshighstockmarketvaluation.

LOCKvs.INTX


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LOCKisvastlyoverpricedwhencomparedtoitsmostdirectpure-play

publiccompetitor,Intersections(INTX).INTX,whichoperatesIdentityGuard,

generates99%ofitsrevenuefromidentityprotectionservices.Theservices

providedbyINTXareverysimilartothoseofLOCK.

Keystatistics:

LOCK INTX

EV $950million $160millionRevenue(TTM) $300.1million $340.7million

EV/Revenue(TTM) 3.2 0.47

EV/EBITDA(TTM) 44.6 3.73

OperatingIncome (2012) $13.1million $33.5million

OperatingMargin(2012) 4.7% 9.6%

Price/BV 4.5 1.5

Price/TangibleBV 23.8 2.9

Price/Op.CashFlow(TTM) 18.5 4.4

DividendYield 0% 8.56%

Subscribers 2.6million 4.2million

EV/Subscriber $341 $38

TheStreetclearlylikesLOCKalotmorethanINTXrightnow.Onefactoris

thatLOCKhassixanalystswhofollowthecompany,whileINTXhaszero.Allsixof

LOCKsanalystsworkfortheIPOunderwritersandratethestockatBuyor


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StrongBuy.Alloftheseanalystspromotethethesisthattheidentityprotection

industryisintheearlystagesofhyper-growth.Ibelieve,however,thatthe

industrymaybeintheearlystagesofacrisis.

INTXssituationdemonstratesthattheidentityprotectionbusinesshas

seriousproblems.Thecompanysstockpricehasdeclinedbymorethan50%since

mid-2011becauseitsrevenuegrowthhasdisappeared.INTXhashistorically

acquiredmostofitssubscribersthroughitsrelationshipswithbanks.INTXonly

spent$21.1milliononmarketingin2012.UnfortunatelyforINTX,itsbanking

partnershavereducedorstoppedenrollingcustomersinidentityprotection

services.Thereason,accordingtomanagement,isthatthebanksareunder

pressurefromtheConsumerFinancialProtectionBureau(CFPB).In2012,for

example,theCFPBlevieda$210millionfineagainstCapitalOneFinancialfor

deceptivelymarketingseveralservices,includingidentityprotection.Duetothe

slowdowninitsbankingbusiness,INTXsmanagementhasvowedtoincrease

consumerspendingtocompetedirectlywithLOCK.Asitstandsnow,INTX

receivesthekindofvaluationmultiplesthattheStreetgivestoslow-growth

servicesbusiness.IfandwhenLOCKsgrowthslowsdown,thestockwillbe

extremelyovervalued.ThebullsonLOCKdonotwantpeopletonoticethisfact.

TheDeutscheBankanalyst,forexample,doesnotevenlistINTXasoneofLOCKs


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comps.ItactuallyappearsthattheDBanalystisunfamiliarwithLOCKsbusiness.

HelistsabunchofunrelatedcompaniesascompsforLOCK(e.g.,RedHat,Adobe,

Oracle),butnotactualdirectcompetitorssuchasExperianandEquifax.

Valuation

HerearethecurrentStreetestimatesforLOCK:

2013E 2014E

EPS(non-GAAP) $0.34 $0.48

Revenue $351.8mil. $423.8mil.

Theanalystspricetargetsrangefrom$12.50to$18.Thesetargetsarebasedon

multiplesofprojected2014freecashflowthatrangefrom17Xto27X.These

valuationsonlymakesenseifLOCKcangrow25+%/yearfortheindefinitefuture.

AsIveargued,LOCKisaservicesbusinessinahighlycompetitivemarket.LOCK

hasabout$1.46/shareincash.IbelievethatLOCKshouldtradeatnomorethan

1X2013revenues.Thisvaluationimpliesastockpriceofapproximately$5.00.

LOCKUpExpiration

TheexpirationoftheIPOlockupatthebeginningofApril,2013,allowsfor

thepossibilitythatmajorinvestorswillselltheirshares.LOCKsexecutiveofficers

arenotsignificantstockholders.Davisonlyownsapproximately2%ofthe


53/57

company.Hebegantosellsharesassoonasthelockupexpired.MostofLOCKs

sharesareheldbypre-IPOinstitutionalinvestors.Asaprivatecompany,LOCK

fundeditselfwithsevenroundsofpreferredstocksales.Thepreferredshares

wereconvertedintocommonshareswhentheIPOwascompleted.Alarge

numberofthesesharesareheldbyVCs:KleinerPerkins,IndustryVentures,and

BessemerVenturePartners.GoldmanSachsandSymantecCorporationarealso

largeholders.Accordingtotheprospectus,theholdersofabout56.8million

shares(3Xthecurrentfloat)haveregistrationrights.Itisdifficulttodeterminean

actualsharecountforLOCK.Theoriginalsharecountwasabout86millionshares,

butthecompanysaidthatthesharecountfor2013willbe98millionshares.The

stockcurrentlytradesonlyabout800Ksharesperday.Theanalystsare

(obviously)promotingthestockinanticipationofmultiplesecondaryofferings.

Conclusion

LifeLock,theidentityprotectioncompanythatcouldnotprotectitsown

CEO,isacompanythatshouldhavediedlongago.Ifyouhavereadthisfar,you

knowthatIbelievethatLOCKisinblatantviolationofthe2010FTCOrder.LOCK

continuestomakeunsubstantiatedclaimsaboutitsabilitytoprotectagainst

identitytheft,promotesitsnearlyworthlessguarantee,payspeopletopromote


54/57

thecompanyontheInternet,andchargesforservicesoflittlevalue.Anybodycan

lookatLOCKsfinancialsandseethatLOCKsadspendinghasacceleratedsinceit

wasaccusedofdeceptivemarketing.Asidefromthatissue,LOCKfacesamarket

thatalreadyhastoomanyfirmsprovidingthesameservices.Meanwhile,the

needfortheseservicesisshrinkingasthecreditcardcompaniesandconsumers

aregettingbetteratstoppingidentitythieves.Sinceitisaservicesbusiness,I

believethatafairvalueforLOCKisabout$5.00.If,however,theFTCorstate

attorneystakeanotherlookatLifeLocksbusinesspractices,thenthestockis

worthmuchlessthanthat.

LegalDisclaimer:

Thisresearchreportexpressesmyresearchopinions,whichIhavebasedupon

certainfacts,allofwhicharebaseduponpubliclyavailableinformation.Any

investmentinvolvessubstantialrisks,includingcompletelossofcapital.Any

forecastsorestimatesareforillustrativepurposeonlyandshouldnotbetakenas

limitationsofthemaximumpossiblelossorgain.Anyinformationcontainedin

thisreportmayincludeforward-lookingstatements,expectations,and

projections.Youshouldassumethesetypesofstatements,expectations,and


55/57

projectionsmayturnouttobeincorrect.Thisisnotinvestmentadvicenorshould

itbeconstruedassuch.Youshoulddoyourownresearchandduediligence

beforemakinganyinvestmentdecisionwithrespecttosecuritiescoveredherein.

Theauthormayhaveashortpositioninthisstockandmaytradethisstock.


56/57
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