Originally created 05/10/04

Diebold finds voting machine business stormy

NORTH CANTON, Ohio -- After the Florida punch-card debacle hurt the credibility of the last presidential election, ATM maker Diebold Inc. decided it should expand into electronic voting.

"In November of 2000, I was embarrassed for this country," said Walden W. O'Dell, Diebold's chairman and chief executive.

The Florida fiasco also inspired Congress, which appropriated $3.9 billion for an overhaul of the nation's voting systems - one that was to be fueled by technology promised by the likes of Diebold.

But Diebold has yet to realize large rewards for its shift into electronic voting.

Instead, it has reaped a storm of criticism and even a call for a criminal investigation by California's top election official, who banned the company's newest touchscreen voting computers April 30, citing concerns about security and reliability.

The Diebold ballot appears on a portable screen that voters touch and confirm, and votes are stored on memory cards. But because the machines do not produce a paper record for each vote, critics say proper recounts are impossible.

Computer security experts say the Diebold machines - and those of rivals - have been carelessly developed and are too vulnerable to tampering and malfunction. Other critics have questioned the close ties that O'Dell and other company executives have with Republicans.

The onslaught has slowed sales and forced the company to lower financial expectations for Diebold Election Systems, the subsidiary that makes the touchscreens.

North Canton-based Diebold supplied 55,600 touchscreen voting stations for the March 2 "Super Tuesday" primaries, mostly in Maryland, Georgia and California. A competitor, Election Systems & Software of Omaha, Neb., has installed about 36,000 screens.

Diebold's e-voting system was first stung by criticism last year when an unidentified hacker managed to obtain the company's software blueprints, known as source code, along with e-mails and other documents. That gave computer scientists a chance to evaluate the code and question its integrity.

And during the primaries, vote counts in Maryland were delayed because of modem glitches, and machines in much of California's San Diego County malfunctioned, potentially disenfranchising hundreds of voters.

Diebold argues that the security concerns are unfounded and blames human and mechanical errors.

"People forget we are a small part of a big process," said Bob Urosevich, chief executive of Diebold Election Systems. "Elections are conducted by state and local officials, not by individual vendors, and that seems to get lost."

Some county election officials agree.

"There are some security issues that were identified, and in many cases they have been fixed," said Jeff Matthews, director of the Stark County Board of Elections in Ohio. "To imply that insiders can change the outcome of an election is incorrect. It implies that election officials across the state are incompetent or corrupt and neither of those statements are true."

That hasn't stopped detractors from taking aim at Diebold's political preferences.

Diebold or people affiliated with the company made more than $325,000 in political contributions since 2000, mainly to President Bush or Sen. George Voinovich, R-Ohio, according to the independent Center for Responsive Politics, which tracks money in politics.

In August, O'Dell said in a fund-raising letter for the Ohio Republican Party that he was "committed to helping Ohio deliver its electoral votes" to Bush.

The letter was sent just as Ohio's top elections official, a Republican, was about to qualify Diebold as one of three companies eligible to sell electronic voting machines in the state.

"The issue won't go away. I feel very badly about it," O'Dell said told The Associated Press. "I made a misstep with that letter."

O'Dell, who has been a guest of the president in Texas, said that since September he has sworn off politics.

At Diebold's annual shareholders meeting last month, O'Dell said he decided to turn the $2.1 billion company's attention to voting machines because he believed it could help modernize elections.

While the election subsidiary has struggled financially, the rest of Diebold, mainly ATMs and safes, has thrived. Election systems was the only Diebold unit to post lower sales last year than in 2002.

Although Diebold's stock price appears hardly to have been affected, some analysts wonder whether Diebold will have the fortitude to remain much longer in the election tech market, which represents only 5 percent of its overall business.

"Election systems is a small part of the business, but it's getting 90 percent of the publicity," said Kartik Mehta, an analyst for FTN Midwest Research.

But O'Dell told shareholders that Diebold has no intention of quitting and "will ultimately produce the solutions that this country wants in a very fair and open way."

Diebold had expected its election systems revenue to grow to as much as $170 million in 2004, from about $100 million last year, based largely on revenue from Ohio's conversion from punch cards. The company now expects election systems revenue in the $80 million to $95 million range.

In an annual report filed in March with the U.S. Securities and Exchange Commission, Diebold said technical and security questions are likely to increase costs and may hurt sales because of delays in implementing the machines.

Meanwhile, the drumbeat of criticism is getting louder, with Ohio officials joining counterparts from other states in questioning whether Diebold systems are secure.

Ohio has delayed releasing $127 million in federal money for new voting machines while lawmakers study security issues; six of the state's 88 counties now have touchscreens.

"Every time there is an independent test, security flaws have been identified," said state Sen. Teresa Fedor, a Democrat on the state's review committee. "It's an indication we need to slow down the process."

Diebold has "not shown they know how to build really secure systems, and to me election security is national security," said David Jefferson, a computer scientist at Lawrence Livermore National Laboratory in California.

"I don't think there is much likelihood of someone hacking into voting systems," Jefferson added, "but we do know with Diebold's system there can be some mischief."

A look at Diebold Inc. and its voting systems segment:

Diebold Inc.:

Headquarters: North Canton, Ohio.

History: Charles Diebold begins manufacturing sales and bank vaults in 1859. The company displays a prototype automated banking machine in 1967 and markets an ATM system in 1973.

Businesses: Financial self service, security devices and election systems.

2003 Results: Sales $2.11 billion; operating profit $262.8 million; net income $174.8 million.

2002 Results: Sales of $1.94 billion; operating profit $241.2 million; net income $99.2 million.

Diebold Election Systems Inc.:

Main office: McKinney, Texas

History: In January 2002, Diebold acquired Global Election Systems, a manufacturer and supplier of electronic voting systems, with cash and stock totaling $24.7 million.

Business: Electronic voting machines.

2003 Results: Sales $100.2 million; operating profit $6.5 million.

2002 Results: Sales $111 million; operating profit $9.5 million.

Diebold does not separate net income for the subsidiary.

Source: Diebold Inc.

On the Net:

Diebold Election Systems: http://www.diebold.com/dieboldes

Help America Vote Act: http://www.fec.gov/hava/hava.htm


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