Intel And Microsoft Squeeze Symantec In Security Software

Not in an enviable spot

Microsoft recently started to offer an antivirus software product “Security Essentials” for free to businesses with 10 or fewer PCs and started to distribute the software through its Microsoft Update distribution system. ^[]

We believe that this step could further hurt antivirus software companies, especially Symantec, which is the dominant player in this market through its flagship product Norton. Intel also announced its acquisition of McAfee, which is in the process of being finalized and could present future challenges for Symantec given that it is a well known brand for antivirus software.

With Microsoft and Intel moving more aggressively into this space, we could see the landscape for antivirus software quickly change in the coming years. Below we assess the potential market share impact for Symantec. We currently have a price estimate of $22.33, roughly 30% above the current market price.

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Microsoft Security Essentials

Security Essentials was introduced in September 2009 and replaced Microsoft’s paid Windows Live OneCare subscription service. According to an accuracy rating agency, Security Essentials identified 98% of over half a million malware samples, ^[] which was second behind Symantec’s Norton. ^[]

The fact that Microsoft’s Security Essentials is free and conveniently installed through the Windows Update system gives Microsoft a distribution advantage and so consumers could opt for Security Essentials and replace Symantec’s Norton antivirus software. Moreover, the decision to provide Security Essential to businesses with 10 or fewer PCs for free could also enable Microsoft to gain a foothold with growing businesses that could become larger paying enterprise clients in the future.

Norton’s Current Leadership Threatened

Norton antivirus software constitutes around 29% of the $22.33 Trefis price estimate for Symantec’s stock. Symantec’s Norton is the market leader in the antivirus software market with a share of around 52% as of 2009. We believe that Symantec will slowly continue to lose market share to around 46% by the end of Trefis forecast period; however this could accelerate if competition heats up from tech giants Microsoft and Intel.

Symantec has lost share in the past in part due to higher prices than competitors and due to the fact that Norton’s PC requirements frustrates some users. Norton antivirus software is priced at $39.95 ^[], which is much higher than many antivirus products in the market (like AVG, Kaspersky Labs, Trend Micro and CA), and its software can be difficult to uninstall which frustrates some users.

Norton Antivirus 2011 promises better features like faster installation and faster virus scans. Another important security feature includes Norton’s approeach to virus and spam detection. Its new software will run behavior and reputation-based checks rather than the signature-based check which should make it more accurate. It works on the principle that a file or an email credentials will first be checked against Symantec’s server, which will have an extensive database of known issues. This proactive rather than reactive approach to software security holds a lot of promise in our view.

Due to its market leadership and new products, our base case suggests that Norton’s market share may not decline at a faster rate. However, the dual threats of Microsoft and Intel in its core businesses is a concern.

There could be downside of more than 10% for Symantec’s stock if its market share declines to 30% by the end of Trefis forecast period, instead of 46% that we forecast. This does not factor in potential pricing declines due to heightened competition which could add further pressure in this scenario.

You can see the complete $22.33 Trefis Price estimate for Symantec stock here.

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Momentum In PCs Can Drive Microsoft To $33

Ballmer's boys are back

Microsoft recently announced earnings and confirmed that the PC refresh cycle is well underway as evidenced by corporate PC sales growth of around 16% and single digit consumer PC sales growth in the latest quarter versus the same period a year ago. ^[]

Due to IT budget cuts and uncertainty regarding the economic recovery, many companies and consumers held back on spending in 2008 and 2009 leaving technology bellwethers like Microsoft, Oracle, SAP and Adobe worrying about when this spending would return.

We expect Microsoft to benefit broadly, but see two drivers in particular that will lift its share price: 1) higher netbooks and notebook sales, and 2) software licensing for companies, also known as productivity software.

Combined, we could see these segments add 12% to our current $30.67 Trefis price estimate, which is about 13% higher than current its current market price.

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Growth in Notebooks and Netbooks

The overall PC industry, including desktops, notebooks and netbooks, grew 10% overall last quarter versus the same period a year ago. Given pent up demand, Microsoft management expects sales growth to remain brisk until at least mid-2011. ^[]

We currently expect the number of notebooks and netbooks unit sales to grow from 176 million in 2009 to 328 million by the end of Trefis forecast period, at an average annual growth of around 8%. However, if notebook and netbooks sales show an average annual growth of 12%, we forecast an additional upside of around 5% to the $30.67 Trefis price estimate for Microsoft?s stock. See our chart below.

Given the trend for lower priced mobile computers and emerging market growth that tripled developed market growth, we feel that a 12% growth assumption for the netbooks and notebooks segment is reasonable.

Software Licensing a Profit Engine

Microsoft dominates the productivity software market which is focused on the corporate market and had around 95% market share in 2009. This segment showed double digit growth and includes Microsoft Office, SharePoint and Exchange ^[].

We currently expect productivity software sales to increase from around 305 million in 2010 to 415 million licenses by the end of Trefis forecast period at an average annual growth rate of 5%.

However, if this growth rate parallels PC sales growth of 10% since 1) users with newly purchased PCs will likely install Windows 7 – the latest version of the Windows OS, and 2) more users adopting Windows 7 will lead others to upgrade their systems, then new licenses could reach 600 million by the end of Trefis forecast period adding 7% to the Trefis share price estimate.

You can see the complete $30.67 Trefis Price estimate for Microsoft stock here.

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