A Question of Symantec

The numbers bear out Symantec's dominance. In 2005, the company held a 53.6% share of the world-wide antivirus software market — including both the consumer and enterprise segments — according to a report released in June by independent research house Gartner Dataquest. Its closest competitor, McAfee (MFE), held a much smaller 18.8% slice. Microsoft wasn't even a blip on the security radar last year.

That could soon change. The software giant made its long-anticipated entrance into the consumer security market on May 30 with the release of its Windows Live OneCare security service. Described by Microsoft as the "pit crew for consumer PCs," OneCare exemplifies the industry's shift from targeted security software products to what is called "Security 2.0" — automated subscription-based security services that not only offer firewalls and protection against viruses and identity theft, but also feature regular PC maintenance and backup storage for everything from doctoral theses to 2,000-song MP3 collections.

Both Symantec and McAfee are responding to OneCare's advances with all-in-one subscription security services of their own. McAfee's Total Protection service was recently released, and Symantec's Norton 360 is anticipated to come out later this year or in early 2007. While it would obviously help Symantec to debut 360 as soon as possible, I'm highly doubtful that its customers are going to defect to the nascent offerings of Microsoft anytime soon. Keep in mind that consumers have been buying Symantec's software to battle viruses and other malicious content that take advantage of weaknesses in Microsoft's operating systems. That doesn't instill a lot of trust in Microsoft's security abilities. Plus, Microsoft may need to do a few upgrades to OneCare to make it more compelling to subscribers.

"Since announcing OneCare, (Microsoft) has received the lion's share of press coverage," wrote Pacific Crest Securities analyst Rob D. Owens in an industry report published on Thursday. "The headlines the product received obscured just how underwhelming the product is, in our view." (Pacific Crest Securities makes a market in Symantec's shares.)

The issue of pricing has also been at the forefront of the security wars. While Symantec has thus far fended off any meaningful impact from the free security offerings of Internet service providers like Comcast (CMCSA) and Time Warner's (TWX) AOL, it could eventually find Microsoft's price point troublesome. A year-long subscription to OneCare for up to three PCs costs $49.95, while Symantec's Norton Internet Security software suite costs $69.99 for one PC ($119.99 for three PCs). A one-year subscription to McAfee's Total Protection runs $79.99.

Even with the pricing pressure, Susquehanna Financial Group analyst Greg Moskowitz says it'll be hard for Microsoft to lure subscribers away from Symantec based on price. Most consumers installed Norton software on their desktops years ago and continue to renew their subscriptions annually. "To some extent, it's almost like the path of least resistance," he says. (As an apparent sign of its confidence that it won't lose subscribers, Symantec recently ratcheted up its annual renewal rate for its Norton Internet Security and Norton AntiVirus products by $10 a year.)

While several analysts say it's still too early to tell what impact Microsoft's presence will have on Symantec's hold on the market, Pacific Crest's Owens ventures that Microsoft could take a "modest share" from Symantec over the next nine to 12 months, but by no means would it threaten the company's leadership position. Next year, when Microsoft finally releases its Vista operating system, which will undoubtedly come with its own security offerings, Symantec may feel more of the squeeze.

Even then though, there are growth opportunities at Symantec's enterprise business that could offset any softening at the company's consumer business.

After spending $10.2 billion to buy storage software powerhouse Veritas last year, Symantec is starting to reap the benefits of adding Veritas's highly regarded storage technologies, as well as its sales force. The company says it has a slew of products in the pipeline that incorporate Veritas technology. Just as in the consumer market, offering bundled products to business customers should help bolster growth.

"I believe that there could be more margin expansion here than people realize," says Stifel Nicolaus analysts Todd Weller, whose firm makes a market in Symantec's shares. The analyst has had a Hold rating on Symantec's stock since it announced its merger with Veritas, but Weller says he's grown more positive on the stock and believes the company "could be at a turning point."

According to a consensus estimate by Thomson First Call, analysts expect revenue at the company to increase by 6.4% to $5.33 billion for the current fiscal year ending in March. While per-share profits are expected to be 99 cents a share, down a penny from fiscal 2006 earnings of $1 a share, analysts expect earnings to jump by 16% the following year to $1.15.

That is if Symantec is still an independent company by next year. Recent consolidation in the security industry has takeover rumors flying. Some analysts have wondered if perhaps Symantec is a takeout target for a large company like Hewlett-Packard (HPQ), which is one of the few big enough to afford Symantec and its $18.3 billion market cap. Stifel Nicolaus's Weller notes that H-P might want to quickly fill holes in its security offerings to keep up with competitors IBM (IBM) and EMC (EMC), which both made billion-dollar-plus acquisitions in the security space. As exemplified by its July acquisition of Mercury Interactive, H-P is looking to expand its high-margin software business, adds the analyst. Of course, Microsoft is also big enough to swallow Symantec, but it seems Microsoft has stuck to smaller buys. Never mind that a deal between Symantec and Microsoft would undoubtedly draw the unwanted attentions of antitrust officials.

Takeover rumors or not, Symantec is poised to grow its business — and its stock price — one way or another. Most likely, it will be on its own while doing what it does best: defending itself against impending threats.