For Symantec and McAfee, ‘Arms Race’ for Security

The two leading makers of computer security software, Symantec and McAfee, are like preachers who conduct dueling tent revivals.

AP

They boast and frighten and denounce each other while trying to convince the crowd that their particular brand of salvation will ward off the devil — in this case, malicious e-mail viruses and evil Internet worms.

The stakes are huge: millions of global followers willing to donate a steady sum every year for protection against online threats.

Recently, the competition between the two has become fiercer, as both have tried to get their software tied to more new personal computers, Web sites and Internet service providers. McAfee has been particularly aggressive, using a string of deals with large PC makers in a bid to usurp Symantec’s leadership position.

“It’s like an arms race,” said Albert A. Pimentel, the chief financial officer of McAfee, who goes by the pugilistic nickname Rocky. Security companies must constantly persuade customers and partners to renew subscriptions or switch from a competitor with similar products.

For years, McAfee served as a self-defeating also-ran, cleaning up the scraps left by Symantec. The company, based in Santa Clara, suffered from a decade of legal and accounting problems that left it in poor competitive shape, and employee morale low.

Things, however, have changed in the last two years since David G. DeWalt left his post as head of sales at the storage company EMC to run McAfee, succeeding George Samenuk, who stepped down in a stock-option backdating scandal. Under Mr. DeWalt, the company has expanded well beyond antivirus software, acquired some niche security players and increased sales to consumers and large businesses.

McAfee is poised to overtake Symantec next year in sales to the business market if current trends hold.

Symantec, based in Cupertino, Calif., remains the overall security market leader, with just about double the market share of McAfee, according to the research firm Gartner.

In the consumer market, Symantec holds an even larger lead, with 52 percent share and $1.8 billion in revenue last year, compared with 18 percent of the market and $624 million in revenue for McAfee. A host of smaller players like Trend Micro, CA and Kaspersky Lab round out the field.

“It is really Symantec and the seven dwarfs,” said Enrique T. Salem, the chief executive of Symantec.

In a bold and somewhat risky bid to raise its stature with consumers, McAfee has tried to win over PC makers with something they all like: lots of cash. In the last year, it spent $55 million, more than any of its rivals, to get McAfee security software preloaded onto new computers. It now counts Dell, Acer, Toshiba, Sony and Lenovo as partners.

“We are shipping on twice as many computers as the year prior,” Mr. DeWalt said.

Up to 40 percent of all computers bought by consumers this year will include McAfee’s software, the brokerage firm Jefferies & Company estimates.

Hewlett-Packard , the world’s largest computer seller, has an exclusive deal with Symantec on its consumer PCs. Mr. DeWalt said that deal should come up for bids within the next year, and Symantec will have to fight to keep it.

“They didn’t have much competition back then, but they will this time,” he said.

Mr. Salem shrugs off Mr. DeWalt’s tough talk. “I love the rhetoric and the chest-pounding,” he said.

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“We need to be on as many computers as possible without being irrational,” Mr. Salem said. If McAfee bids too high, Symantec will walk away from the deal and direct its money toward building some of its other, nonsecurity products, he said.

But, in another breath, Mr. Salem boasts that Symantec has won eight out of the nine PC deals up for bid so far in 2009. Symantec, for example, has chipped away at parts of Dell not covered by McAfee, like gaming PCs.

The payments that both companies make to partners have their own byzantine accounting, and critics complain that the companies are not being straightforward with shareholders.

Quite often, the deals with the PC sellers require the security companies to make upfront payments. Both parties then share revenue over the lifetime of the deal, as some people extend their subscriptions beyond the initial free trial period and begin paying annual fees for the software.

McAfee incurs larger upfront costs than most for its deals while waiting months before it can begin booking subscriptions as revenue. Investors must guess at how many of the trials will turn into actual sales as they weigh the business value of McAfee’s payments.

Thus far, it is difficult to tell exactly how successful the payments have been.

Gartner shows McAfee gaining just 0.5 percentage points of market share in the consumer security software market in the last year, with Symantec losing about 4 percentage points.

Mr. DeWalt says McAfee will begin showing more significant market share gains and higher deferred revenue totals as the trial and payment process plays out. “We haven’t seen the full impact of them yet,” he said.

McAfee says that the upfront payments are small when compared with the total potential value of the PC deals and that conversion rates have been strong to date. In addition, the company says it has tried to explain the deals to Gradient and characterizes the firm as shaping its research in a sensationalistic way that is meant to attract short-sellers, who sell borrowed shares of a company’s stock, hoping to buy it back later at a lower price.

As with many technology companies, McAfee’s shares fell in the last year, but at $41 last week, its share price is about the same as prerecession levels.

Executives from McAfee and Symantec say the partner deals are minor items. McAfee makes more money selling corporate security products than consumer products. At $6.2 billion a year in revenue, Symantec is one of the largest software companies in the world.

In addition, both companies are in a part of the market that has done well in the global technology spending slump. According to Gartner, the security software market grew 19 percent last year. McAfee has proved particularly resilient to the downturn, with revenue rising 22 percent last year to $1.6 billion, largely on the back of a more diverse product mix.

One long-term risk for both companies is the popularity of free basic security software packages offered by some vendors, including Symantec’s PC Tools brand. In addition, Microsoft, which dominates the overall PC software market, has just released a test version of free security software.

McAfee and Symantec argue that true deliverance from malicious software requires more commitment — and more money. Both companies try to persuade customers to buy whole suites of security software, including firewalls and online backup services.

“Last year, we saw a 500 percent increase in malware,” said Mr. DeWalt.

That’s a lot of demons to ward off.

This story originally appeared in the The New York Times