by Moe Zilla

Created on: July 26, 2009   Last Updated: September 18, 2009

How can you compete with free?

That's the worry investors have about Microsoft's plan to release a new anti-virus software that's free. It's an aggressive attempt to go after Microsoft's competitors, specifically Symantec (SYMC) and McAfee (MFE). But it may not hurt the competition as much as investors think...

First, remember that Microsoft (MSFT) always announces products long before they release them. Microsoft's free anti-virus software, "Microsoft Security Essentials "(formerly "Morro") is still in public beta (limited to 75,000 downloads in just the U.S., Israel, and Brazil, and then China in July), according to ZDNet, and the product's vague release date is now "fall". From early reports it looks like a strong product that's surprisingly innovative. The product's "dynamic signature service" reportedly recognizes virus-like behavior before a virus has even been identified, and instantly starts transmitting data for research at a central Microsoft server.

But before Symantec investors start worrying that the sky is falling, it's important to remember that two-thirds of Symantec's revenue doesn't even come from anti-virus software, but from their enterprise software - and even then, their consumer line extends far beyond anti-virus products to backup and firewall products. (Note that Symantec's flagship product, Norton Utilities, also includes registry cleaners and defragmenters, performance and process viewers) And the same is true for McAfee, which drew 61% of its revenue from its corporate product line, according to their last quarterly report. Last quarter McAfee even announced that Hewlett-Packard (HPQ) would be globally selling McAfee's entire line of enterprise-level security products! Like Symantec, McAfee also has a diversified product line, including enterprise firewall solutions like and products like IntruShield (which protects networks from denial-of-service attacks).

If it's a war between Microsoft and the other anti-virus vendors, it will happen in slow motion. Microsoft traditionally releases a weak product which it improves gradually over time. And both Symantec and McAfee built strong brands over many years, so their customer loyalty should slow down Microsoft even more. The fight could take an ugly turn. Screenshots have already leaked, and revealed that Microsoft won't even run the software unless the user's version of Windows first passes a validation check. But in typical Microsoft fashion, it then recommends "that you remove other antivirus and anti-spyware programs before continuing..."

How worried should you be? It depends in part on your investment strategy - but short-term investors have nothing to fear. Right now, talk of Microsoft's free product will only affect the competing stocks to the extent that investors extrapolate into 2010 - or even further. And since Microsoft has publicized its plans, the news has already been "priced into" the value of the stocks. The stocks may still fluctuate a little more based on changes in those extrapolations.

But remember that they're all ultimately just guesses about the future. And ironically, it's that uncertainty should stop any dramatic swings in the value of each company's stock!

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