NEW YORK (CNN/Money) – It's official. Microsoft wants to make a big splash in the security software market.
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The world's largest software company announced on Thursday that a free beta version of an anti-spyware tool was available for Windows users to download. Later this month, Microsoft noted, it plans to offer a free anti-virus product as well, which will remove existing viruses and update once a month to target new threats.
Investors in security software companies McAfee and Symantec hit the panic button following the news. Shares of McAfee (Research) dipped 3.6 percent Thursday, while Symantec (Research) plunged 7.4 percent.
Do investors in these companies really need to be afraid of Microsoft (Research) "Netscaping" them? That term refers to how Microsoft made erstwhile browser king Netscape largely irrelevant once Microsoft began bundling Internet Explorer into Windows? (Time Warner (Research), the owner of CNN/Money, also owns Netscape.)
It appears that investors may have overreacted. Concerns about increasing competition aren't new.
Microsoft first dipped its toe in the anti-virus market in the summer of 2003 when it purchased the assets of Romanian security software firm GeCad. In fact, Microsoft began offering some virus removal tools based on GeCad's software last January.
Fears heightened a few weeks ago when Mister Softee announced it was buying anti-spyware firm Giant Company. So Thursday's announcement shouldn't come as a surprise to investors.
"It's been no secret that Microsoft wants to get into security. In terms of information flow, this is not news," said Rob Owens, an analyst with Pacific Crest Securities.
Won't be easy for Microsoft
Despite its formidable financial resources and marketing heft, Microsoft faces a lot of challenges in the security software market.
|Microsoft has made rumblings before about getting into the security software market but it hasn't had a major impact on the top three anti-virus firms.
For one, given the company's myriad antitrust problems over the years, analysts highly doubt that Microsoft will bundle anti-virus software into Windows. Instead, Microsoft is likely to begin selling a stand-alone product.
But will consumers pony up to buy anti-virus software from the same company whose own operating system is so vulnerable to security lapses in the first place?
"For more sophisticated users, it's a small price to pay to get security that you know works from a vendor who has been doing it for 15 to 20 years. It's a different ball game for Microsoft who is not known for security," said Gregg Moskowitz, an analyst with Susquehanna Financial Group.
Kevin Trosian, an analyst with Wedbush Morgan Securities, adds that large business customers will be skeptical of a Microsoft security software product because of the high number of security problems that have plagued corporate networks during the past few years.
"The disdain and contempt that enterprise customers have for the security lapses means it is likely they will not be rabid adopters of a Microsoft anti-virus product," Trosian said.
Plus, analysts said it seems that Microsoft isn't close to rolling out a truly competitive product just yet.
Microsoft's MSN Internet division just announced last month that it had decided to use anti-virus software from Taiwanese security firm Trend Micro for its popular Hotmail e-mail service.
MSN had previously been using software from McAfee. If Microsoft really had a top-notch product for anti-virus protection, then why didn't it replace McAfee with its own software instead of that of another security vendor?
Wall Street overreacted
With all that in mind, shares of Symantec and McAfee look attractive. Both stocks trade at about 23 times earnings estimates for their next fiscal year. Analysts are forecasting annual earnings increases of about 16 percent a year for McAfee for the next five years and 18 percent for Symantec.
"Expectations are too dire," said Moskowitz, downplaying the Microsoft threat. "People are somewhat dismissing these companies' stronghold over the consumer security market."
Of course, Symantec has been also hurt lately by concerns about its planned acquisition of storage software firm Veritas (Research). Since rumors of the deal first surfaced, Symantec shares have fallen 28 percent. So investors have to realize that merger integration questions could plague the stock in the near-term.
Trend Micro, which trades in the U.S. as an American Depositary Receipt (ADR), may also be worth considering but it's a riskier bet since there are no U.S. analysts following the stock. Shares of Trend Micro (Research) dipped more than 3 percent on Friday morning after finishing relatively unchanged Thursday.
Overall, analysts said, investors should probably treat any further dips resulting from more Microsoft security announcements as a possible buying opportunity.
"The threat from Microsoft is real, however, the headline risk is much higher than the actual risk," said Trosian.
Wedbush's Trosian owns shares of Microsoft but his firm does not have banking ties with it or other companies mentioned in this piece. Other analysts quoted do not own shares of any of the companies mentioned in this piece and their firms have no investment banking ties with them.