Microsoft (MSFT) recently started to offer an antivirus software product “Security Essentials” for free to businesses with 10 or fewer PCs and started distributing the software through its Microsoft Update distribution system. [1]

We believe that this step could further hurt antivirus software companies, especially Symantec (SYMC), which is the dominant player in this market through its flagship product Norton. Intel (INTC) also announced its acquisition of McAfee (MFE), 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.

Microsoft Security Essentials

Security Essentials was first 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, [2] which was second behind Symantec’s Norton. [3]

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 can easily change to Security Essentials from Symantec’s Norton antivirus software. Moreover, the decision to provide Security Essentials 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 [4], 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.

Notes:

1. According to Microsoft’s website
2. According to PC World, citing av-Test.org as source
3. According to Symantec, citing av-Test.org and av-comparatives.org as source
4. As mentioned on Norton website

Disclosure: No position