McAfee Inc. (NYSE: MFE) is a computer security company specializing in comprehensive software to prevent users and software from gaining access to home, business, and enterprise systems or servers for malicious reasons. In the last year, the company earned over $1.1 billion in revenues, but kept only $150 million in profits. To streamline operations and cut costs, the company is planning on downsizing its sales force, and has shifted sales focus to its 40 main customers. This has created more successful sales channels, but has also left McAfee vulnerable to the whims of a few big customers.
McAfee faces a number of trends unique to companies that offer software as a service. The proliferation of cheap, powerful PCs is raising demand for powerful consumer security software, but increasing competition between security companies has been pushing software prices down, depressing profitability. With the release of Windows Vista causing free security software to flood the market, McAfee faces more heavy competition than ever, but this hasn't stopped profits from growing, though margins have been relatively constant.
McAfee is a software company specializing in PC, wireless, and mobile security solutions, including antivirus, antispyware, antispam, antiadware, vulnerability analysis, identity protection, and intrusion detection. Its primary goal is to deliver comprehensive security software to prevent users and software from gaining access to a system or server for malicious reasons. Over the past few years, McAfee has shifted its focus fully onto the security software realm, selling off other product lines and causing revenue to drop. The company has also been experiencing some management difficulties due to a stock option scandal, but seems to have settled most of its problems over the past few months. With new sales and expansion strategy, McAfee could be poised to gain precious market share and revenue.
McAfee's products are designed three different ways:
McAfee's expansion strategy includes the acquisition of smaller, niche security firms. Such acquisitions remove competitive pressure and allow the company to integrate new technologies into existing products. McAfee appears to be targeting the security compliance and control market, which is predicted to have phenomenal growth in the next few years. Recent acquisitions of companies like Foundstone, Citadel, and Preventsys illustrate this new focus on vulnerability analysis and control. Furthermore, McAfee's products are dynamic; as the company spends money on R&D to keep up with competition and meet new security threats head-on, there is a constant focus on maintaining the customer renewal by keeping products up-to-date and competitive with other firms.
The average consumer understands very little about computer security, and would find the idea of shopping for security software about as scary as contracting a computer virus. Increasingly, telecommunications carriers like AOL and Comcast provide security features to protect customers from intrusion and data lost. Consumers are also looking to computer manufacturers to provide their security, and companies like Dell and Hewlett-Packard are offering the option of preinstalling software on machines being shipped to customers. McAfee has embraced these trends, cutting direct sales down to only 40 of its top customers and making deals for Dell and AOL to distribute McAfee software. This allows McAfee to generate sales revenue from the millions of people who buy computers from Dell or get internet access from AOL, while only spending resources on selling to a few big corporations. The potential downside to these arrangements is that hardware-software packaging could lead to lower pricing. With PC and internet manufacturers increasingly competing through pricing rather than features, McAfee may have to cut prices to sell to companies like Dell, who wouldn't want to significantly raise prices on their products just to sell another company's software.
As service and hardware providers also become security providers, McAfee's direct sales bases will shrink. With only around 40 major customers, McAfee runs a major risk: if any customer decides to go to another company for security products, McAfee will lose a significant portion of its revenue. As long as customer relations and McAfee's products are satisfactory, this should not be a problem, but competitive pricing and features from other security providers could also force McAfee to depress its own prices leading to lower profit margins.
PCs are becoming increasingly more powerful, to the point where there is very little that can significantly differentiate them to the average consumer. For the most part, computers today come standard with the power and memory needed for everyday tasks like word processing, listening to music, or editing photos and videos, so manufacturers can no longer compete in terms of features. Increasingly, the computer industry is engaging in price competition, making more powerful computers more accessible to the public. This is beneficial to McAfee: more people able to afford better computers will lead to more people wanting to protect their investments with McAfee's software. As computer sales go up, it's probable that McAfee's software sales will go up.
As PCs become commoditized, so too is security software. Most consumers don't know the difference between Symantec's Norton software and McAfee's software; furthermore, both companies spend money on R&D to keep their software updated to the most current threats, so there is very little differentiation between both products that the average consumer would understand. Combining this effect with service and hardware providers providing security software and the Windows Vista Effect and one can see the road to price depression. Manufacturers and service providers will depress software prices to attract customers, and then the security software companies will depress prices to get the manufacturers and service providers to agree to a partnership. With two different levels of price competition, it's easy to see how profitability could be negatively impacted..
McAfee faces heavy competition from Microsoft, Symantec, Cisco Systems, Check Point Software Technologies, OneCare, Trend Micro, and CA. The security industry is a highly competitive open market with easy entry, making entry-level companies with new technologies a constant threat to McAfee. Price competition from industry leaders Microsoft and Symantec coupled with stronger-at-cost enterprise security packages from Cisco and Check Point all have further potential to greatly damage McAfee's revenue, and with the growing market for antispyware software being filled by Yahoo, Webroot, and Microsoft, there are significant market threats to McAfee's future success. It should be noted, however, that McAfee has been slowly gaining antivirus market share on Symantec, as shown in the table below. With the antispyware market growing more quickly than the antivirus market, however, McAfee's antivirus strength could prove less than useful in securing new customers.
The introduction of Windows Vista is dangerous to companies like McAfee because Microsoft's aggressive packaging of its own security software with its ubiquitous operating system could lead to fewer customers purchasing McAfee's products. For many customers, the protection provided by the Windows Security Center would seem like enough (indeed, it could be enough), and because of this, there is less incentive to purchase McAfee software. Microsoft's bundling should be considered a major threat because Microsoft has been known to put other companies (such as Netscape Communications) out of business by including competing software in its operating systems.