Competition between Symantec, McAfee intensifies

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. 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.

Salem shrugs off DeWalt’s tough talk. “I love the rhetoric and the chest-pounding,” he said. “We need to be on as many computers as possible without being irrational,” 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.

Salem boasts, though, 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. Vance writes that 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.

“I think they are taking a very interesting view as far as trying to match their PC arrangement expenses with the deferred revenues they expect,” said Nick Gibbons, an analyst with Gradient Analytics, which sells forensic accounting research and has given McAfee a failing rating. “Investors would be at less of a disadvantage if management would disclose more about the deals.”

Gibbons argues that the partner payments add to a host of large costs at McAfee, like stock-option expenses and acquisition charges, that make McAfee’s balance sheet complex and offset the revenue gains.

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. 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.

Vance notes that 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 DeWalt.