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SEPTEMBER 29, 2003

NEWS: ANALYSIS &
COMMENTARY

Microsoft: A Killer App That
Could Kill the Competition

Its entry into the antivirus market has
rivals spooked

It's a great time to be in the antivirus business.
In August, two separate bugs laid low millions of PCs around the world, causing
an estimated $2 billion in damage. Both exploited vulnerabilities in Microsoft
Corp.'s Windows operating system. And on Sept. 10, Microsoft warned of yet
another security hole in Windows that could lead to a new bout of bugs. All that
has sent sales of antivirus software soaring. So which company stands to benefit
the most from the surging demand for security software? That's right:
Microsoft.

The software giant recently closed a deal that could help it
dominate consumer antivirus software. On Sept. 3, Microsoft acquired the
technology of GeCAD Software, a Romanian software maker, for an undisclosed sum.
Analysts expect Microsoft to bundle GeCAD's software with the next iteration of
Windows, due out in 2005. That could virtually eliminate competition in the
consumer market for antivirus software now dominated by Symantec (SYMC ) Corp., Network
Associates (NET ) Inc., and
others. Says Laura Koetzle, a senior analyst at Forrester Research Inc.:
"Microsoft will eventually monopolize the business."

There's more than a
little irony in that. Critics have long blamed Microsoft for much of the virus
epidemic, arguing that the company has worried less about security than about
getting new products out the door. Vulnerabilities have made Windows and the
Office word-processing and spreadsheet program favored hacker targets. If
Microsoft wrote better software, critics say, the problem would largely go away.
The prospect of Microsoft making money from its own shortcomings has prompted
some cynical chatter in the industry. "The fear is of the fox guarding the
henhouse," says Bruce Schneier, chief technology officer at Counterpane Internet
Security Inc.

What's behind the move? It's not the money: The $2.2
billion antivirus business is chicken feed to a company that last year generated
$32.2 billion in revenues. But Microsoft badly wants to protect its
virus-battered reputation. It could do so by convincing users to take advantage
of antivirus software and regularly download its patches. According to Microsoft
research, 63% of home PC users either don't have antivirus software or are using
obsolete programs. "My focus is on the people who aren't currently protected,"
says Mike Nash, vice-president of Microsoft's security business
unit.

Microsoft is providing few specifics about its antivirus strategy.
But analysts expect it to follow the existing industry model: selling
subscriptions to a service allowing consumers to update their antivirus
protection as new strains of malicious code emerge. "That's certainly the
thinking we have," says Nash.

Of course, rivals won't hand over the
consumer market without a fight. But they're sufficiently realistic to know that
their best bet lies in the corporate market, where Microsoft will pose less of a
threat. Corporate servers often run non-Windows operating systems, and Microsoft
has no plans to make its security software work with rival products. What's
more, many corporate buyers are leery of Microsoft's engineering. "The general
response in the corporate world is no one trusts Microsoft security," says Gene
Munster, senior research analyst at U.S. Bancorp Piper Jaffray (USB ).

In the consumer
market, by contrast, software that's easiest to use, even if it isn't
technically the best, tends to win out. And since Microsoft's products probably
will be bundled into Windows, it will have a big advantage. Few believe that
including antivirus software in Windows will violate antitrust laws. What
potential rivals fear is that Microsoft will use its market power to thwart
them. "The question is, will they play fairly or will they abuse their monopoly
position?" asks Symantec CEO John W. Thompson.

He and other rivals know
they are facing a force more ominous than any virus. "When Microsoft enters an
industry and includes the software in Windows, the sector disappears," says
Steve Chang, CEO of antivirus software maker Trend Micro (TMIC ) Inc. It's a lesson the
software industry knows all too well.

By Jay Greene in Seattle, with Jim Kerstetter in San Mateo, Calif.,
and Steve Hamm in New York

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