I was recently asked to comment on the state of the Security Software industry. Here is how I responded:
Companies such as Symantec and McAfee are experiencing increased pressure from Microsoft, which has beefed up the built-in security capabilities in Vista. In an effort to counter this competition, the larger firms have made numerous acquisitions that will help differentiate their product portfolio and maintain product superiority. Acquisitions typically focus on two areas:
- Acquisitions with next-generation feature/functionality that can be incorporated into the core product suite
- Acquisitions that target a niche or highly specialized market that will remain impervious to any mass-market product that Microsoft introduces
As Symantec and McAfee reevaluate their portfolios over the next year, they are likely to continue acquisitions at a slower rate, as management fills gaps in the portfolio and focuses on integrating previously made acquisitions.
Whether consolidation in the industry is good or bad depends on who you are.
- Consolidation reflects a defensive posture against Microsoft; however, it will not alter Microsoft’s slow entry into the market (nor will it alter Microsoft’s ineptness at developing secure products)
- Symantec and McAfee will become larger and more stable, in a better position to hold off Microsoft
- VC-backed startups will find it more difficult to scale organically to the size needed to generate 10x returns for their investors
- Bootstrapped startups will continue to be able to find niche segments that are under the radar of the incumbents (even during and after this period of consolidation)
- Customers will see fewer, more stable products and services with consistent levels of quality…for a price