Why is Microft giving away free antivirus?

Earlier this week, Microsoft announced that they were going to give away their antivirus for free.

Now antivirus is pretty big business - much bigger than the browser market that got them in hot water with the Justice Department. Now, with another Democratic administration coming into office, why would they risk going back for a second helping? What's their motivation?

I mean, Symantec Corporation's shares fell almost 10% the day of the announcement. They have a lot more money to get all lawyered up than Netscape did. So what gives?

Eric Raymond has a post that gets near - if not dead on - the motivation, although he doesn't mention antivirus. Microsoft has already lost 30% of the sub-notebook market:

30% is significant share, well above the single-digit range that desktop Linux has been stuck in for the last decade and larger than ISVs can afford to ignore. And it’s hitting Microsoft’s bottom line:

The devices, which usually cost less than $500, are the fastest-growing segment of the personal-computer industry — a trend that’s eating into Microsoft’s revenue. Windows sales fell short of forecasts last quarter and the company cut growth projections for the year, citing the lower revenue it gets from netbooks.

30% of one market may not sound like a lot, but it's enough to make them cut their revenue projections. The market is brutal when that happens, in what looks unfair at first glance, but is actually very sensible. After all, if you exceed your earnings expectations by a penny a share, the market yawns; if you miss by a penny, your stock can close down 15%. The reason is that the market knows that CEOs hate to miss the target, and will do anything legal (and sometimes illegal) to keep from missing. If they miss anyway, then something really bad is happening.

And so it is with Microsoft, if they're downgrading their targets. Eric's post has some interesting numbers about this:

That will be at least four million netbooks running Linux by year’s end. The truly deadly news, however, is at the end of the article:

Equipping Linux on a computer costs about $5, compared with $40 to $50 for XP and about $100 for Vista, according to estimates by Jenny Lai, a Taipei-based analyst at CLSA Ltd. [...] “The engineers designing computers understand that if they want to cut costs, the only way to do so is to get rid of Microsoft,” IDC’s Chang said.

So how does this relate to antivirus? Consider the security software that the laptop buyer has to pay for with the following laptop options:

Apple MacBook: nothing.

Linux laptop: nothing.

Windows Laptop: Antivirus. Anti-spyware. At least $50 per year.

If you keep your $500 notebook for four years, you've paid another $200 minimum in a "Microsoft Tax", and Microsoft doesn't even see any of that money!

All you Mac and Linux fanboys can stop giggling now.

So why would Microsoft dare risk the ire of a newly expansionist Department of Justice, and antivirus competitors with the better part of $10 Billion market cap? Because the best way for them to squeeze cost out of the Windows laptop is by eliminating the antivirus software. Consider:

$5 Cost of Linux OS for manufacturer, ultimately paid by customer.

$35 Cost of Windows XP OS for manufacturer, ultimately paid by the customer.

$200 Cost of antivirus software over 4 years, paid for by customer.

From the point of view of a Microsoft Product Manager, this is a no brainer - it's the easiest call that they'll make in their entire career. Throw in the antivirus, which is a commodity anyway, and Microsoft becomes a little more viable. Sure, Symantec and McAfee get screwed, but quite frankly the entire antivirus market is parasitic on Microsoft anyway.

If this saves Microsoft 10% of the notebook market, and even 5% of the rest of the computer market, then this represents maybe $2 - $4 Billion dollars a year in Microsoft earnings. Interestingly, that's about the size of the antivirus market.

Microsoft is being squeezed. They're squeezing what they perceive as a parasitic market out of existence, to capture that part of the value chain as their margins tighten.