The line-up remains undisturbed as yet. i-flex still tops the list of Indian software product companies with total product revenues of Rs 492 crore. TCS beat Infosys to the second place this time with total product revenues of Rs 160 crore. This happened because not only did TCS raise its total product sales by close to 100%, but Infosys saw product revenues actually decline by 19%.

At TCS, growth has been largely fueled by rapidly increasing product exports, which grew 105% to reach Rs 154 crore from previous year's Rs 75 crore. Much of this, however, comes from sales of TCS Business Products and Technology products that are billed as part of a larger project. Its only stand-alone product revenues from its accounting software packaged-EX-actually almost halved over the year-from Rs 4 crore to Rs 2.6 crore.

Suffering a visible fall of 19% in total product revenues, from previous year's Rs 167 crore to Rs 135 crore, Infosys has been pushed to third place. The company blames this on a fall in demand in the markets that it operates in-Middle East, Africa and South East Asia. It is interesting to note, however, that while Infosys' India revenues fell by 19%, its closest competitor, i-flex, increased its India revenues by 67%. According to i-flex it did not see any noticeable fall in demand in these geographies.

The general trend among the Top 10 remains more or less the same, barring some minor changes as Cranes Software and Hughes displaced Nucleus and Newgen. The market remains highly skewed towards the top three and exports still dominate the software products segment in with more than 79% of total revenues coming from outside India.

In spite of the predominance of exports, and even as problems and hurdles remain largely unchanged in the product segment, it's interesting to note that domestic revenues of a lot of companies have gone up significantly during the fiscal.

At Home
By and large, the news here was good. Though an average domestic growth of 13% is nothing to go to town about, given the problems of this sector, it is also not a number to scoff at. Companies like Subex, Polaris and especially i-flex had a great year in the domestic sector.

For example, Subex Systems increased domestic product revenues by 150% in 2003-04. Most of this increase was driven by their existing GSM customers extending the product usage to cover all of their circles, along with new GSM and CDMA customers. For the next year growth is expected from their new product INcharge or as operators increase their subscriber base. Ramco Systems is another player who has seen an increase in their domestic market, an increase of 4% from previous year, they remain focused on the Indian market where they grew by a more than healthy 75%.

During the fiscal, however, Ramco reduced its license costs leading to a dip in the products to total revenue percentage-from 67% to 44.3%. The company believes that India offers much potential, and is targeting the SME segment aggressively to get 20% of total product revenues from India by 2007.

Pressure on Pricing
The king of domestic products, Tally Solutions, with its accounting package, chose not to participate in this year's analysis. Based on market feedback-recording volume growth for Tally in the domestic market at 26% for 2003-04 and taking into account the 40% discount offered on their products in the first quarter of this fiscal-DQ estimates revenues for the year at around Rs 105 crore.

In March 2004, Tally introduced a single user version of their accounting package at Rs 9,900. Tally's distributors say this was done to penetrate the SOHO and retail markets better and move the product to smaller players.

In fact, if there was one cloud on the horizon, it was the serious undercutting and discounting that happened in the domestic market. While some of Tally's discounting was a result of wanting to convert pirates to legal users, it was also because of market pressures. A lot of this pressure has come from the peculiar profile of the SME user, which is the largest prospective buyer base for most of these products. Ramco had similar issues; while i-flex and Infosys both accuse each other of undercutting in the domestic market.

Exports Continue to Drive Growth
But then, exports remain the bread and butter of many of these product companies. Take i-flex for example. Though the domestic part of their total revenues increased by 1% in FY04, they remain largely committed to the export market with 39 licenses sold in 2003-04 as compared to 34 in the previous year. The year also saw the company receiving awards such as for being the #1 Banking Solution in the World for the second year in a row by IBS, and "Core Banking Solution of the Year" and "Application of the year" awards from The Banker, the banking publication from Financial Times, London.

Most of the companies remain committed to their product roadmaps. Subex, which will release its third product before December 2004, hopes to increase its product revenues to 70% of total revenues in next three years before deciding on the path forward for the services part of the business.

Nucleus Software, which is bringing out a new product in the third quarter of 2004-05, plans to become a 100% product company in the next decade. ICICI Infotech wants to increase its product percentage from 20.5% to 50% in the next two and a half years.

Small is the Word
One of the amazing facts about 2003-04, is the number of small players who have pushed their determined heads out into the product scene in India. While many in the product industry strongly believe that it is the small company that can eventually bring the focus, dedication and expertise that will make a product work in the global economy, they also discredit many of the product organizations cropping up.

Says Subhash Menon, CEO of Subex, "Yes, there are more companies in India who are talking about products. But then, it seems to be more of a fashionable word rather than the real thing.

"For one, most of these so called product companies spread their expertise too thin and try to get into different segments at the same time, which is typical service thinking. For another, when you get into these companies, you realize that their real revenues are fuelled by things most often related to services."

"Small companies who are working on products should look at depth in products, rather than breadth. Products with breadth take a long time to develop. If they look for niches, their chances of success increases," says Girish Vaidya, head of the Banking Business Unit of Infosys.

But even as these small companies crop up, once their first pilot project of product is proven, many choose to either become partners or ISVs of bigger multinationals, in the process, while assuring good returns, they lose their identity. The bigger players, while acknowledging the trend, opine that it is eventually the product's value to the customer or absence of the same, that will push small companies to that choice.

Says R Ravi Sankar, CEO, International Operations and Technology of i-flex, "It essentially boils down to how well differentiated in idea the product is. If it's good enough, the company can stick it out on its own, especially since the financial benefits at the end are much more." Whether afflicted with the service mentality or not and whether they disappear as an identity into a larger conglomerate, the very fact that companies are more willing to talk about products and consider the same as a viable revenue stream for the future can only be an encouraging sign. Especially, considering the odds that product companies face in India.

Made in India: Not So Easy!
While the industry predicts healthy growth rates of 30%-40% year on year for the next two years, hurdles remain huge for an average Indian product company. The lack of a proper ecosystem can kill many ideas at the root.

"VCs remain reluctant to pour money into product companies. They are too tuned into the services model, especially in India where they don't look at product companies as viable options at all," said Vishnu Dusad, MD of Nucleus Software. This is in spite of the fact that the development costs in India are much lower than in a foreign economy.

Add to that, the huge gestation period required for product development, the lack of product-specific talent and the marketing issues involved-the challenges are far from over. Couple that with the fact that products, unlike services, are binary-there is either a product contract or there is nothing-and it is enough to put off any determined soul.

So the argument still rages back and forth-start at home or in the export market? Tie up with a vendor or go it alone?

"Products demand a marketing expense that we just cannot put in. We would prefer to use our expertise to replicate solution frameworks across clients and build in customization. It has worked well for us and products carry a huge marketing cost that we are not keen to invest in," says Rajat Mathur, VP, International Business, Solutions Division, Wipro Infotech.

While there is the argument that starting at home with the product push could be the answer, many believe that home is not a good place to start after all.

"It is impossible to function in the Indian or global market without backing from some large SIs and that is near impossible to garner. While some of them might be even customers on a local scale, the truth is, they prefer to train their manpower on international software because their value then rises. Consequently, they push the international products and Indian products tend to suffer. Successes with SIs are too few and far between and I don't see the situation changing for the next five years at least," says Diwakar Nigam, co-founder and MD, of Newgen Software, one of the early product companies in India.

The pressure and near impossibility of an individual company carrying the cross of marketing cost is the reason the industry is fast beginning to clamor for the need to build a collective brand-the brand of India as a product player in the global market.

Kamesh Ramamoorthy, VP, Enterprise Applications, of Ramco Systems believes that the public sector and government agencies should take to Indian products sooner. He also says that organizations like Nasscom's Product Forum should encourage that action within the country. Makarand Patalkar, chief of staff, Executive Management Office, i-flex takes it one step further and says that Nasscom should be much more active in imbibing the idea of an Indian product brand on the global scene.

Sunil Mehta, VP of Nasscom, says that the Product Forum is working with the IT ministry to open certain sectors of government procurement to Indian products, especially defense. They are in talks with the ministry to include a clause in the tender notices, which insists that candidates should have an Indian product as part of their portfolio offering.

Knowing bureaucracy though, that might take some time to be implemented but Nasscom does not seem to be in a big hurry to go down this road, stating that it prefers to take things one at a time.

Indomitable Spirit
The fact that product companies remain optimistic despite challenges is probably a tribute to their spirit. And, to a growing belief that as entry level barriers in the services segment increase, product development might suddenly become popular. "It's a process of evolution. It's more and more difficult to start services companies on a small scale these days, which means more entrepreneurs will gravitate towards products in the future. It's an inevitable phenomenon which will happen gradually when the services mantra dies down a bit," says Subhash. "Products will never be as big for India like the services. This is because the global market for products is just not as big as the services opportunity. But considering that we are starting off from a relatively small base, the market opportunities are going to be limitless for the next five years at least," says Ravi. There are, however, some unrecognized challenges.

Key among them for the domestic market-a robust distribution and retail channel, especially if the SME segment is to bring in bulk of the volume growth. In the exports market-not just branding and marketing, but the available of money to pour into a world class product.

In the long term, a whole lot of things have to come together and work as a whole to translate the products potential into clear reality. And it makes a lot more sense for organizations and forums to work on behalf of the product community, rather than leave it to small individual players to struggle it out in the global sea.

Calm seas to swim in and able pilots to steer the ship into port-that's what the Indian software product brand needs in 2004-05.

Sathya Mithra Ashok in Bangalore

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