Print

Comment

Email

Digg

Del.icio.us

Reddit

Twitter

In the summer of 2006, Subhash Menon was sitting in his office completely caught up in a mighty jumble of paperwork. The CEO and founder of Subex Systems had to contend with scores and scores of documents, ranging from analyst reports to legal opinions to bank documents to foreign business norms. Through the arduous days and nights, Menon did not buckle and seemed to be rather stoic about the biggest gamble in his professional life; buying an overseas firmAzurefor a sum that was around four times Subexs annual revenues. And to compound the issue, Azure at that time was in the blue. At just over $140 mn or Rs 620 crore, it was then the single largest overseas acquisition by an Indian software company. If Menon was sweating, he certainly did not show it.

Software, especially software products business from India was something of a misnomer even then. While, thanks to TCS, Infosys, and Wipro, India and IT are fairly synonymous across the world. But, it was purely a services footprint and not a software one. Though Rajesh Hukku and his i-flex brand had indeed registered some mindshare, it was not sufficient enough. Also, the fact was that whatever software products existed at the time were mainly in the BFSI space, unlike the telecom space that Menon was trying to create. Thus, essentially Menon was taking a big gambit by going in for such an M&A. Unlike other entrepreneurs in the US and Europe, Menon had no margin for error.

CyberMedia Research    DQ Estimates

Indian product companies are yet to make any major headway in advanced markets, even though the export revenues are growing. The chief reason attributed for the same is because of the lack of expertise in managing the other aspects of products namelysales, marketing, and support. While the Indian technoprenuers are able to create a world-class product they are not able to build a world-class ecosystem around it

Nonetheless, the merger went through and a new entity emerged from the amalgamation, namely Subex Azure. After some teething troubles, things stabilized and this year Subex Azure moved up the rankings in the Dataquest software products space to be ranked at #5. In fact, post the Azure acquisition, Menon undertook a bigger acquisitionCanadian Syndesis for $164.5 mn.

In many ways, the story of Subex Azure is quite like the story of the Indian software products space, moving from the lanes of self-doubt and abnegation to that of confidence and global aspirations. In fact, one look at the major players in the table, and one can easily discern the undercurrent that runs through the industry. Barring i-flex (now Oracle Financial) that dominates the space, the rest of the players seem to be gnawing at each others feet; the difference between the next six firms is not as big, so as not to be bridged in a years time. Thats what happened this year, as 3i Infotech rose to second rank based on its superlative performance, while the last years top companies slipped on the scale.

This intense competition among the few product companies in India is the main distinguishing feature of the industry that is now valued at around Rs 8,829 crore, growing at around 34% over the last year. The heartening fact is that even though much of the revenues for the players still comes from overseas, the domestic market has now become significant, accounting for around 35% of the market share. This is a fairly healthy mix of overseas-domestic revenues, unlike the predominantly overseas dependency of the IT services sector.

The Year that Was
Yet, for all the rosy picture it presents, 2008 was certainly a challenging year for software product players. The North American market demand slumped by 40% across verticals in the last fiscal, thanks to the deepening crisis in the US. It was BFSI, manufacturing, retail, and telecom that were the worst hit. Considering that a significant portion of product revenues still came from the BFSI space, it was badly hit. According to a major study undertaken by the Browne & Mohan consultancy firm, the revenues from the BFS space grew by 10% less as compared to last year, thanks to the slump. In fact, the report states that except for Flexicube (i-flex) and Omnienterprise (Infrasoft), that won thirty-nine and thirty-four new customers respectively, it was a fairly staid year for TCS BaNCS and Finacle (Infosys).

The same was the case with the telecom segment as well, as the growth rate came down to 37% from 42% last year. The shift is due to a plethora of factors induced by the slowdown, as TR Madan Mohan, managing partner, Browne and Mohan, points out, In the last one year, a significant change is affecting product companies. They are realizing that their customers may want to move out of a license regime to pay for managed services. Consider Subex, which used to earn substantial revenues from product license and is now seriously moving to the managed service model, as telcos are demanding less of capital outlays as rollouts are expensive and they prefer software costs as operational expenses in tandem with their growth.

On the other hand, there was the occasional good news as well, as the product company ecosystem grew larger in the past year as start ups in telecom (BRIO), RFID (S3Edge) and aerospace/defense (VXL) companies witnessed excellent growth. It was also a year which saw the emergence of revenue making open source product companies such as DimDim, Webyog, RDX India, Aghreni, etc.

On the geographic front, there is a rapid shift that is taking place as the revenues from the North American markets dip; there is much growth and action in the emerging markets, namely that of the Middle East, Eastern Europe and Africa. In fact, Saudi Arabia, Oman, Croatia, Greece, South Africa, Kenya, Turkey, and Egypt are emerging as hot destinations, with companies like Infrasoft creating specific solutions like Islamic Banking for these markets. This broadening and expansion is also bringing to the fore a new set of companies that have been fairly active in this space.

Top Heavy?
The software product industry in India is still oligarchic in nature, dominated by the top ten companies that account for over 70% of the revenues. In fact, according to a Nasscom Software Product Study conducted last year, the top twenty firms account for nearly 93% of the market share. Hence, much of the action is indeed focussed around these companies. Nonetheless, according to Mohan, the concentration of the top ten firms is expected to decrease to about 50% in FY 10 as small and medium software product firms like Nucleus, Tejas Network, and Geometric Software make a bid for the big club.

In fact, small product firms form the largest chunk of the product universe, followed by SMEs. Very large firms such as TCS, Infosys, i-flex, etc, form just about 7% of the entire population. So in the coming years, the top heaviness of the industry will lighten a bit as more and more companies venture into this space.

Page(s)   1  2