Indian IT companies have a significant niche in the world market today; even IT multinationals have found India a good home for their R&D centres. In 2000, real Indian firms, owned by Indians and located in India, were still junior partners; they were writing software for American clients overnight and sending it off in the morning. Indians were proud of them, but they were still far from being world players. In this column in Business Standard of 28 August 2000, I tried to put their performance in perspective.
INDIAN IT COMPANIES: THE REAL ACHIEVEMENT
A ceremony was recently held in Rangoon. There,
government ministers and other dignitaries made speeches about the importance
of joining the IT revolution while, in the background, young Burmans went on
typing something on the keyboards of hundreds of computers.
We see the same phenomenon in India. We have a
bumptious minister of information technology; and Silicon Valley Indians who
had made good in the IT revolution are ushered into 7 Race Course Road to
advise the Prime Minister. The idea, or the wish, is the same – that the mixing
of politicians and information technologists will lead to explosive growth in
information technology. This belief is natural to politicians, for they believe
that they are using public resources for the national good. It is more foreign
to technologists; but no one is above flattery, especially flattery from the
powerful.
These encounters should not be decried, for greater
knowledge amongst the powerful is always to be welcomed. But its impact on the
course of history will be small unless some simple relationships are more
widely understood. I do not claim that I understand them fully myself; but let
me set out what I have gathered from the last six months’ observations in the
home of information technology.
What the internet has done is to create a new means
of communication, comparable to the press, radio or television. Its market is
the person on a computer – at home, in the office, or in a cybercafe. The
number of persons thus connected, and the time they spend on their computers,
constitute the maximal market for this means of communication. The internet is
more comparable to the radio or television than to the press: the consumer does
not pay for access to it. (More precisely, the consumer pays through the nose
for access in India, because of the government’s monopoly of telephones, and
nominal amounts in industrial countries where telephone services are much
cheaper; but he does not pay for the product that is conveyed through the
telephone lines, namely the web pages or the sound or both.) Which means that
the costs of supplying him must be entirely borne out of either advertisements
or any charges he agrees to pay for something other than access. These charges
are embodied in the price of things he buys through the internet. In other
words, the revenue of the internet industry consists of advertisements, plus
commissions on products sold through the internet.
Why should anyone sell anything through the
internet? Because the cost of doing so is a fraction of selling things through
shops or offices. Marketing costs typically add 50 per cent to the cost of a
manufactured product before it ends up in the hands of the final consumer; this
margin is a measure of the revenue into which internet-driven sales can bite.
Not everything can be sold through the internet; I cannot, for instance,
imagine anyone getting a haircut on the internet. But whatever might be
excluded, the volume of the goods and services that remain – anything from a
fifth to a quarter of national income – is simply enormous; that is why the
scope of the internet is far from being exhausted.
I keep encountering conventional investors who are
outraged by the valuations of internet companies, who shake their heads and
mutter, “This cannot last”. I think it can. The automobile revolution, which
started a century ago, was running with full vigour well into the sixties; even
today there are countries – including India – where motorized vehicles are a
growth industry. The internet revolution is some ten years old; it could take
half a century to run its course.
But the concern of the run-of-the-mill investment
banker is not simply about the internet; his problem is that he is scandalized
by the valuations, and is at a loss about how to pick amongst companies that
are making losses, that have risible tangible assets and are run by people with
no track record. And yet, they are tempted. A stream of Indian tycoons beats
the path to the Silicon Valley looking for a gold mine, for the secret of the
huge fortunes that are being made here.
The point is that these companies’ valuations are
determined in the market – that some investors have driven up those valuations.
Those investors, rightly or wrongly, think that they have some basis for
valuation other than the conventional ones of assets, profits, and reputation.
What is this basis? Is it right or wrong? How would one assess an IT company?
How would one build it up? These are the important questions.
A look at different companies gives different answers. The
internet is a means of communication. In its initial form, it communicated the
written word. Eventually it will capture various markets for the written word,
and create new ones. But the first entrants into the market looked for existing
markets for the written word to penetrate. The biggest and most accessible
markets were the large companies, inside which so many words passed back and
forth as information, instructions and records. All these could be made
paperless. The early experiments just tried to replace paper by computer
memory. But computer records were not simply cheaper; they were eminently
transportable, and far more widely accessible than paper. These characteristics
of theirs were increasingly used in the design of new, computerized office
systems. This was the bread and butter of Indian IT companies in the nineties.
Because it was so new, no standard models were available; each company was a
new market, and all work was custom work.
People bemoan the fact that Indian companies concentrated
on this type of labour-intensive work which created no broader market; they
think the latter should go into the market for branded software. This criticism
shows a poor grasp of the branded software market. Consider Windows in its
successive versions – 95, 98, 2000, NT – or its closest competitor, Lotus
Office Suite. Why did the various Fortune 500 companies go to Wipro or Satyam
instead of using these standard packages? Because the packages were too
elementary for them. This is changing; Windows NT is better suited to the
environment of a large office than the previous products of Microsoft.
Eventually, branded software may well emerge which will fit the individual
requirements of the most varied companies. In the meanwhile, there was a ready
market for custom software; Indian companies exploited it. That is enterprise.
They could not have exploited the market for branded office software then: as a
look at the market suggests, it was oligopolistic, entry barriers were severe, and
Indian companies could not have made a dent in it.
The Indian companies’ performance in the custom
corporate software market was creditable, especially in light of their severe
handicaps. Such experimental software was always subject to bugs, hiccups and
ad hoc adaptations. An American supplier, within four hours’ flying distance
from the customer, unhampered by visa restrictions, always had an edge. An
Indian programmer could always do better by leaving his Indian employer and
coming over to the States. The Indian companies’ real success was that they so
well overcame these handicaps.
