Economy

Running a product business in India

Today one of my friends called me for a routine catch-up, he is is running a start-up firm in Rajasthan (India) developing software products . We discussed many things, including on how difficult and virtually impossible it is to run a software products firm, based in India – historically there has been literally no domestic market that is willing to open their wallets to buy your products (even Developer products) . This is unfortunate as India boosts millions of Software Engineers, Developers and Professionals servicing the US & clients around the world. This is an audience that preaches to the world the importance and benefits of Software. But when it comes to Indian “Enterprises” buying software it seems to be a completely different world.  At my firm “Vishwak Solutions” we have been selling “Developer” Tools for over a decade through our brand EasyTools.com, but so far we have probably sold just a single copy (or maybe two) to customers in India, all our meagre sales have been from US, Europe, Australia and everywhere else except India.

The prevailing tax regime in India doesn’t help either in improving the scenario. For almost last two years, all packaged software including those from Microsoft, Adobe are being taxed with both Central Service Tax @10.3% and local state government VAT @4% (or higher). Only in India, you will have a sale transaction classified by Tax authorities as both a service & goods. The unified tax GST is being elusive with Central & State government on logger-heads. It appears no one in Central or State governments want a simplified tax regime that removes all ambiguities and makes doing business easier, making the ground highly conducive to corruption & inefficiency at every levels. Lastly refunds from Tax authorities in India is virtually impossible.

I won’t attribute the lack of growth in Software Products sales to be a pure Indian phenomenon alone (though in India it is evident and never existed in the first place). Globally what used to be a thriving business of Shareware, where small (SOHO) and part-time developers could develop, sell and make a decent earning selling PC Software today is virtually dead. It has morphed and taken a limited new birth in the Mobile Phone industry, thanks wholly to the widely successful Apple’s App Store. A distant cousin of it is the growing Games for Gaming console business. But the original PC software that targeted consumers and businesses is simply not there anymore. You need to divide the market into three to understand what’s happening.

The lower level (sub $100 priced products) is non-existent due to two forces. One the basic operating system (Windows or Linux or Apple Mac) itself over the years filling the gaps that existed in previous versions with each subsequent release – for example, Music Player, CD Burning, MP3 Ripping, Photo & Video editing, Defragmenting, Disk Partitioning and so on. Second, most of the needs and features that were fulfilled by Desktop Shareware tools are now available on the web for free. And when it comes to Online tools, only one business model seems to work so far and it is an advertisement (which too, favours the bigger players). For making advertisement model work you need to run a loss-leading business for a long time to generate sufficient volume which requires deep pockets or good portfolio of external investors willing to write a huge cheque in every round of funding.

The classic failures in this space is Netscape Browser, WinAmp Music Player (its parent Nullsoft), struggling WinZip or InstallShield. The only exception I can think of in this space is the Antivirus vendors like Symantec, McAfee or QuickHeal – but I am not sure how long this window of opportunity will exist too, most of these players I believe are doing well due to their enterprise business and not due to their consumer business.

The medium level (anything where customer investment is $100-100,000). This is normally the most active region of software product business, which provides the core profits for the Small & Medium-sized firms. In the last decade, most of this space is occupied by Free (as in Free beer) Open Source software. Think of classic LAMP stack components like the MySQL Database and PHP Language for this space. More easily recognizable examples in this space are Content Management Systems (CMS) and Blogs which are now dominated by OSS (Joomla!, Drupal & WordPress). If anyone today builds a CMS or Blog engine that is just a plain/basic CMS or Blog engine, there will be no uptake from customers. The basic features have been highly commoditized and people today expect it to be available in the underlying framework or free. In my opinion, this is where Drupal or WordPress shines as a free platform to build on. But as the product gets specialized to a particular Industry say with Workflows, templates, forms & other features for that Industry, its revenue/yield moves away from Zero dollars. But to do these feature additions, the investments required too grows exponentially and you need to keep doing this every year – the marketplace just doesn’t give you enough time to recover your original investment, it is a continuous investment, investment & investment cycle.

Apart from the availability of Free software, the reason for failure here by firms is due to fast raising complexity and hence cost of developing software. In the last 15 years after the Web (HTML, XML, JavaScript) programming model, there has been no fundamental innovation on how software is being developed or deployed. Cloud Computing I believe is an evolution rather than a revolutionary way of software deployment & hosting. The development tools have grown to IDE, Intellisense levels and then stagnated there for years – this is true for .NET, Java or C++ or Adobe Flex.  All alternate programming tools/frameworks/approaches/modelling tools have failed or haven’t caught on for wider usage to have any impact. On top of this, is the rising cost of Salary levels for Software Professionals like in developing countries like in India – how long can you sustain 20-30% annual salary increase, productivity doesn’t grow that much each year.

Lastly, to market products that costs say $20,000-50,0000 (the medium in this space) and to reach these customers the cost of marketing has been ever increasing. Simple tools like Google Adwords alone don’t work for this space. You need dedicated marketing teams, social networking agencies, real-world events and distributors. All this costs many times more investments than just product development. And closing a sale in this space doesn’t happen over a week or so they take anywhere between 2-4 months, the recent recession in US & Europe has increased the purchase decisions timeframe as well.

If you are thinking about Subscription-based online services in this space, then I can only quote SalesForce or Google Docs or Linked-In as successful here and they are obviously few. I have heard about stories of companies in Israel who are playing successfully in this space by licensing their innovation and IP to bigger software firms rather than reaching to customers directly. I need to do some research on this trend if you know any details please post it in the comments.

The Top level ($100,000 and more) there is very little to say as there are only handful of players here today – Oracle, Microsoft, IBM & Adobe. Over the last two years, they have been moving towards increasing their services revenue and expecting less of product licensing. IBM and Oracle are pretty aggressively pursuing this trend, Microsoft & Adobe seems to be getting in terms of this inevitable trend. RedHat & VMWare seems to be doing good as well in pursuing services revenue.

Coming back to the conversation, I had with my friend. We continued talking that to survive in the #1, 2 space you got to be extremely aggressive and expand your market share very very quickly. Release a suite of product variations very quickly. Go for the kill or get killed. Try out online subscription models as well. Get an external investor sold on your idea ASAP.

I shared with him the following practical pointers to doing software exports in India:

  1. If he hasn’t already to get IEC Code (Importer Exporter Code). To import or export in India, IEC Code is mandatory. No person or entity shall make any Import or Export without IEC Code Number.
  2. Apart from any private banks he may be banking, to open an account with the near-by Public Sector Banks. This will help with getting loans on favourable terms and government interest subsidies for Small & Tiny sectors, and good relationship with the local branch & manager – which can give lot of intangible benefits and connections.
  3. Book-keeping or accounting in India is just not as easy as entering values to Tally. So have at least a part time accountant to do that.
  4. Have your part time accountant to file Service Tax, Income Tax, TDS returns every month or quarter on time. Penalties for non-compliance can be very harsh. Have your Auditor to review and submit you a report that all returns are submitted correctly and on time, you can pay your Auditor a very nominal fee per month for him/her to spend those few hours every month.
  5. Have accurate invoices for all foreign exports, even though done online through a intermediary, printed out in paper and filled properly. Failure can make proving that Service Tax or VAT not applicable for them will be very difficult. Proving your case to tax authorities on these matters in India is nothing but impossible and drains your energy and time. Tax authorities here are certainly not tax-payer or business friendly, especially the smaller firms.
  6. Take insurance coverage for all your critical assets – Computers, Servers & other items as you see fit.

T.N.C.Venkata Rangan

References:

  1. Detailed summary of hurdles an entrepreneur must overcome in order to incorporate and register a new firm in India
  2. My own blog post on Doing business in TamilNadu
  3. My blog post on Mr.Bharat Goenka’s (CEO of Tally) talk in Nasscom Emerge
  4. My blog post “IT Job Market in India & Industry trends

Update 9/Nov/2010: Today’s Economic Times newspaper carried two articles relevant to this discussion.

1) Product companies wilt as IT buy favours majors

Unlike in countries such as the UK, where the government wants small and medium businesses (SMB) to account for a quarter of the IT spending by public sector organisations, many Indian start-ups cannot even bid for government technology contracts despite having relevant, and at times, better solutions.

If you can’t get us to sell in India, how do you expect us to become successful global firms,” asks Sanjay Nayak, CEO of Tejas Networks

From around $1.89 billion in revenues during 2008-2009 , the Indian product firms’ revenues fell to $1.64 billion during year ended March 2010, says Browne & Mohan, which analysed 418 top product companies across Chennai, Bangalore, Pune, Delhi, Thiruvananthapuram, Bhubaneshwar, Chandigarh, Ahmedabad and Hyderabad.

2) Moving Indian product story into next orbit

Update 18/Feb/2015: In an article in today’s Economic Times Former Director of Infosys Mohandas Pai and Former CEO of Yahoo! India Sharad Sharma have brilliantly summarized what’s preventing India to lead in Products space.

Building a world-class product company needs a different mindset. You have to go all-in and bet the company on the market or on the technology shift underway. This mindset is new to us. Our success in building services companies comes in the way.

11 Comments

  • @Vignesh, first a disclaimer I am not a qualified Lawyer/CA so please treat my comments as such.

    DGFT Website (http://www.dgft.org/IEC_Code.html) says "To import or export in India, IEC Code is mandatory. No person or entity shall make any Import or Export without IEC Code Number".

    To me it appears anyone (individual or business) who export needs to have an IEC code. It doesn’t matter whether you export services or goods, OR you export for just $1. iPhone App store or oDesk will be classified as Exports due to the fact the work is delivered abroad and you get paid for it from Abroad.

  • Enterprise software market is not the same as it once was. There doesnt seem to be much scope even for enterprise segment ($100000 or more) be it in India or abroad unless it is for highly specialized mission critical industry vertical software like for banking, insurance, manufacturing or finance. For every enterprise horizontal you can think of, there are free or nearly free software available.
    CRM -> Fatfreecrm, opencrm, sugarcrm; BI -> Pentaho; CMS -> Alfresco; ERP -> Openerp, BPM-> Bonita, ETL/data integration -> Talend.

    As regards monetizing online services, Freemium model seems to be the way to go for (charge for premium features while a basic version always remains free). If you try to rely on ads as a way of monetizing your online web app, you will find only little revenue because people use ad blockers or very rarely click on them.

  • @Dilip. Thanks for breaking your silence, I enjoyed your well-summarized comments and I share your concerns. We need to have more of these dialogs within the IT Industry across levels and between all stake-holders. Unfortunately today we are at a dead end unless some fresh initiatives comes to break the stalemate.

    As you have rightly said, India’s Outsourcing advantage is proving to be its curse when it comes to the local domestic market in both Products and Services. Every country now want to export its way out of recession, but as Paul Krugman, the Nobel prize-winning Princeton University economist has said "There isn’t another planet to export to," [ref: http://www.businessweek.com/magazine/content/10_43/b4200013889287.htm%5D

    So if Indian IT Majors turn a little from QoQ results and look over the horizon, it will become clearer to them on the need to invest and grow the domestic IT Market. You can’t be ignoring for long an Economy that is growing by over 8% YoY. They need to start by educating the Indian IT market – on the advantages of Software, its productivity gains, competitiveness that it can provide and so on. In this tailwind, SME IT Firms can follow. Unfortunately today the SME IT firms have to do this and are paving their way to graveyard.

  • Hello Venkat,

    I have been a long time reader of your blog and am delurking now to comment for the first time. Nice analysis and write up. I have always felt that it is unfortunate that India, despite being an outsourcing superpower has not successfully created an ecosystem (VCs, Entrepreneurs, Product management professionals) that promotes software product companies. Even the few who went down the product development route had to move to a services model to either support their product development efforts or shut it down. While TCS,Infy,Wipro,CTS etc need to be credited for driving the offshoring revolution, they have seem to have done very little to invest/create world class products themselves. On the contrary they have potentially hurt product startups by making it very difficult to compete for talent by offering high salaries/perks that startups cannot match. The cost advantage that India used to have is gone. At my workplace I am seeing more and more Chinese firms getting outsourcing contracts for work that would have previously gone to India. Hopefully it is clear to folks in the Govt/Nasscom that in the long run just relying on IT outsourcing as primary form of software export is not sufficient.

    There are two possible options to reverse this trend. One is just like India skipped the landline telephone revolution and jumped onto the mobile revolution; we could bypass the shrink wrapped product development in lieu of developing world class services. Services like Amazon’s AWS and Azure make it easy for startups to create scalable service offerings at a fraction of the cost to deploy your own datacenter. It also lowers the barrier to entry into established markets. Option #2 is to develop apps for Apple/Android/Win7Phone Appstores (this would be the new version of the sub $100 product market that you mentioned).With the tablets/smartphones market set to explode in the next few years, this market is still nascent and right time for Indian product companies to get into and establish themselves as credible players.

    Thanks for sharing your experiences on the challenges faced by Indian software entrepreneurs. Hats off to folks like you. Hopefully the Indian govt and IT industry will wake up in time to ensure we don’t kill the hen/goose that lays the golden eggs :-)

  • @Hariharan, as far as I know you need IEC code even if you are importing or exporting for a value of Re.1. It is basically like your Income Tax PAN Number to identify uniquely an Importer/Exporter. Whether you are importing/exporting for a loss/profit, product is successful or not, whether it is a product or a service all doesn’t matter here.

  • Good wealth of information. I have few doubts.
    Is IEC Code Number necessary for Cloud based software(SAS). Should I worry about it before the product become success?

  • Good points… but my thoughts are as follows:

    — Consumer software business in India and to an extent in major parts of the world is pirated and this is largely reasoned out that it is not easy to buy and run software in comparison to pirating. In effect consumers do not see the value of their purchase to the price point. Many consumer oriented tools today do’nt have any direct market value and has only a notional value that is small units – too small to discretely pay. If Google can pay for Picasa through advertising that is costed in sub-cents…then that is the value of the consumption – at least today.

    — Enterprise software interestingly is not very different. The only reasons enterprises in most parts of the world buy commodity software is because they need to stay compliant. As for enterprise class software – whatever competition arrives is gobbled by the big 4-5 that ensures that their margins are preserved.

    In essence the world of software in converging back into the HW. You have two choices:

    1. On-Premise: Bundle the H/W and S/W.. IBM and Oracle are both doing this in enterprise, Apple in consumer space. Microsoft is partnered with a large ecosystem for bundling. If it is not bundled..it is not probably going to sell. Others like Symantec, Adobe, SAP will merge into some of these structures soon…

    2. On-Demand: Bundle H/W and S/W and sell it as a service for usage. This model works well where the user/consumer/enterprise perceives the utilitarian value of what they achieve as a function is fairly discrete and disposable. In effect it is non-critical to them but something they are willing to pay as a contract. For example Amazon has launched more offerings that offer lower utilization, lower redundancy, lesser security etc than things that are better. In reality on the cloud, people are moving a lot of non-critical functions and therefore when price becomes the debate, the offering level is reduced.

    Both IBM and Oracle have interesting offerings that allow you to buy OnPremise devices in OnDemand mode… here you can get the H/W, S/W and services installed in your premise, managed by their staff and you pay monthly. This creates a tight captive market that even foot in the door becomes a challenge for new entrants.

    When it comes to pondering i always reflect back on the five forces of Michael Porter in a market place.

  • Well said Venkat…It was really on the dot. While most of the young generations of these days, feel that they can start something on their own, it’s really worth reading what you have posted. Also there is a factor of the lower level or the mid level coming with a price tag of "resource cost" and most companies end up seeing the loss, even before the product launch. A very thought full post and I liked it, Thanks. Will share to my teams as well and make them understand more on reality !

  • hi.. read ur post about doing business. i agree with most points but i still feel that Indian S/W firms don’t have guts to create products. its not as if rest of the the Indian industry doesn’t create products, so why only IT industry?. i think its a combination of taking risk, lack of long term investment and lacking the right frame of mind. computer penetration in India is much lower than other countries, so difficult to achieve volumes.

  • nicely written, thanks for sharing.

    it would be great if you write about, how to pick the right people in India, what are the problems to face in india to recruit sw people.