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.

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.