Why aren’t there more global software product companies out of India? Basab Pradhan examines
A few years ago at Infosys I used to regularly get the question – why isn’t Infosys doing more in software products? In response I wrote this piece for Rediff where I addressed the question of why Indian services companies don’t do well at products and why they shouldn’t even bother. Since then Infosys-incubated OnMobile has done quite well, but that in no way disproves my claim that the two business models – products and services – are so different that they don’t belong together (OnMobile was a separate company well before it found its groove).
Lately I’ve been getting a different question – why aren’t there more global software product companies out of India? (I use ‘product company’ as short hand for any information technology IP based company). Clearly, it isn’t for lack of software engineering talent.
The single most important reason is the lack of a domestic market for software. India’s market for business or personal software is very small market compared to developed markets. And you can’t build software products away from the market.
Designing software products requires a kind of iteration with end users that just isn’t possible unless you are ‘just across the street’ from your end user. Demos, prototypes, white-boarding with users who are willing to give of their time is what creates a good product design. Something that just can’t be achieved by using tools and methods, however sophisticated, in an offshore model.
This, by the way, is true for all product development, not just in software. You have to first create a customer base in your home market that can then become the springboard for international expansion. The auto industry is a global industry and to my mind there is no company that started making cars for a foreign market before establishing a beachhead at home.
Why is India’s software market so small? Partly due to the size of the economy and partly because average income is so low that productivity gains due to adoption of technology don’t pay off unless that cost of the software is really low. This is true about all emerging markets.
The software products market is dominated by American software companies. As the largest integrated market by far, the US has a great advantage here. But that is not the only reason. The most competitive companies in an industry tend to cluster, as Paul Krugman showed us, and areas like the Silicon Valley and Boston are the industry clusters for software.
Can Indian tech companies succeed? They can – by first serving needs in the local market that are not served by global software companies. Such needs could be underserved because the global players find the market too small and the prices too low to make changes to their software or because the market need is unique. The price that would work for say a small business ERP in India may not be something that any US ERP vendor is interested in.
Pricing, or ‘the bottom of the pyramid’ path is a very plausible path to success especially with business software. The world over, businesses will be able to afford computers before people at home do. Small businesses in third world countries, very much like in India, don’t like to pay (too much) for software. But you do need business software to scale your business. A successful Indian business software company will know how to make a profit at price points where big software companies won’t.
The competition at the bottom of the pyramid is going to come from Open Source. Open Source is slowly creeping up the stack. There are even a couple of Open Source ERP names. But perhaps Open Source is an opportunity itself. Perhaps Indian companies should use Open Source to play the IP game. I have yet to see much happen on this front although this could have been closer to the knitting of the Services companies. Maybe we will soon.
About the author
Basab Pradhan is formerly CEO of Gridstone Research. Basab blogs at 6ampacific.com