Indian Software companies need to achieve scale and rapid growth, and Internet companies need to survive. These disparate objectives will drive consolidation in the coming year.
For software services, the leaders need to keep growing – there doesn’t seem to any obvious bottleneck other than the ability to recruit people. Infosys is adding over a thousand people each quarter. Beyond a certain time, the supply of quality people will become scarce. This is because they get split – too many companies wanting them. What India needs are 3-4 gigantic software companies – companies like TCS, Infosys, Wipro and Satyam have got excellent marketing and execution skills, what they need is a near continuous and inexhaustible supply of the raw material (people). Recruiting one-by-one is one way, but I expect that in the next year, these companies will drive consolidation by acquiring some of the smaller companies. All of them (except TCS) have or will shortly have currencies (market listings) in both India and the US for stock-based acquisitions.
For Internet dotcoms, it is another story. Almost all are fighting to survive in a small, finite market (as of now). Supply of external capital has run out and their critical resource – people – are now heading for the exits. India does not need so many dotcoms.
What we need are perhaps 3 horizontals and 1-2 portals for 8-10 of the major verticals. What we have in India today is about a thousand of these portals. So, most of them will either die or will get rolled up (acquired) by one the larger portals. The winners in India in the horizontal portal market are quite evident – Yahoo because of its global brand is already the most popular site in India, and Rediff and Satyam Infoway, because both have cash and a currency for acquisition of virtue of their Nasdaq listings. Profits from the core business (excluding interest and other income) are still quite distant for most of the companies in the Internet space in India.
In the Internet space, the drivers for consolidation will be venture capitalists and private investors who have sunk in over USD 200 mm. There is no doubt that the Internet is the future, and that the winners will win big (as has been evidenced in the US). But there will be very few winners. Entrepreneurs and investors need to be practical and will do well to remember the truth in this business: we consistently underestimate the winners, but for weak companies, no valuation is cheap.