Emergic

Netflix, Shutterfly and Moxi Digital are representative of some of the new companies and services that are being launched to piggyback on the emerging world of digital gadgets and media.

Netflix is a DVD rental service with a difference. No late fees and a flat monthly subscription of USD 20. Here’s how it works: you create an account to their website, and select the movies you want to watch. They mail the DVDs – three at a time. After you are finished watching, you mail the DVDs back (postage is on them) and they send you the next three. Netflix has a subscriber base of 500,000 and growing. A mix of clicks, bricks and flicks!

Shutterfly is a web-based photo service that lets you print and share photos. Writes a visibly impressed Stewart Alsop in Fortune: “You can print your pictures in various sizes; edit your pictures by, say, removing red-eye or cropping nasty relatives; and share digital photo albums by sending people e-mail links. But then, sometime before Christmas, Shutterfly added a new application to create photo greeting cards. That in itself isn’t big news, since all the services let you create a greeting card with your own photos. But it is a lot of fun.So where’s the magic? Shutterfly designed its application so that you can see a pair of hands holding the card you designed. It’s a nifty way to envision what your card will actually look like in the hands of your correspondent. True, this feature is no big deal technically, but it’s a brilliant piece of customer service: As a consumer, you can now be absolutely sure that your card is going to look the way you want it toMy dollars will not be going to Kodak or to my local drugstore for traditional photo processing. After 30 years of taking pictures, I am beginning to handle my photography in a completely different way. That seems significant.”

Moxi Digital is creating the ultimate media server. Writes Lisa Bransten in the Wall Street Journal: “Moxi’s souped-up boxes combine the functionality of cable or satellite receivers with DVD players and the personal video recorders. The VCR-sized box hooks up to one television and can send data such as audio and video to electronics around consumers’ homes that are hooked up to smaller auxiliary devices. With the new offering, [Moxi] hopes to address the problem of too many home devices and remote controls that can’t communicate with each other.

The incompatibility makes it difficult to do things like download a music file from the Internet and play it on the stereo, or start watching a program in the living room, pause it and then watch the rest in bed. The Moxi boxes are designed to do both those tricks.Moxi will give away the hardware design and license the operators its software to make and run them.”

There are opportunities aplenty as change rumbles through. Writing in his weblog, John Robb gives a glimpse into tomorrow’s world, and some ideas on what’s needed:

In five years, you will likely have a Personal Storage Device with ~1 Terabyte (1000 GB) of storage space. It will connect to sub-$300 video/still cameras, play-back audio and video to any monitor, and connect P2P with other PSD users via high-speed wireless. I will be able to download an entire library of music and movies to you in 20-30 minutes during a face to face meeting. Further, I will be able to manage this library of content via my PC. This replaces CD and DVD technology with ferocity.

An interesting aspect of this is that much of the new content created will need to be published. The volume of content created will require that personal publishers provide end-users an easy to use interface. There are two approaches on how to do this: server based systems and desktop systems. The server side systems could never keep up with the volume of storage necessary to share this content. Desktop systems in contrast, will allow people to share the pointers to personal content within an easy to use Weblog interface on a central server, and enable the actual transmission of the content via P2P. Further, permission-enabled desktop hosted Web Services will make it possible for me to search a database of content, select the items I want to utilize, and then easily download what is available from the closest source.

As the revolution with digital gadgets and media takes shape, many trends are discernible:

Integration: Devices which were once separate are coming together. For example, take cellphones and PDAs. Handspring’s latest device Treo combines both. Moxi Digital aims to combine various functionalities like MP3 and DVD player, cable modem, satellite receiver and personal video recorder into a single device.

Specialisation: This is the counter-trend to Integrated devices, with the belief being that consumers will want specialised, feature-rich devices for specific purposes. Take the gaming consoles, for example. Nintendo and Sony are focused on packing power into its consoles, while Microsoft aims to add much more value by its decision to equip the Xbox with a hard disk. There is likely to be a mix of both integrated and specialised devices, much like the software industry. However, the lessons of what Microsoft Office did to its competitors is worth remembering. It’s the “suite vs best-of-breed” battle all over again.

Connections:These devices are getting inter-connected. These connections are happening in two ways: peer-to-peer (P2P), and through a computer (hub-and-spoke, or client-server). Napster was an example of a P2P service which used resources at the edge (music files on hard disks on everyone’s computers). Apple’s iMac is an example of the “digital hub” strategy at work, where ease of connection and software creates a platform for sharing and managing digital data from multiple devices.

Messaging as Emperor, Content as King: Messaging in all its forms – email, IM, SMS – remains a key driver for many devices. People just love to communicate! The next generation of cellphones will have small, in-built cameras to send photos across to the other person. Multimedia Messaging is already being touted as one of the key reasons to drive a cycle of cellphone upgrades. Digital Content follows closely behind: we want our music and our movies! Witness the numbers buying up DVDs, creating another stream of profits for the content owners.

Media Servers: Will the computer serve as the hub around which all the other devices will be organised?

Or, is this the start of the post-PC era? Amy Wohl thinks there is a new category emerging: Entertainment Centres or Home Media Servers. Writes Wohl on the functionalities:

Deliver, store, and manage TV programs, movies, and music from cable, satellite, the Internet, or CD sources to the media center’s hard drive.

Provide electronic mail and messaging. Support web browsing, on-line shopping, and on-line games.

Provide its services to any appropriate (digital?) device in your home from TV’s and stereos to portable devices (tablet PC’s), personal computers, and other household-of-the-future devices (say, the bulletin board on your refrigerator where you do the web-based grocery shopping).

Emerging out of all this is the Home Theatre. Writes Katie Hafner in the New York Times (January 24, 2002):

A home theater is defined as a setup with at least a 27-inch television, an audio-video receiver that includes surround-sound processing, a videocassette recorder or DVD player and four or more speakers, all placed strategically around the room.

According to estimates by Odyssey, a market research firm in San Francisco, some 25 percent of American households now have a home theater, and 37 percent of households have a television with a screen 30 inches or larger.

Also emerging: companies with innovative business models. More on this tomorrow.

Some of they key drivers pushing innovation in the world of gadgets are:

Miniaturisation: Things just keep getting smaller. Driven by Moore’s Law (processing power doubles every 18 months), more and more power is being packed into tinier spaces, creating smaller gadgets. This has been the key factor in the PC revolution and continues to drive to the next era.

Storage: Storage capacities are increasing rapidly (estimated to be doubling every 9 months) and costs are falling. Apple’s iPod comes with a 5 GB disk. As storage space increases, it now becomes possible to put hundreds of songs or even movies on to hard disks and equally importantly, be able to transfer them.

Bandwidth: The fibre optics revolution and falling bandwidth prices may have caused grief to many telecom companies but it has surely made customers very happy! As broadband now moves towards homes, it becomes possible to push digital content to consumers.

Wireless:This is being driven in two directions – the cellphone companies are creating high-speed networks (2.5G and 3G, capable of transmitting in speeds in excess of hundreds of kilobits per second), and wireless LANs (via the 802.11 family of protocols, using open spectrum). Both will co-exist: 802.11 will deliver connectivity for the last few feet (for example, in homes) while the cellular networks will create the platform for ubiquitous wide area networks.

Digitisation:The world is moving from analog to digital rapidly.

The Internet Protocol (IP) is forming the distribution base for digital media. Digital communications was earlier limited to messages and files; it now extends to photos, music and movies. This digitisation leverages on the Internet as the transmission medium and computers and specialised devices for storage, recording, playback and manipulation.

Content Distribution: How do you get the content to the users? Writes Kevin Werbach in Release 1.0, “Distributed content distribution focuses on end-to-end delivery of replicated objects or streams instead of packets or code. It differs from content-delivery networks (CDNs) such as Digital Island and Akamai that are now widely used by popular Websites, because these services optimize distribution from Web hosting facilities only to the edge of the public Internet, not all the way to a particular desktop. Distributed distribution creates multiple copies of each object and uses smart algorithms to pull data from nearby sources, including other users. Because it involves replication, it works well for one-to-many scenarios, such as streaming video broadcasts and downloads from a Web page. The economics of the distributed approach improve as the same content goes out to a larger audience.”

Battery Power:Improving battery power is critical for portable devices. We want to take photos without having to worry about the nearest power socket. We want our music to travel with us. As batteries last longer, our usage of digital gadgets will increase.

Taken together, all of these drivers are creating the underpinnings of a revolution in the converging world of computers, communications and consumer electronics.

Continuing with some of the recent developments in electronics and digital gadgets:

• Handhelds and Cellphones are, in the words of Bill Gates, “becoming one market.” Consider the recent Handpsring Treo, which uses the GSM network to make voice calls from the PDA. In another interesting development, TeleSym has turned a Pocket PC handheld into a mobile phone using Voice over IP technology. In the words of Dan Gillmor of San Jose Mercury News, “This could be the killer app for Microsoft’s otherwise uninspiring handheld operating system The fact is that voice is heading toward free. What customers want is a pipe and bandwidth, and the right to use it as they see fit.”
• Intel is developing a cellular Internet chip, which will enable the use of cellular networks just like we use LANs. Wireless networking through 802.11 is creating freedom at home and in offices – take the notebook anywhere and Internet connectivity is there. Guerilla networks using Wi-Fi protocols threaten to undermine the 3G revolution in which telecoms worldwide have invested tens of billions of dollars.
• Anyone with a quarter will be able to try out what is being called the US’ first outdoor Internet pay phone, on the southwest corner of Fifth Avenue and West 46th Street [in Manhattan]. The new phone, which allows users to send e-mail, surf the Web and call anywhere in the world for 25 cents per minute. (New York Times)
• From a News.com article: Is that a router in your pocket? As funny as it may sound, the answer to that question could be “yes” if a start-up called IXI Mobile has its way. The company on Monday announced its vision for a personal network in which a small cell phone and inexpensive e-mail device connect to cellular phone networks via a miniature server and router that would reside in the owner’s pocket.

The server, which would be about the same size as a tin of mints, would have a GPRS (General Packet Radio Service) modem to provide the connection for the cell phone and other devices. Amit Haller, CEO of IXI Mobile, said the advantage of such an approach is that it would allow all the complexity to be on the server, paving the way for accessories that could be cheap and sleek.
• By using a very thin hard disk and battery, Toshiba has managed to produce a full-width laptop (Portege 2000) only a bit over a half-inch thick, and weighing a mere 2.6 pounds. Yet it has a bright 12.1-inch high-resolution screen, and a keyboard that is surprisingly good, with full-width keys that have decent vertical travel, and are arranged very well. (Walter Mossberg writing in the Wall Street Journal)
• IBM has developed a prototype of a portable computer module that is the size of a small pad of paper and has the computing power of a typical notebook or desktop computer. The portable computing device includes 128 MB RAM, 10 Gb hard drive and a microprocessor that runs at 800 Mhz. “We’ve taken the PC down to where you can take it home and finish your work,” said Kenneth Ocheltree, manager for next generation mobile at IBM Research. Code-named “MetaPad”, the module is 5 inches long, 3 inches wide and about three-quarters of an inch thick. The module fits into a larger accessory piece that features a small, flat screen on front and is about 6 inches long, 4 inches wide and 1 inch thick. (Reuters)

These are, but, a few glimpses in the digital world of tomorrow. It is coming to us from various sides, but the message is the same: a mix of digitisation, connectivity, convergence and communications is dramatically changing our everyday life.

One bright spot in the world of technology is the plethora of digital gadgets that are now making their way into lives. These gadgets (like software in the enterprise space) are no longer silos: they are being integrated together to create new applications and forms of entertainment. The pace of innovation has been relentless. At the same time, they are also enabling innovative new business models. This is also spurring a fascinating race for domination among many companies.

Take a look at the range of digital gadgets that are now becoming available: Game Consoles, DVD players, MP3 players, webcams, Digital Cameras, Satellite Radios, Flat-Screen TVs which form the centerpiece of home theatres, PDAs, Cellphones, Smart phones, ultrathin and ultralight notebooks. The choice and some of the price points are astounding.

Even in India, VCD and DVD players from China and Taiwan are now available for Rs 2,500-Rs 5,000 (USD 50-100). Uptake is actually faster in some of the second-level towns and cities because the theatres haven’t improved much over the years – the result being a rapid growth in the rental market. Consumers worldwide are not too different in their need for entertainment!

Consider some of the recent developments in the world of consumer electronics and digital gadgets:

• DVD players are selling like hotcakes, and so are the DVD movies as Hollywood races to exploit the next window for its huge library of movies.

“Pearl Harbour” collected more money in DVD sales than in its US theatrical release. “Shrek” has already sold over 8 million DVDs. Already, 30% of US homes have DVD players with 13 million players being sold last year.

• In 2001, 8 million digital cameras were sold in the US and an additional 10 million internationally, creating a USD 8.6 billion market.
• Foveon, plans to begin shipping a new type of digital image sensor that outside experts agree is the first to match or surpass the photographic capabilities of 35-millimeter film. Foveon’s chip technology, which captures images more efficiently than existing digital cameras, is expected to make possible multipurpose devices that take both high-quality still and video images. Eventually, some mass-market cameras with chips from Foveon could cost less than conventional film cameras. (New York Times, Wall Street Journal)
• Moxi Digital has announced a device which combines the functionalities of a DVD player, stereo, cable modem, satellite receiver and personal video recorder. Microsoft has been rumoured to be working on a product called HomeStation which would use the Xbox gaming console and add to it a video recorder, DVD and MP3 player, and allow Internet email and Web surfing.
• Apple’s new table-lamp-style iMac is part of its “digital” hub strategy to serve as the central node to enable the management of all digital content – from music to movies, from photos to home videos.

Even as the Indian software industry races ahead in its effort to become a key component in the value chain of global companies, a few pointers need to be kept in mind which could dampen overall prospects in the coming years.

Domestic Market: Except for a handful of companies, the Indian domestic market has remained woefully slow in its adoption of technologies. The result is that most of the leading Indian software companies have negligible revenues in their own backyard. While the dollar-denominated earnings (a lot of them tax-exempt) are great, software companies need to help Indian industry become competitive with their global and state-of-the-art expertise. Obviously, Indian companies cannot match the dollar rates but what they can offer is a fertile training ground. No country can become a great player globally by ignoring its domestic market.

Software Products: There has been little of note by the Indian software companies in the global market for packaged software. The “intellectual property” creation is being for others. Not to say that Indian companies aren’t involved in cutting edge work – there are many of them engaged in mission-critical outsourced RD projects for global majors. The time has come for some of the Indian companies to look at making investments in using their expertise to develop products which can be targeted at global products. The lessons can be learnt from the Indian pharma industry, which is now moving from generics (the equivalent of outsourced services) to molecules (products).

Wider View of Technology: So far, the concentration in India has been only on software and related services. From an enterprise point of view, technology comprises of hardware and communications also. Indian companies can leverage their core skillsets in creating innovative solutions in these areas also. Lest we forget, there is an Indian hardware success story in Moser Baer, which has in the words of the Far Eastern Economic Review (Nov 1, 2001), “transformed itself into a turbocharged producer of recordable compact disks.It claims to produce the same quality disks as its Taiwanese competitors, but at a significantly lower costIt has now embarked on a risky strategy to double its production and become the world’s No. 4 manufacturer.In order to take a bigger piece of this fast-paced, high-risk industry, Moser Baer will be competing with the world’s best, both on cost and quality.”

The knowledge-intensive economy offers opportunities to build the foundation for a new India, which occupies its place in the world not due to geo-politics and its past but due to its economic prowess. While not discounting the inherent risks and challenges in their current businesses, Indian software companies and budding entrepreneurs need to focus beyond the labour arbitrage which has served it well in the past. They need to be able to envision a vastly different future – one in which India is not just the “back-office of the world” but a driver of technological innovation.

The biggest set of opportunities seen by software companies, venture capitalists and entrepreneurs is in the area of BPO – Business Process Outsourcing (the less glamourous phrase for this being IT-enabled services). The same outsourcing concepts which have worked with software are now being extended to other business processes – from call centre functions like answering phones and emails to accounting and HR processing. Why pay double the money hiring people locally (in the US, for example) when people in India can do they at less than half the cost – so goes the logic. The last two years has seen many startups in the BPO/ITES space. The software companies too are expanding their range of activities – after all, they have the advantage of the client base and execution skills. BPO is the Next Big Thing in India.

Elaborates a recent report on BPO by Birla Sun Life Securities:

BPO refers to the delegation of a company’s IT intensive business processes to an outside agency to help increase value. The external vendor, combining his technology skill sets and domain expertise, adds new dimensions to the process to attain better efficiency and cost management.

The growing tendency amongst organizations to manage costs and focus on core competency (read: revenue generating activity) is leading them to outsource processes such as HR, finance and accounting, logistics, administration, sales and planning. Within broad areas lie certain niche pockets like risk management, tax planning and US GAAP accounting.

The key drivers for growth in BPO shall be positioning by the external service providers to portray themselves as partners in their clients’ fortunes and not just entities raising bills.

Take a look at some of the recent activities on the BPO front:

• Infosys has added on its website BPO to the list of services that it will provide. (Business World)
• A few months ago, Wipro picked up a 17% stake for USD 10 million in Spectramind, which is a third-party outsourcing firm.
• HCL Technologies has invested USD 15 million in its call centre subsidiary (HCL E Serve) and plans to invest up to USD 40 million in the next two years. It also announced the formation of a 90:10 JV with British Telecom to run a 400-seat call centre in Belfast. (Business World, Business Today)
• WestBridge Capital led a USD 15 million investment round for First Ring a few months ago.

Business Today (November 25, 2001) explains the lucrative economics. (As a comparison, software companies charge about USD 25-30 per hour for offshore development and about USD 55-60 for onsite development).

The typical Indian call centre charges customers USD 8-12 an hour (per seat) for providing email services, USD 15-18 for real-time chat, USD 25-35 for voice-based services, and above USD 35 for technical help. The last includes value-added BPO activities such as processing insurance claims, mining customer databases for information and maintaining books of account. Operating margins vary from as less as 15% for low-end email contact centres to 60% for BPO-centres. Ergo, the only way a company wanting to succeed at the low-end of the business can do so is by building up its volumes.

Therein lies the catch; it takes between USD 16,000-20,000 per seat to put up a call centre focused on the international market. That works out to around USD 2 million for a 100-seater, and that amount doesn’t include the operational costs.

Not a game for companies with small pockets, anymore! Expect to read more of BPO activities in the coming months. Says Phaneesh Murthy, Infosys’ director and head of sales and marketing, “BPO will be the industry of this decade as IT services was of the nineties.”

Software is the one industry which has made India proud over the past decade. We have seen in the last decade the result of leaving an industry unfettered by silly rules and regulations. By no means is long-term success assured for all of the players. Yet, as in every competitive industry, the challenges are great and so are the opportunities.

A recent report by Enam post last week’s Nasscom observed:

• Despite the current slowdown, long-term fundamentals of the industry remain robust. There are various opportunities that are emerging in the immediate term; the off-shoring wave is likely to gain momentum due to heightened awareness of Indian cost advantage.
• Indian IT players need to work significantly on their positioning and services offerings, as the new customer segment, with unique requirements likely to emerge.
• The pricing environment is likely to remain tough due to the structural shift in negotiations from the Tactical to the Strategic level. This implies that growth is likely to be achieved by volumes rather than pricing.
• Larger companies and mid sized companies with clear domain focus are likely to maintain growth as the buyers are becoming more discreet and a thorough due diligence process has been put in place to select offshore vendors.

The coming years needs to see more of the same – business as usual. Indian software services companies have conclusively proved that the business model of outsourced development and works – to the benefit of all. Writes Douglas Lavin about GE in India in a recent Wall Street Journal article:

General Electric Corp. hired 6,000 people in India last year,

bringing its headcount there to 10,000, to handle accounting,claims processing, customer service and credit evaluation and research for GE around the world.

This year it expects to hire roughly 1,000 scientists. The firm is so gung ho on India it posted signs around its GE Capital unit there reading “trespassers will be recruited.”

Indian companies are already aiming for larger projects – having built up efficient software factories in India, just like China has done in manufacturing. The supply of engineers remains abundant. The cost differential while diminishing is still significant. Execution is a skill which companies have honed well in recent times. The challenges to growth lie in being able to market effectively to the leading companies in the world and be able to provide an ever-increasing portfolio of services to the client base.

Consolidation has not really happened in the software sector – so far. The bigger Indian companies have chosen organic growth. What has perhaps prevented acquisitions so far have been the high valuations of other companies (in India and abroad) though these have become more rational in recent times, and the perceived management and cultural differences. In addition, talent has never been in short supply, so growth has meant continued recruitment and training.

Even as Indian companies continue to “actively look” at targets overseas, the reverse may start happening. There have been rumours in the Indian press of companies like EDS targeting investments in leading Indian software companies to accelerate their own growth, strengthening the belief that outsourcing software development to India is an irreversible trend.

The past year has sliced the software industry into three. There are the giants, who now have enough scale, marketing and execution prowess to continue growing at rates in excess of the industry average. Then, there are the small companies, who specialise and survive. And in between are the middle-tier companies, who are caught between the need to specialise and the desire to grow big rapidly. The middle-tier companies run the risk of becoming the “living dead” unless they achieve rapid growth. Software is one industry in which consolidation is likely to happen less through mergers and acquisitions but more through the departure of clients and employees in the middle-tier companies.

While the going was good (read “the dotcom and telecom era was thriving”), there was plenty of business for everyone, and some. In the past 18 months, most of this business was evaporated. The software services business is now focused on helping the larger corporations of the world in implementing their eBusiness strategies and making the most of their existing IT investments. This requires not just execution skills, but also a deeper understanding of their industries and business processes. This is where relationships and branding matter; this is what the biggest Indian companies are on their way to exploiting. This is also where the middle-tier companies face their biggest challenge because their ability to differentiate is limited, and competing purely on price is not going to take them too far.

So, as the pressure builds on Indian companies to “move up the value chain” (an oft repeated term), there is also the looming threat of China with its “what-India-can-do, China-can-do-better-and-cheaper” approach. At the same time, newer opportunities are opening up in IT-enabled services and business process outsourcing, as companies worldwide look to cut costs and shore up earnings. Newer markets are being scanned across geography (outside of the US) and in industries like biotech, where IT is playing an ever-increasing role. Emerging technologies like Web Services and the Mobile Internet promise more investments in technology in the coming years, creating a need for even greater demand for integration services.

All in all, India’s software industry is growing up – fast. The opportunities are there but so are the challenges. As the euphoria of sky-rocketing stock prices has faded away, there is a growing realisation that while the market opportunity is there, a lot more needs to be done to grab it. After all, India’s largest software company has revenues of less than USD 1 billion. Compare this with IBM Global Services’ revenues of USD 35 billion. India’s share of the total world market is just 1.3%. We have a long way to go!

Software Services have been perhaps one of India’s biggest export successes in the past decade. Led by companies like TCS, Infosys, Wipro and Satyam, India’s software industry earned USD 6.2 billlion in the year ended March 2001. Growth for the current financial year is pegged at 30-35%, impressive given the turn of events and the global economic environment. This is, however, lower than the 50%+ growth rate the industry has been used to in the past few years. What are the challenges facing India’s software industry? In the words of a recent Business India cover story, “Can Software Shine Again?”

The advantages of India’s software industry are summarised by Business India (Jan 21-Feb 3, 2002):

According to a Forrester study conducted in November 2001, India’s IT strengths are:

• the country’s decade-old experience in this area
• fluency in English
• supportive government policy infrastructure, and
• high-quality offerings

This is amplified by a 1999 World Bank study, which says that India is the only country that figures in the high-quality-low-cost segment of the quality-cost matrix. An October 2001 survey by McKinsey indicated that the cost of doing offshore software development in India was almost 30-80% lower as compared to development in Europe and US.

India also has a talent base with enormous potential. It has the world’s second largest pool of English-speaking scientific manpower.

It churns out a huge number of engineers every year and the government aims to triple that number by 2008.

The tremendous growth (and potential) has helped companies like Infosys, Satyam and Wipro list on US stock exchanges. Fresh from its acquisition of CMC, TCS is considering an IPO in the coming year. All the leading Indian companies have strong management teams, a growing clientele and are cash-rich.

Here’s a look at the top 10 Indian software companies, ranked on 2000-01 export revenue (Rs 1 crore = USD 0.2 million, or USD 1 million = Rs 5 crore):

Rank	Company	Exports (Rs, crore)
1	TCS	2870
2	Infosys	1853
3	Wipro	1756
4	Satyam	1241
5	HCL Technologies	1127
6	Cognizant	703
7	Silverline	647
8	NIIT	570
9	Pentasoft	555
10	Pentamedia	548
11	Patni Computers	516
12	IBM Global Services	506
13	Mahindra British Telecom	450
14	HCL Perot	439
15	DSQ Software	438