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Indian software services chase higher-margin products

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CIOL Bureau
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Narayanan Madhavan



BANGALORE: From being a rent-a-brain service provider to the world, Indian

software firms are shifting to branded products that could give them hot niche

markets and bigger earnings.



A major vote of confidence came in August when business software leader

Oracle Corp. struck a $593 million deal to buy a 42 percent stake in banking

software maker i-flex solutions ltd.



A lone ranger making products in an industry dominated by low-cost,

English-speaking programmers, i-flex is now a trailblazer for a host of niche

product firms.



According to a study by the Indian Institute of Management (IIM), Bangalore,

India's product revenue potential is as high as $7 billion by 2010, a near

10-fold rise from current levels. The global packaged software market is

forecast at $350 billion in 2007.



Products require longer to build and need deeper pockets. For a nascent

industry in a developing economy, that has historically spelt higher risks for

entrepreneurs.



"In middle class India, the appetite for risk is low. But it is changing,"

Kiran Karnik, president of the National Association of Software and Service

Companies (NASSCOM) said earlier this month after a brainstorming seminar on

product innovation.



Apart from market risks, costs are also involved in patent filing. Each U.S.

patent costs $25,000-$30,000 to file -- difficult for small entrepreneurs.

Industry officials are looking for more early-stage "angel investors" and

government support.



"Product companies are unfortunately not the darlings of the financial

world," said T. R. Madanmohan, professor at IIM.



Nonetheless, the number of Indian software product makers grew to 250 in 2004

from just 16 five years earlier. Product revenues more than doubled to 18.6

billion rupees ($408 million) over the same period, and Madanmohan expects these

to hit 25 billion rupees by 2008.



Among emerging listed product makers are Cranes Software, which makes

statistical analysis tools, and Financial Technologies, which makes online trade

software.



Polaris, 3i Infotech, Nucleus Software and Ramco make business or finance

software. 3i gets 45 percent of sales from products, in which the profit margin

is as high as 51 percent, while services fetch 38 percent. Service giants like

Infosys Technologies Ltd. and Tata Consultancy Services Ltd. also make finance

products.



GAMING IN PLAY Subex Systems, like i-flex an early player in products, even

acquired assets from France's Alcatel to consolidate in an anti-fraud niche in

telecoms services.



Madanmohan said gaming is an area in which Indian companies can tap a huge

emerging opportunity to make software products.



The $17 billion outsourcing-driven industry has also added product

development as a service, going beyond piecemeal components.



"Outsourced product development services provide an effective ecosystem for

talent that will translate into emerging product entrepreneurs from India," said

Pradeep Singh, chairman of Aditi Technologies, whose customers include Microsoft

Corp.



Symphony Services, another product specialist, has customers that include

customer management software maker Siebel.



Products, including development services, accounted for $710 million of

Indian exports in the year to March 2004, the latest available figure, compared

with $560 million a year earlier.



U.S.-based companies are also luring overseas Indians back home to join

development teams, helping product innovation.



A quarter of router-maker Juniper Networks' 300 engineers in Bangalore are

those who relocated to India.



"We didn't approach India as an arbitrage thing," said their head Sam

Srinivas. "We hope to come up with a lot of products."



Companies like Broadcom, which makes chips laden with software to help

video-on-demand, are expanding in India. Broadcom's Indian unit has filed more

than 150 patents.

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