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Telecom software : "Citius, altius, fortius" - Views on News from Equitymaster
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  • Jan 1, 2001

    Telecom software : "Citius, altius, fortius"

    "What great delight it is to see the ones we love and then to have speech with them." -Vincent McNabb, God's Way of Mercy

    Today thanks to the Internet, distances don’t matter. Communication across the globe has become so easy. But we have a long way to go. Till now (at least in India) communication over the Internet is text based. The experience thus is not exactly like what Vincent McNabb describes. This is where the next generation networks come in.

    This innate human desire is fuelling the growth of the telecommunications industry (estimated to be US $ 1,000 bn). The imperatives for the sector are:

    • Faster data transfer
    • Multimedia over the Internet
    • Integration with existing legacy networks and other devices like phones (convergence)
    • Ability to communicate with all kinds of networks
    • Finally, the ability to reach irrespective of a person’s physical location (wireless applications)

    The initial telecommunications device such as a digital switch were hardware based and the value break up between hardware and software was (70:30). Today, the percentages have reversed.

    The digital technologies are converging, blurring the distinctions between the communications and networking industries. WAP (wireless application protocol) is a good example of the convergence of the two. This has created soaring demand for the software that powers today's networks.

    Next generation networks like ATM (asynchronous transfer networks) are heavily reliant on software for functioning. Due to software based switching that these networks can be made more intelligent and can switch at faster rates thus increasing bandwidth.

    This has created a huge opportunity for India's offshore software developers. Along with the explosive growth of the Internet and wireless communications, advantage India is the availability of skilled human resources (software engineers with telecommunications expertise). But the catch is that the solutions are very difficult to implement. Skill set requirement and entry barrier for the industry is high.

    Due to all these factors that India has become an important development center. According to Nasscom (the National Association of Software and Service Companies), India's telecoms software exports was 10% of the total software exports in FY99 and grew to about 12% (US $ 500 m) of total software exports in FY00. According to Nasscom estimates India's telecoms software exports will grow to 25% of the total exports in FY03.

    The major players in the segment are Wipro, Tata Consultancy Services, Hughes (exclusively into this vertical), Mahindra British telecom, Satyam and of course Infosys.

    (Rs m) FY01E (Revenues from
    telecom software)
    % Share of
    global market
    Wipro 32,047 9,614 0.7%
    Hughes 1,724 1,724 0.1%
    Infosys 17,646 1,059 0.1%

    Global markets for telcom software estimated at Rs 1,478 bn for FY01

    Due to the demand supply gap the billing rates are higher. This means the companies have better operating margins and lower receivable days as the clients are very big established companies. Also, all the technologies are in the development stage and there is tremendous scope for innovation and research. Therefore, a lot of Indian companies are eyeing the segment. To name a few Digital, SSI, Polaris and Trygin. Considering the small share the Indian companies have in the global market place, growth opportunities are tremendous.

    Recognition for India’s effort has come from all quarters. The World economic forum in Davos awarded Wipro, “Technology pioneer” award. This is a sign of greater achievements to come.

    Appreciating India’s cost competitive technical abilities some of the larger telecommunication groups like Siemens and Motorola have chosen to establish their own in house software development facilities in India. However, the danger is that, if too many MNC companies use this same methodology, Indian companies might feel the heat at a later date.

    But until then, telecommunications is big business for Indian companies. As we said in the title: Telecom software: "Citius, altius, fortius" (meaning swifter, higher and stronger).



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