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Software: Calling growth - Views on News from Equitymaster
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  • Mar 15, 2003

    Software: Calling growth

    Software companies providing services to the telecom verticals were one of the hardest hit due to the technology meltdown. Infact, revenues from the telecommunications vertical are now being termed as ‘exposure’. However, we believe that this very vertical could provide strong growth in revenues to the industry that is limping.

    Traditionally, the Indian software companies provided services to the telecom equipment manufacturers (or box makers). The box makers make equipments that move data and voice from one end of the globe to the other in absolutely no time (like routers and switches). Another group of companies in the telecom vertical are the telecom service providers (TSPs). Service providers buy the equipments from box makers and provide telecom and/or Internet services i.e. move data and/or voice (like MTNL and VSNL in India). This segment has been hardly been tapped by the Indian software companies.

    The growth in business is likely to come from the TSPs. Many would scorn at the very idea. This is due to the fact that the TSPs in the US and Europe are facing very tough times due to their precarious financials and overcapacity in the industry. These companies have spent significant amount on purchasing licenses for new services but have not been able to earn sufficiently out of these services to justify the financing costs. Consequently, consolidation amongst TSPs is imminent.

    Also, to survive in the future survive in the future TSPs will have to provide value added services and replace legacy systems with cost effective technology. A technology that is a strong contender for providing voice and data services at a fraction of prevalent costs is VoIP (voice over internet protocol). For example, in Japan (the fastest growing markets for net telephony), a three-minute call from Tokyo to Osaka that used to cost 68 cents is now available for 6 cents using net telephony. Thus, pricing pressure will force service providers to move towards IP based networks, as the value proposition for customers is immense.


    According to Adventis, a consultancy, traditional service providers are already losing customers to cable-telephony services that use VoIP technology. The rate of loss of customers could increase from the existing 5-6% of lines a year to 15% or more going forward. Customers are choosing cable-telephony due to cheaper costs.

    Companies like Hughes Software that have product offerings in the IP space will see an improvement in demand as service providers shift to IP networks. Also, due to the adoption packet switched and wireless networks, legacy networks will need to be interfaced with the new ones. Also, information systems that support operations and managements will need to be re-worked to accommodate the new service offerings. Thus, the need for re-aligning operational support systems (OSS)/ billing support systems (BSS) presents another opportunity for companies like Hughes Software. Traditionally billing for the telecom industry has been time based. However, going forward, the billing have to be based on quality of service provided, amount of data and value of content. The advantage companies like Hughes have is the understanding of networks that need to be interfaced with software that supports management information needs like ERP (enterprise resource planning) or CRM (Customer relationship management).

    Another area of growth for the industry will be the development and deployment in the wireless space. Going forward, customers will expect voice and data services to be available wherever they go. And the telecom companies will have to gear up to provide these services. Thus, demand for GRPS (General Packet Radio Services) also known as 2.5G and 3G (GSM) services will require telecom service providers to set up the required infrastructure. The demand for the infrastructure should augur well for the equipment manufacturers, which will in turn translate in to demand for telecom software companies. According to the TIA, spending on wireless services in Eastern Europe, Western Europe, Latin America, North America and the Asia-Pacific region, jumped nearly 30% between 2000 and 2001, to an estimated US$ 242 bn, surpassing spending on landline toll service for the first time. We had focused on this area in a previous coverage on the sector. (Read more)

    Despite the slowdown, the share of the telecom equipment manufacturers increased from 12% of the total software exports in FY01 to 14% in FY02, a growth of 17%. This is quite a commendable performance by the Indian software industry considering the fact that top six companies (Cisco, Nortel, Lucent, Nokia, Alcatel and Motorola) in this space saw an 18% decline in R&D expenditure. However, the Indian Software industry is now focuses on the spending by TSPs to develop cheaper services offerings and thus, to keep themselves ahead of competition. It is unlikely that this spending will be discretionary. Thus, growth in revenues from the telecom vertical could bring add pace to the growth of the Indian software industry. And for investors, looking to investing in technology, companies with specialization in the niche area of telecom software could provide an investment opportunity. Having said that, it also needs to be mentioned that the element of risk while investing in technology stocks in on the higher side.



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