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Software: Economics prevail - Views on News from Equitymaster
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  • Jun 23, 2003

    Software: Economics prevail

    Gordon Moore, Intel’s famous Co-Founder, once predicted something that is known as, Moore’s Law. He predicted that the speed of a silicon chip would double every year with price also falling at a similar rate. This prediction has come to be very near to truth. And the IT industry has come a long way since then. In this article, we try to analyze what happened in the (recent) past, and what changes the IT industry is going through currently.

    Till the middle of 2000, IT firms and their customers thought that everything in the IT industry would continue to grow exponentially – be it the scope of IT and the number of clients. And this ‘doubling’ actually started to happen – eyeballs doubled, so did venture capital, so did bandwidth and, of course, so did share prices of IT stocks. And India was a very integral part of that ‘doubling syndrome.’ The table below would be sufficient enough to make out of the ‘frenzy’ that had caught the investors in Indian IT industry during the boom.

    The (more than) doubling syndrome!
      Avg stock price
    Avg stock price
    Change in
    Avg stock price
    Change in
    Infosys 3,436 9,750 184% 3,923 -60%
    Wipro 2,563 5,311 107% 1,456 -73%
    Satyam 487 3,993 720% 233 -94%

    Times have changed for IT companies worldwide. Now, when global economies are all in the midst of an economic slowdown, everyone – IT firms, customers, and investors – seems to have become wiser. They seem to have learnt the bitter lesson of being overly optimistic on IT industry’s growth story. And the laws of economics have, at last, taken their very respective place in the industry. But this does not mean the end of the growth story, more so for the Indian IT firms.

    This recession has, in fact, been like a blessing in disguise for the Indian IT industry. The industry is going through a phase of deep changes. IT companies are becoming more proactive on the R&D front. Over the years, Indian tech majors are setting up marketing and distribution branches across the world. And then, they are slowly moving up the value chain. The high-end services where Indian IT companies still have to make their presence felt are IT consulting, package implementation, systems integration and R&D services. Considering these companies’ miniscule size (when compared globally), they still have a long way to go. For example, though companies like Infosys (11% of revenue), Wipro (10% of Global IT business revenue) and Satyam (21% of revenue) are witnessing increasing contribution to their revenues from high-end service like package implementation, the potential is huge.

    Source: Mckinsey-NASSCOM study

    In the phase that will follow, profitability is likely to take a hit in the short-term. But as the entire IT industry matures, its constituents (again, the IT firms, customers, and investors) will benefit tremendously. And Mr. Moore will be very proud of that!



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