TRENDS: Look Ma, no Cash!



Industry: Cash is King

Even while the Top 20 keep trying to push up revenues, revenues will become
increasingly irrelevant this year. What will matter is cash flow, liquidity and
margins. Almost every systems vendor will make a bid for high-margin services
revenues. “We don’t sell boxes, we sell solutions” becomes a
life-or-death mantra when boxes generate 2% margins and solutions, 20%. Software
and services firms will look for higher-margin services including more offshore
work, even at the cost of taking a hit in billing rates.

Systems: S-words rule

In 2001-02, systems vendors will increasingly look to services, servers and
storage–to survive the slowdown, pay salaries, and grow. And the O-word:
Outsourcing. Outsourcing services for enterprises, but more importantly,
outsourcing a range of “non-core” activities by the systems and other
vendors: channel programs, marcom, HR, and more. And the E: efficiency. Leaner
operations, better productivity, manpower freezes.

Channels: Growth, but no cash

With inventories and credit lines piling up, cash levels dropping, and those
razor-thin margins getting squeezed further, big distributors have a very tough
year ahead. They’ll move further up the Top 20 ranks, outstrip system vendor
growth, and be wooed by the big vendors. But buffering the growing credit lines
(over 45 days, when we last looked) down below and, above them, the vendors’
funds (even MNCs don’t have much cash) will be more than they can manage.
Revenues will continue to ramp up, but at near-zero margins, what will matter is
funds turnaround, cash flow, profitability, efficiency, information systems…
these will be the differentiators between life and death, as Tech Pacific,
Redington and Ingram Micro are joined by small by aggressive distributors.

Vendors: E-positioning

Is the ‘e’ dead? Of course not. Last year it centered on dot-coms. This
year, it’s about the brick-and-mortar companies that have recognized the
imperatives of having the ‘e’ enhance and transform businesses. And about
the vendors who have realized this too, and have repositioned themselves to
provide e-infrastructure and e-solutions, rather than just sell boxes and
systems. This ‘e’ will grow rapidly this year. The big growth here for large
enterprises will be on the supply chain and CRM side.

Servers: Healthy, though a bit slower

The slowdown effect will dampen spirits. Unlike last year, when dot-coms were
a force pushing server growth, it will be just the banking and finance segment
that will push server sales in 2001-02. However, demand here will grow further
as ATM and front/back office networks are deployed by public sector and smaller
private banks. Insurance is another likely growth-driver, as will be telecom and
Internet service providers. Also, thanks to the ‘e’ reality setting in,
corporates of all colors and creed will continue to invest in building up their
e-infrastructure, helping server and systems sales even more.

Govt: Joker in the pack

The SME and home segments have of course been the bright star for the last
couple of years, and ramping up channels and finance schemes would be a
priority. But it’s the government that’s likely to make up the big swing
factor
for industry revenues and those PC numbers this fiscal. If it gets stuck with
its post-Tehelka caution, there will be a gradual decline. But if, as is more
likely, it loosens up and enhances IT infrastructure in ministries, departments,
banks and projects by March 2002, as promised by Yashwant Sinha in his latest
Budget speech, then that would trigger a minor boom–or perhaps a big one, by
association. This would push up PC, server, services and network equipment sales
all around.

Assemblers will rule

Brands, price cuts, channel infrastructure–is the end nigh for local
assemblers? Far from it. They are thriving. For these are really the channels
for most hardware and peripherals components. They’re carrying a plethora of
branded components from Intel to Samsung, thus reducing the gap between their
PCs and the big brands. They’re backed by strong channel programs from Intel,
Samsung and others. And they carry so many brands of peripherals and associated
components that they can offer much more choice to end-users. All this coupled
with their low costs and the neighborhood presence means that they’ll continue
to eat into the market for the few remaining major Indian brands, if not the
multinational ones as well. And they’re already there in the small towns
across India–the assemblers will continue to hold over half the market.

Bandwidth: The crunch lives on

Fat pipes remain elusive, even though the ground-level bandwidth availability
has increased. Gateway capacity has nearly doubled, going past 1 Gbps, still
well under a tenth of the demand (and it’s a no-brainer to predict that the
BSNL, VSNL, et al will continue to claim that there is absolutely no shortage,
and it’s all available “on demand”). The new private gateways have
helped. But the big steps forward will be: the linking up of cities’ brandband
networks over the private channels of Reliance, Bharti, et al, the major
undersea optic fiber projects, the bandwidth exchanges that interconnect ISPs
and cut down on loading on the international gateway. Only then will faster
last-mile links and cable-to-home take off–and make sense. All this will
happen in 2002-03–not this year. For now, India Inc will continue to be hosted
on US-based servers.

Data centers: Still evolving

At least six Internet data centers (IDCs) set up in 2000 to target Web and
corporate hosting have gradually evolved–first into applications and data
storehouses, then to services and solutions companies over the last year. Most
of them–Satyam, Netmagic, Cyquator, Global Telesystems, Asianfrontiers.com–are
offering a host of services such as e-mail forwarding, auto-responders, POP
accounts, bandwidth and virtual hosting support. The market is nascent and will
take at least a year more to get up to steam. A big barrier is cost–hosting is
still four times more expensive for the same capacity and quality of service,
thanks to duties and infrastructure overheads.

If India’s international gateway capacity steps up sharply, and if these
Internet data centers add on a high component of services, then they could get
competitive in the Asian market. But not this year. And they’re not breaking
even till some years down the line.

The end of ‘Free’

A year after the famous dot-com bust, it was a time for change at free ISPs
and e-mail service providers. A rethink of business models, on the cards for
some time now, saw the first few e-mail providers finally walking the tariff
route, as usa.net and 123india.com suspended free services. Free ISPs like
Caltiger also did a turnaround, switching to the ‘charge’ mode for rural
users. The trend seems set to continue, especially as ad revenues have failed
pitiably in bringing in any semblance of black ink for service providers. Many
other companies are likely to announce similar switches in the ongoing year,
with value-adds being the new USP. What’s clear is–the
free-subscription-plus-ad-revenue model has failed for online services other
than “content”. What is likely, however, is a mix of services–free
ones for user acquisition, with some core premium charged services.

Microsoft .Net and Hailstorm

Microsoft’s “OS for the Internet” .Net plan takes off with the
Hailstorm launch later this year in a developer beta. Based on the Passport
identity system visible at Hotmail, this system will build services on top of a
common database and authentication system. If you have a Passport identity, you’ll
be able to use (and pay for) many other services without repeated registration,
or giving away credit card numbers to anyone (except Microsoft). This is the
starting point for Microsoft: free services like Hotmail, later with charged
premium services and subscriptions, based on the same user registration…
growing into a possible monthly subscription for online services and software,
rather than a one-time purchase model. Final objective: can they get all
Internet users in the world to pay Microsoft a small monthly fee? Something like
Coke/Pepsi’s of switching a small share of the water drunk by each person on
earth to cola. And as ambitious. Given the existing 100-million subscriber base
for Passport, we are talking some big bucks here.

Caution VSNL: Clean it up

The end of this year should see the public sector monolith monopoly of Videsh
Sanchar Nigam diluting its equity holdings to some extent. The divestment of 25%
of government holdings (another 1.97% will be offloaded to VSNL employees) will
set the ball rolling. As it loses the monopoly that it is so used to, VSNL will
have to fight market forces to retain its top position. It would not only mean a
whole new approach to customer services and marketing, but would also require
competing with the more market-savvy players. Clearly, it is going to be the
beginning of a service quality-oriented market, and that should spell some cheer
for the end-user.

Dot-coms: Continuing bloodbath

From dot-comes to dot-gones. The bubble that mesmerized almost every IT
entrepreneur in India last year burst just as fast as it blossomed.
Much-too-ambitious ideas, unrealistic goals, lack of business expertise or
tangible revenue models, all combined with the onslaught of the economic
slowdown to wipe many dreams off the market. Venture capitalists, who were
willing to fund almost anybody till last year, became conspicuous by their
sudden and marked reluctance to part with cash, with the rarest of exceptions
such as Tarun Tejpal’s Tehelka.com. Caution and realism set in and will
continue. Pure dot-coms will find it very tough to sustain themselves. A
brick-and-click model, which combines a strong real-world differentiators and
presence backed by online activity, will spell survival.

Oracle’s e-biz play

The idea of software that turns sales quotes into orders and updates totals
in inventory was bound to be appealing. When Oracle launched its 11i e-business
suite in June 2000, the integration of e-business functions was its trump card.
The 11i basket includes the entire range of e-business processes from CRM, SCM,
ERP, financials, HR, procurement and professional services automation. Reports
of technical bugs hampering the performance of this suite followed the launch,
but the year still saw over 400 companies worldwide going live on the 11i
e-business suite (20 of these are in India). The underlying concept of having a
single solution across the board, as against integrating several best-of-breed
products, should propel this product further into the e-business space.

Itanium: Big Iron

Its been two years of waiting for the Intel’s IA64 chip, but the Itanium is
finally here. With Intel sparing no efforts to push the 64-bit Itanium, the
market is going to see real action in the current fiscal. With co-developer HP
and Compaq supporting the Itanium in force and with IBM sitting on the fence
with an expression of support, the 64-bit baby has the possibility of realizing
Intel’s dream of making it in the high-end RISC-Unix hardware space. While the
heady flow of bubbly is still a few years away, it will probably be the
developer community in India that will account for some Itanium sales this year.
But as IA64 software picks up, next year should see enterprises taking up the
Itanium in the mid-range server segment. While the financial users will stick to
the very big iron, small servers will ramp up further in the around Rs 10 to 40
lakh class–where Intel should gain market share, both with its multi-way IA32
servers and the early Itanium severs from HP, HCL et al, in H2 of this fiscal.

Grooms.com: Losing steam

Up to a year ago, IT grooms were hot. Much like doctors and engineers before
them, finding a bride was no problem, nor was a decent dowry, thanks to fat
salaries and likely foreign trips. Not any more. Lay-offs, salary cuts and
slowdown stories have seen to that. The argument now goes like this: Doctors at
the very least can start their own practice. Traditional engineers may not make
pots of money, but they make it year after year. And the IT guys? With them, it’s
fat salaries or nothing. Too much like gambling. There is an upside to the
current IT jobs scenario, though. House rentals in Bangalore have come down, and
houses are available. For Bangaloreans cribbing about cost of living–it may be
cruel, but it is bliss.

The Big Three: Growing bigger

The party may not be as big as last year’s, but it is far from over. The
three software powerhouses, TCS, Wipro and Infosys, continue to grow at healthy
rates even through the continuing slowdown. Despite growing by over 100% last
fiscal, Narayana Murthy dropped a bomb when he projected that Infy would grow
this year by only 30%. However, if the Q1 results are anything to go by, the
company will beat its own estimates. However, most of these revenues will come
from volumes, not high-margin projects. Wipro chairman Azim Premji has said the
company will continue to grow above industry average. That’s a promise the
company is likely to keep, with the huge growth in Wipro Technologies’ R&D
services segment. Mumbai-based TCS now has the sheer size to carry it through
any downturn. Like Infosys, it will continue to capitalize on its large customer
base even as it intensifies its focus on the telecom vertical.

Pentium 4: Full speed ahead

Despite the hype, the world’s fastest chip evoked an initial response that
ranged from lukewarm to downright indifferent. However, price cuts and
modifications later, P4 started moving ahead and is expected to replace P3 as a
mainstream product by Q4 of this fiscal. While the 1.8 GHz version is already in
the market, it is expected to easily hit 2.2 GHz on Northwood by the end of this
year, and 2.4 GHz by Q2 2002. Also, Intel is pressing ahead with P4 notebooks
for the beginning of next year. And by the end of next year, Intel could be
nearing the impressive 5 GHz mark.

Peripherals: New rules

There are exciting times ahead for the peripherals segment, not just about
volumes. The move by Samsung to re-position itself from a computer peripherals
to an “essentials” company, along with its big new monitor
manufacturing activities, and the change of guard at LG and its much
talked-about plans of big investment in IT & telecom–these are likely to
be two growth-drivers here. It would also be interesting to keep an eye on
Microtek, the home-grown player, which has remained strong second-rung monitors
player behind the Koreans.

Training: Clean-up time ahead

The going was never quite so bad for the IT training and education sector,
where the slowdown has been a big spoilsport. NIIT’s net profit for Q1 2001-02
was down by 93%, while Aptech’s net was down even more. Then there were the
Wintechs and Zaps that just zipped from being big biz to big fraud to big zero–looting
thousands of students and hundreds of franchisees along the way. The year ahead
should see smaller players also exiting, bigger brands spending more and more on
drawing customers. While on-line training is yet to pick up in the country,
growing re-training demand in the software companies should see these companies,
including HP, going in for a B-2-B-2-C model, selling more of training delivery
mechanism to the companies rather than content. Finally, the training majors
will continue to push aggressively for services, though Aptech will finally
separate its training and education division from services.

ISPs: Time to add value

In the past, Internet access has contributed a major chunk to ISP revenues.
But with increased competition in the basic access market, value-added services,
content and e-commerce are set to drive the ISP market, with services like VPN
and Web-hosting picking up. Reliance and Bharti, for instance, intend to be
infrastructure providers as well as set up their own data centers. Others will
target services like VoIP, multimedia and real-time datacom. Access rates will
see further decline. Many private operators will fill the gap between demand and
supply of bandwidth by setting up private international gateways and laying down
optic fiber cable for broadband services. Interesting times ahead.

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