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  • Four things to know about the Indian IT sector’s IP deals

    How large is $1 billion? Even by India Inc’s standards, that’s quite a lot. To give you some perspective, it’s almost equal to the quarterly profit of a large-cap company listed on the Indian stock exchanges. And yet, that’s what the beleaguered Indian IT industry has bet in the last few quarters.
    Why you ask? It’s to get access to Intellectual Properties (IPs) belonging to International Business Machines Corporation (IBM). Investments like this may be a must-have for growth, but investors don’t seem happy about IT giants’ recent investments in IPs.Let’s understand this issue further.

  • What is an intellectual property and why it matters?

    It’s easy to mark tangible properties. But what about ideas, formulae, trademarks, copyrights, patents or software that you may have produced? Those can be registered as your ‘intellectual property’. This way, you can ensure nobody benefits or copies these. In case someone does so, you can legitimately claim for a portion of the revenue or other forms of payments. Companies often ask for an annual fee or ‘royalty’ payment. This makes IPs a revenue stream for companies. Even those who legally use an IP benefit because they don’t have to invest a lot of time, money and resources in building such properties. An annual fee, for such people, can be cheaper.

  • Why is the Indian IT investing in IBM’s IPs?

    IBM has registered many of its software products as its own IP. These are mature, tried-and-test software with an existing client base. An Indian IT company can use these products as the base for building newer or innovative products; sell it to clients, and earn low-cost revenue. In fact, the cost of development can be so low that a company can pocket 50-80% of its revenue as profits, according to a Kotak Securities report. The actual profit margin depends on how much work goes into enhancing IBM’s product. Another benefit that Indian companies are eying is that these IP deals can get them access to long-term clients for a period of 5-15 years. The Indian IT, thus, considers this an effective revenue stream, especially at a time of poor demand for outsourcing.

  • Why IBM wants India’s IT sector to invest?

    IBM has invested a lot of resources in building its software products. Enhancing them further—especially on a case by case basis—could mean a lot more cost, especially in comparison with the returns. Moreover, the client base of these IP products has either fallen or remained stagnant. It could also cost IBM a lot to reach out to newer clients. Instead, by forging partnership deals, IBM can get access to a whole lot of clients as well as a stable revenue source. As a result, it has partnered with 20 Indian IT companies in exchange for royalty.

  • Why are investors unhappy?

    The BSE IT increased 11% in 2017 even though the Sensex rose by 27% over the same period of time. This means the IT index underperformed the Sensex by 16%. This shows that investors are largely pessimistic about the sector’s future earning potential. The IT firms’ decision to invest in IBM’s IPs failed to enthuse investors too. They do not expect these deals to generate high returns. Moreover, the IT companies will need to take the responsibility of developing the IPs further. This could increase cost. The revenues could dry up over the life of the product too. In fact, a Kotak Securities report suggests that the deals offer “little strategic benefit” to the Indian firms in terms of client access or IP competency.

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  • Rs 5,400 crore

    Last year, HCLTechnologies partnered with IBM on IP products. The country’s fourth-largest IT firm invested around Rs 5,400 crore, according to a Times of India report. In return, the company expects a revenue of $220 million or nearly Rs 1,400 crore every year.