Thank you, Steve Jobs

Steve Jobs Picture courtesy: Apple Computer Inc.

It must be very strange that I write my reactionary post to the demise of Steve Jobs, five days after he passed away. Unlike most media agencies who would have a readymade eulogy for every ailing celebrity, for me, the unfortunate passing of Steve Jobs was extremely sudden and has still to sink in. It was just like the time I was told that Michael Jackson passed on.

I am not an Apple user, have never bought an Apple product (apart from an IPod that I was gifted and hardly use) and have been fed a staple of competing products from the day I saw my first computer. But when you saw an Apple product, you felt envy. They were beautiful, simply beautiful. While most of us would argue that were not exactly functional, you have to agree that they were beautiful.

As a computer technician, I remember when I was asked to install software on an iMac G3. None of the other technicians wanted to take that service call. This was in India where the standard is Windows and Intel. And the Apple iMac was the costly fancy gadget that everyone wanted to just gape at and not mess around with. In a small discussion room in my office, there stood the Bondi Blue funny shaped monitor. When I snapped out of the awe for the funny looking computer, my first reaction was “Where’s the CPU??” And when they told me, I said “Why didn’t they think of that before??”

That reaction embodies Steve Jobs’ influence on Technology. He proved that technology was not just functional, but needed to be aesthetic too. The joy of a product is not just what it can do, but also what it looks like, feels like, the experience that the user gets. For Steve, like with Michael Jackson, it was the experience, not just the product. When you focus on that, its not about the product anymore. Ask any Apple fan anywhere in the world. 

Then as I got Steve Jobs as a case study in MBA class, you started to marvel at the maverick business sense the man had. With ideas that were way beyond the present, but with constant touch with what the customer would desire, he went onto to do things that were outrageous for the norm. The Apple Macintosh, iMac, the iPod, the Macbook, the Apple Store, the iPad… everything that made no conventional business sense, but Steve knew it would work. And how.

I know Steve only from what I’ve read about him, the presentations he made and generally hearsay. But when you hear him talk about life in a commencement address to new students at Stanford, you realize the depth of the man. he was not all technology and business, not all greed and the other human shortcomings. He was about life, and being the best you can be. And he was. In his own way, Steve Jobs was the best he could be.

Sir Richard Branson, the entrepreneur I most admire, calls Steve Jobs the entrepreneur he most admired. And in a way, I have to agree. Steve Jobs was the magician and showman who resurrected not once, but thrice in an entrepreneurial career that I’m sure he looked back at with restless satisfaction. There are few people for whom Frank Sinatra’s My Way would be the perfect swan song. Sinatra was one. Steve Jobs would be the other. But then for Steve Jobs, his swan song would be the enormous legacy of products, ideas and “awesomeness” he’s left us to gape at…

I’m going to miss him say, “One more thing…”

Thank you, Steve.

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News and views: Microsoft to buy Skype for $ 8.5 billion

The biggest buzz on the street today is the imminent acquisition of Internet Telephony major Skype by IT giant Microsoft. More details about the news are here.

My particular read of this news is essentially that Microsoft is giving into its panic of losing the race for IT dominance to competitors like Google and Apple. I contrasted this with the earlier news of the tie-up with Nokia and in many ways, the rationale for the decision also seems to be the same. The Nokia tie-up was aimed at Apple iPhone and Google Android, while this one is solely levelled at Google.

Microsoft hit a plateau with innovation a long time back and has been content with providing “me-too” products. Somehow, the Microsoft top management answer to tackle this is either tie-up with or acquire popular market leaders in a financial crunch. Other than a few winners like Forethought (which became Microsoft Powerpoint) and Visio Corporation (which became Microsoft Visio) Microsoft’s history with acquisition has not been very promising, case in point, Hotmail.com, Savvis and Fast Search & Transfer.

The synergies for this acquisition are clear. Skype, being the first and most popular Internet telephony, has a huge retail fan base as well as is popular with Small Businesses. With Google’s GTalk slowly gaining popularity due to its integration with social networks, Microsoft would want to integrate Skype technology with its Operating System and Office Suite products and leverage its loyal user base in those products. Whether this integration would be smooth or would end up being another feature in the Microsoft products that users never use, is still to be seen.

The winner here is clearly Skype, which just like Nokia, has received much needed funds to remove its financial woes. Microsoft on the other hand, has gained powerful technology, which it would need to use innovatively to succeed.

India Budget 2011-12: MAT and why India needs to build IT products

It is two days since Mr. Pranab Mukherjee presented what many are calling the boldest budget from the ruling NDA coalition in recent years. And while the budget would have been dissected and laid bare thread by thread at the time of this writing, the most amusing aspect is noting the reactions that come from of various quarters to the proposed changes.

I specifically noted with much amusement the various reactions that came from the IT and ITES sector head honchos. Being part of the IT fraternity myself, while the budget made no specific gains for the IT/ITES sectors, there was the very visible tax whammy that the sector was hit with.

In a nutshell, with respect to the IT and ITES sector,  the 2011-12 Union Budget proposed:

Tax exemption to export-oriented units under the Software Technology Parks of India (STPI) scheme ceases in 2010-11. This effectively removes the following benefits:

        • Custom duty and excise duty exemption
  • Central Sales Tax reimbursement
  • Corporate tax exemption on 90% export turnover

Minimum Alternate Tax (MAT) was increased to 18.5% from 18%. MAT was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but who were not contributing to the Govt by way of corporate tax, by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax. MAT now is applicable to  units operating in Special Economic Zones (SEZ), which enjoyed a 100% tax exemption, among other benefits.

Dividends from foreign subsidiaries on Indian companies would be taxed at the lower rate of 15% instead of the normal tax rate. This would facilitate flow of this revenue into the country.

So to appreciate the full impact of these recommendations, let us examine the typical case of an IT company that has three units, one in an STPI, one in a SEZ and one in a foreign country. Let’s say each of these units makes Rs. 100 in profit. The normal corporate tax rate is roughly 34% including surcharge and cess.

Unit

Before Budget

After Budget

Net Loss / Gain

STPI Unit 90% exempt
10% taxed
34% x (10% of 100) = 34% of 10 = Rs. 3.40
34% of 100 = Rs. 34.00 Added Tax of Rs. 30.60
SEZ Unit 100% exempt
0% of 100 = Rs. 0.00
MAT of 18.5%
18.5% of 100 = Rs.18.50
Added Tax of Rs. 18.50
Foreign Unit Normal tax rate
34% of 100 = Rs 34.00
15% tax rate
15% of 100 = Rs. 15.00
Lowered Tax of Rs. 19.00
Total Tax on Rs. 300.00 Rs. 37.40 Rs. 67.50 Additional tax of Rs. 30.10

* MAT provision explained below

So effectively, while companies paid an effective tax rate of 17.33% before, they will now pay an effective tax rate of 22.50%, roughly 5.17% more tax. Naturally, this will vary based on the proportions of profit revenue from the various types of units.

Direct Implication

IT Industry pundits and players have obvious reason to be disappointed. The removal of STPI tax exemption was coming, as it was a time bound incentive scheme which was supposed to end in 2009-10 and was extended for one more year. While further extension was on the wish list, it was unrealistic to expect it.

The MAT inclusion for SEZ units was the unexpected blow. While large, established firms like TCS, Infosys and Wipro would only see a rise in their tax burden, the implications run deeper for smaller firms.

MAT is the minimum tax payable if the tax computed normally is less than 18% of the book profit.  Take the case of the STPI unit before budget. Let’s say that out of an income of Rs. 100, the book profit is the complete Rs. 100.  (A lot of consulting companies have this kind of business model, whereby the profit margin is 100% or more)

Normal computation of tax would make the tax liability only Rs. 3.40, which is less than 18% of Rs. 100. Thus the MAT provision would kick in and the company would have to pay a minimum tax of 18% i.e. Rs. 18.00.

Book profit refers to profit which is booked, but not realised. For example, a computer maintenance services company gets a contract for annual computer maintenance a year. This company would show the contract amount as its revenue for this financial year, while it will provide the services and get actually paid for in the next financial year. While the company has not received the money, its income for computation of tax has increased by this amount.

Now though MAT was a way of earning tax revenue by the Govt. from high profit making companies who were enjoying incentives, MAT was just unfair additional taxation. So, to make it look fair, a provision was made whereby the difference between actual tax and minimum tax could be carried forward for a period of upto 10 years and used to offset the tax liability when the normal tax exceeds the minimum tax.

So the differential amount in our STPI unit example (18.00 – 3.40 = 14.60), could be carried forward as tax credit and be used in a year when the normal tax (90% exempt, 10% taxed) exceeds the minimum tax (18%).

If in the next year, our STPI unit has a income of Rs. 100 again, but makes a profit of only Rs. 10. (Either low sales or too many expenses). The normal tax would again be 34% of (10% of 100) = Rs. 3.40 while the minimum tax would be 18% of Rs. 10 = Rs. 1.80.

Now in this case, the real tax is higher than minimum tax and the company is liable to pay the higher amount. But due to the tax credit of Rs. 14.60, it can reduce its tax liability from Rs. 3.40 to Rs. 1.80 by using some of that credit.

 

Due to the years of tax exemptions, larger and older companies have accumulated large reserves of tax credit under this provision, These tax credit reserves can be used now to offset the added tax burden. However smaller and newer companies do not have the benefit of such tax credit reserves and hence will be strongly affected by the pure tax burden. Such newer companies also have main units in SEZ areas and virtually no foreign units. As a result, the budget provisions only add their woes.

 

Long term solution

The Indian IT Industry is predominantly a Services oriented industry. It is true that there are few products in the market, but given the size of our economy as well as the number of potential innovators, the numbers are few and far between. While services are undoubtedly the strength of the Indian IT Industry, it is fast becoming evident that the traditional business model is not sustainable. Factors that contribute to this are:

Shrinking profit margins: Gone are the days of Y2K where India was a dormant pool of readily available talent. As services business models have matured, so has the commoditization of services grown. Rather than the service offering being a niche area of expertise, it has transformed into a downward spiralling price game.

Increased competition from other low cost outsourcing destinations: The solitary position of India as a natural English speaking outsourcing destination is a story in the past. The emergence of Brazil, Russia and China as major competitors for the outsourcing pie has put a direct threat on the viability of the services model.

Economic downturn in traditional markets: The focus of the IT Industry continues to be US and UK markets. Both these markets are currently saturated with an influx of service providers and customers in these markets are spoiled for choice. Moreover, both these traditional markets are becoming increasingly hostile to the concept of outsourcing, mainly driven by local political pressure.

If the industry’s blind adherence to this kind of static business model continues, increased taxation and eliminating incentives, which will slowly become a norm towards good fiscal policy making, will eventually cause the Indian IT Industry to lose its competitive edge.

The answer lies in making a shift from the supply driven model of outsourcing services to the demand driven model of IT products and branded services. Products and branded services predominantly enjoy the luxury of naming their price, as against a commoditized service, whose price is solely based on what the buyer is willing to pay. Moreover, products are also easy to quantify in terms of value, as against services, whose value is increasingly subjective and largely perceptive.

When a company sells products, the revenue and subsequently profit, is booked immediately. As a result, the book profit and realized profit is more or less the same. This eliminates the need for additional taxation elements like MAT. Moreover, the taxation is simplified as corporate tax will be calculated on the income revenue only.

[Disclaimer: The views expressed in this article are solely the opinion of the author and are not under the influence of any external parties thereof]