Whether it is the size of marketing budget or number of fixes in a service pack, you can count on international software giant Microsoft to cast a shadow over its peers.
The company has carried that weight through to its investment in the South Africa market. Indeed multinationals looking to make a splash with an equity-equivalent deal in the local market will have to do some serious pencil sharpening to measure up to the R472-million deal Microsoft signed with the department of trade and industry in April this year.
The South African operation, as a fully owned subsidiary of Microsoft, was not able to sell a portion of its equity to comply with the ownership requirements of the department’s broad-based black economic empowerment (BBBEE) codes of good practice. As a result, the company opted to participate in the department’s equity-equivalent programme.
With the department’s approval, multinationals can replace the ownership portion of the codes with a programme supporting enterprise creation, economic development, technology transfer in the small, medium and micro-enterprise sector, economic growth and employment creation through developing technological innovation, or sustainable job creation. The value of these contributions can be measured against 25% of the value of the multinational’s South African operations, or 4% of the total revenue from its South African operations annually over the period of continued measurement.
Ali Faramawy, Microsoft’s president for the Middle East and Africa, says the initiative was conceived specifically to support the needs of the local market: “In the conversations with our global leadership team in Seattle, they made it clear that this was South Africa’s moment, and this was the time to step up our commitment to the country. “The best way to do this was to ask the right questions in the context of South Africa. So we asked: what does the market need? What are the government’s priorities? And what is the greatest impact we can make? The result is the investment being made for economic development.”
The deal, announced by Maria Ntuli, then deputy minister of trade and industry, and Mteto Nyati, Microsoft South Africa managing director, will see the company spending almost half a billion rands to help between five and 10 small, black-owned software development companies grow into global companies by 2017. Speaking at the launch, Nyati said the investment targeted several priority areas identified by the government, namely creating jobs, developing enterprises, building the local software economy and developing scarce technology skills.
To qualify for the programme, companies needed to be established, had to be more than 50% black-owned, had to employ less than 30 people, and had to have a turnover not exceeding R10-million. “We’re looking to take existing software development companies and transform them into companies that compete in South Africa and around the world in areas like cloud computing. We want to create a new model for entrepreneurship and set a new benchmark for developing talent in the local software industry. We want BBBEE to be associated with real development, job creation, business development and skills enhancement,” said Nyati.
Global domination
External consultants KPMG were contracted to run the rigorous vetting process leading to a shortlist from which the successful companies would be identified, interviewed and selected. Within three months of releasing the request for proposal, 600 companies had applied for the coveted positions in the programme. Against a backdrop of BEE deals featuring the politically well-connected or related, it is refreshing that Microsoft’s multimillion-rand commitment does not follow suit.
Nyati says: “This is not just another BBBEE deal that features familiar faces and just ticks the boxes — We anticipate these small companies will learn and collaborate with our existing partners and in doing so create new software solutions and approaches for the unique challenges we have in South Africa and for those of international markets.”
Microsoft intends to focus “significant time, energy and resources” — in addition to the financial investment on growing the fledgling companies. This will build partners in new, potential high-growth areas and hopefully generate greater competition in the South African technology industry overall, the company says.
The World Economic Forum’s 2009/2010 Global Information Technology Report saw South Africa falling from 52 out of 134 countries in the previous year to 62 out of 133 countries. Although the country’s market, political and regulatory environments scored well in the index, South Africa’s poor readiness of individuals weighed negatively.
It was based on education, buyer sophistication and cost of communication; individual usage (measured by ownership of or access to information and communication technologies, ICT); and government readiness (prioritisation and usage of technology). The country’s sluggish performance in the technology arena is reiterated in the Global Competitiveness Report 2010/2011 where South Africa comes 100 out of 139 countries on ICT usage.
In July, local research house BMITechKnowledge placed the number of PC internet users in South Africa at the end of 2009 at about 4.9 million against a total population of about 50 million. This, it said, was expected to grow to 5.9 million by the end of 2010. Its findings indicated that primary place of access was the workplace, followed by the home and then other locations such as places of education.
“In terms of PC internet usage, activities such as watching television online and video calling are still in the early adoption stages, whilst other activities such as online dating and online gambling have started to experience strong growth as they move up the growth curve. “With the introduction of uncapped ADSL accounts aimed at residential users, the rate of increase of highbandwidth applications is likely to accelerate, meaning that broadband networks will start to strain under increasing pressure,” the report author Ryan Smit said.
Multimillion-dollar mentor
For a small business in the emerging South African market, gaining access to Microsoft’s international expertise and resources is a ticket to the big time.
In the 35 years since its founding, the company has gone from brainchild of two Harvard students to a globally recognised brand. In this time it has been called a shareholder’s darling, a regulator’s arch enemy, a marketer’s fantasy and an employee’s dream job.
As its peers stumbled and sometimes faded into obscurity, Microsoft innovated its product lines, areas of business and, most importantly, itself. Microsoft might be investing R500-million into the chosen businesses but an astute company will be able to mine billions of dollars worth of value from the engagement.