The Digital Skeptic: Intuit and Friends May Take Digital Bullet

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

NEW YORK (TheStreet) -- Tax and accounting software firms such as Intuit (INTU) are getting ready to step well ... into it.

"We are at a point now where we see the world shifting once again," Brad Smith, president and CEO of the Mountain View, Calif., company, told analysts in September. "End users no longer want to be consumers. We want to be participants."

But if what analysts are saying back to executives such as Smith is any indication, what consumers really want is to not be customers at all.

Never mind that Intuit's products handle something like 2 billion invoices, 1.6 million vendors and 30 million employees; the overall tax prep and accounting software market is going just one place.

Nowhere.

"The sheer number of competitors is so high that revenue will be hard to come by in this industry," said Dale Schmidt, an industry analyst for IBISWorld, based in Santa Monica, Calif., who has written a definitive report on the topic.

Tax business now like the music business
Schmidt spent a good hour over the phone with me explaining his research into the eroding economics of tax prep and accounting in the information age. It was a familiar call, since I have seen the same trends grind the music, publishing and legal professions to a similar fine, white powder.

"It is pretty much the emergence of the free online tax filing systems," he explained.

Just like in music and books, there seems to be no end to the number of outlets offering all or part of Intuit's products for free or at no incremental cost.

The big free accounting software donor is, of course, the government itself. IRS.gov offers a full suite of online tax tools that match much of what, say, Intuit's TurboTax does. Features found in sophisticated money management tools such as Mint and Quicken are now given away by credit card shops including American Express ( AXP), MasterCard ( MA) or Visa ( V). And banks including Bank of America ( BAC), Chase ( JPM), Citibank ( C) and Wells Fargo ( WFC) all toss in such tools as customer gimmes.

And let's not forget the literally dozens of other tax prep and accounting expense tools that compete directly with Intuit's business products: Outright, FreshBooks and Expensify all offer services similar to Intuit's for either less or nothing at all.

"It takes a significant amount of revenue from a company trying to work in the space," Schmidt says.

The aggregate digital effect on the tax prep market is stunning. In his report, Tax Preparation Software Developers in the U.S., Schmidt estimates that through 2017 the tax prep industry will grow by an average annual rate of just 0.6%, or a fraction of the rate of inflation in North America. Ouch.

The long slow slide of bean counting
The upside, I suppose, is that the air will leak out of the tires slowly.

Schmidt is confident there is no Black-Swan-mortgage-meltdown-flash-crash event ahead for the industry. Big firms such as Intuit or H&R Block ( HRB) are not headed for Chapter 11 in the next five years. He said the decline will be slower and the pressure will be felt by smaller firms first.

But the overall trend looks sadly familiar to these tired eyes.

Just as in the digital music or movie or video game business, tax prep in the information age is under that same forces of commoditization as these other forms of digital information. Products that once were bedrock pockets of value will no longer turn the profits they once did. And the industry will need to test pricey unknown territories of ever-bigger and more expensive properties to make up the difference.

It is no accident Intuit and H&R Block now flirt with health care, point of sale and even retirement planning products.

It turns out that the grim business of digital bean counting is just that, a grim business.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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