Consolidation of fledgling ASP market will result in casualties

Few would argue that the rise to prominence of the application service provider (ASP) and the future of the ASP market was the...

Few would argue that the rise to prominence of the application service provider (ASP) and the future of the ASP market was the hot topic in the software industry this year.

The sector was not short of long-running sagas either, with the still ongoing court battle between Microsoft and the US Department of Justice over the break-up of Bill Gates’ company, and the drawn-out acquisition of ailing Dutch software company Baan by Invensys among the most indicative of these.

On the proliferation of ASPs, at the beginning of the year, a wide variety of firms ranging from industry giants such as Oracle, down to small ISVs and VARs were looking to move into the market, despite the fact that the ASP market had yet to take off.

This was perhaps triggered by estimates by the likes of analyst Ovum, which predicted that the ASP market worldwide would grow at an astonishing rate, from $1bn (£625m) in 1999 to $44bn in 2004.

As we approach the end of the year, with the ASP Industry Consortium now established, and the newly created ASP Forum set up by a select few industry players to cut through the hype and resolve customer confusion, analysts are still predicting growth, albeit at a slower rate than was first mooted at the outset of 2000.

Indeed, the consolidation we are seeing in the market now, with the ASP bandwagon jumpers falling by the wayside, was forecast at the outset by Rob Hailstone, who was then research director at Bloor Research. Back in January, Hailstone commented: “We will see things start to shake out,” adding “despite its immaturity, the market is fragmenting already”.

These comments have been borne out by the latest study into the European ASP market by Frost & Sullivan, which predicts that despite the growth expected in the sector, market consolidation is expected to squeeze many smaller players out by 2003.

The Microsoft saga

Returning to Microsoft and the seemingly endless battle between the software giant and the US DoJ over the decision to break the company in two after it was found in breach of anti-trust laws. We did not have to wait long into 2000 to see major developments taking place at the vendor, with supremo Gates opting to step down from his position as CEO after 25 years at the helm, to be replaced by Steve Ballmer.

Although Ballmer insisted at the time that Gates’ decision was not made in reaction to the bad press he received during the anti-trust case, many industry observers believed the opposite was true.

And in April the ruling was delivered by Judge Thomas Penfold Jackson that most were expecting — that the company must be split in two.

Since then, of course, Microsoft has appealed against the decision and the case is set to drag on unresolved well into 2001.

When the ruling was made, most analysts were of the opinion that Microsoft would continue as normal and would perhaps even prosper further from the move.

But one analyst was rather more scathing about the way in which Microsoft had handled the whole issue.

Clive Longbottom, then of CSL, now at Quocirca, said of Gates: “Billy-boy could’ve avoided this if he wasn’t so arrogant as to think he could disregard the US judicial system.

“If he had broken up the company himself six months ago, he could have put a positive spin on it and increased the share value, rather than have it forced upon him and see the shares plummet,” he added.

If all this wasn’t bad enough for Microsoft, it also had to contend with an investigation by the European Commission into its Windows 2000 software system. But enough about Microsoft’s woes.

Highs and lows

Another long-suffering outfit, the once prosperous Dutch software company Baan, was at last put out of its misery when it was acquired in the summer by Invensys. The takeover followed a wretched period that saw the company post consecutive heavy quarterly losses stretching back nearly three years.

Belgian voice recognition software producer Lernout & Hauspie has also had a dramatic turnaround in fortunes. In the spring, it became the largest producer of speech recognition software in the world as a consequence of its acquisition of Dragon Systems for £376.5m.

But the intervening months have been little short of disastrous for L&H, with a number of high-profile resignations from the company’s board, including those of co-chairman and managing director Pol Hauspie and former CEO and president Gaston Bastiaens.

In addition to the departures, the company filed for Chapter 11 bankruptcy protection in the US; suspended the CEO of its Korean unit, Joo Chul Seo, after he misappropriated £21m of a Belgian venture capital company’s money, using it as collateral for a private loan; and the US Securities and Exchange Commission investigated the company’s past financial statements.

The combined effect of the various setbacks saw L&H’s stock suspended from Nasdaq and Easdaq, having fallen 90 per cent in value since its March high.

As we now approach the close of the year and anticipate what is in store for 2001, it is fairly safe to assume that software services, ASPs, managed service providers (MSPs) and the like will continue to be the main growth areas, with major companies such as HP completely shifting their focus to capitalise on the changing marketplace. Perhaps 2001 will clear up the confusion surrounding the mechanics of the hosting market.

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