The future success of the ASP industry has been a hotly debated subject in the IT world. Although there has been a great deal of hype about the industry, it has not generated the sales expected. But Butler Group is of the opinion it is a viable business proposition and will eventually become a successful industry.
It would appear that the predictions for the size of the ASP industry are driven by a combination of the number of organisations likely to take up the delivery model, and the size of these organisations. Larger organisations are the target market for many ASPs because of the bigger profits to be made; ASPs aiming at smaller companies require high volumes to become profitable, but still provide a unified delivery.
There are implications over the next year for small niche ASPs, vertical sector ASPs, through to large, established organisations (such as Microsoft and Oracle) enhancing their own ASP ventures. For example, Microsoft has recently acquired Great Plains (a provider of e-business solutions), showing it is producing not only for the desktop market, but other applications as well. In other words, Microsoft is competing with its customers in the ASP market space. This is being viewed as predatory by many Microsoft-centric vendors. However, many members of the ASP world have also greeted this news with delight because the Microsoft name is adding a measure of credibility to a volatile industry and, as a result, it should be easier to sell ASP services.
The result of this acquisition is that Microsoft will have a Great Plains Division. It is envisaged that the integration of technologies from both companies will create a unified group of business applications built on the .NET platform, deliverable as an ASP solution (among others). This acquisition has been driven partly by the diversification mentioned above, and also the quality of the Great Plains offering in the mid-size market. Butler Group believes that, in the longer term, this combination
Many companies are looking at the simplification of Web application development and deployment to carve out a niche in the marketplace. However, the warning bells should be sounding here, as Oracle and Microsoft are already on this bandwagon and it will not be easy to compete against these giants. That these large organisations are entering the ASP arena means the future of the industry is perceived as important enough to be involved in.
What are the characteristics that Butler Group considers to be important when determining the future success of the ASP industry? The following nine aspects have been identified:
- Value and viability
Early adopters or late movers?
Value and Viability
The viability of the ASP market was brought into question last year when a number of high-profile ASPs failed as a result of lack of take-up and withdrawal of investment. Without customers there is no market, and this resulted in a significant amount of negative press in the IT world.
ASP is marketed as being new and efficient and an essential addition to the opportunities available to businesses today. The original market-drivers still stand - the Total Cost of Ownership (TCO) is generally higher for purchasing than using an ASP, it is a faster time-to-market for delivery of applications, and the lack of skilled IT staff in the marketplace for traditional organisations. The speed of deployment is extremely important for businesses to remain agile and constant availability is critical. As such, the basic needs of the potential customer are unchanged, and are probably even more pertinent today because of the advances in technology.
So why is take-up still not at the rate expected? Factors such as the negative publicity surrounding the market and the perceived loss of control highlighted by larger organisations have contributed towards the low-rate of customer take-up. Additionally, Small to Medium-size Enterprises (SMEs) are unsure which the most viable ASPs will be, therefore they are reluctant to take up the model. The 'wait and see' approach has been adopted, particularly in the SME arena.
Butler Group believes an ASP can help an organisation maintain or increase profitability, when compared with purchasing and maintaining an application in-house. The purchase and support of an application is not the core competency of most businesses and, as such, ASPs do this better. Some larger and enterprise-class organisations have created their own IT departments to make it a part of their business, but the danger with this is the problem with recruiting and maintaining IT staff, plus the other headaches that come with running your own IT department. Therefore, ASPs can be utilised by different sizes and types of organisation.
There are two aspects to price: actual cost; and the billing mechanism.
It is looking increasingly likely that the cost of using ASPs, particularly for customised solutions, is going to rise this year. There are three possible justifications for this. Maybe the original charges are too low to be sustainable, so ASPs simply have to increase them to avoid failure. Or perhaps the ASPs have decided to invest more to improve their product offering. Or maybe it's the customers who want more and are willing to pay for a better service.
The truth of the matter is that it is a combination of all three, and maybe more besides. The original focus of the ASPs was on customer acquisition. In order to obtain these customers in a sceptical and unsure market, the cost of using an ASP had to be low.
However, loss-leading charges are only sustainable in the short-term; ASPs have to be able to provide customers with the service they are expecting, and this needs to be paid for. 'Something for nothing' is a paradigm the industry, as a whole, is beginning to move away from.
Additionally, ASPs need to continually invest in infrastructure, but without demonstrating a move towards profitability, investors are unwilling to provide more finance. Infrastructure improvements are vital to the continued well being of an ASP - the rapid advances in technology is one reason customers use ASPs, but it is the ASP's responsibility to keep up with this.
Customers also want more from their ASP. The service element is increasing in focus. The benefits that organisations gain from using an ASP, such as regular monthly payments rather than a major capital cost, have to be combined with support and flexibility. As such, the ASP has to increase its prices to provide the extra service the customer wants. ASPs are starting to focus on profit, rather than solely customer acquisition, and are being pushed towards profitability by their investors in order to deliver results according to the business plan. A number of high-profile ASPs, such as USinternetworking and FutureLink, have announced staff reductions already this year, in their bids to move towards profitability
As a result of this change in focus, customers must balance two of their primary requirements - the ASP must stay in business, but also charge them as little as possible for doing so. From the ASP's perspective, as much profit as possible must be made to keep investors and shareholders happy, and to maintain the business, while attracting as comprehensive a customer base as possible.
The standard charging model, in use by most ASPs, is Per-User-Per-Month (PUPM). However, potential customers want choices of how they are billed, and PUPM may not be the most cost-effective for them. Other examples include billing for the amount of time an application is used over a specified period or, alternatively, per transaction.
Butler Group considers that it will be a big differentiator between ASPs if some are offering only PUPM billing and others are giving a choice of transaction-based, time-based, and so on. It would appear that ASPs have begun to heed the requirements of their customers and many are starting to implement software allowing a choice in billing.
Butler Group believes that the ASP industry has developed further, to be focused on the delivery of software as a service, rather than solely the delivery of applications on a rental basis. This is a key requirement of many larger organisations when considering utilising the services of an ASP.
Furthermore, the service a customer expects is becoming much more defined. Many ASPs are developing standardised Service Level Agreements (SLAs) so that they are committed to delivering a specified level of service to all customers. However, some customers will require more specialised SLAs and which could also state customer responsibilities with respect to delivering an SLA. Butler Group expects there will be standard SLAs at the lower end of the market, with the negotiated agreements being designed for larger or more specialised companies. For example, some organisations are demanding extremely high levels of guaranteed availability, irrespective of cost, therefore these agreements need to be carefully constructed by the ASP to ensure they are viable.
Customer concerns regarding security are going to remain one of the key issues. Customers are demanding that any potential ASP guarantee the security of their data (and organisation, with respect to the service being delivered) before any agreement can be achieved. Standard protection, such as encryption and firewalls, are already in place, but more is in the pipeline.
For example, security is being developed inside the application, rather than outside. It is important that new ASP applications and services are designed so that multiple customers can be securely supported on the same image of the application, to enable the economies of scale that ASPs so desperately rely on.
The other area the ASP needs to focus on is in-house security. It may be a surprise to some that the higher security threat any organisation faces is in-house, rather from external sources such as viruses and hackers. Therefore, measures need to be in place to counter proactively that threat to as great an extent as possible.
The only thing clear about the future of the ASP industry is that it is going to be big. The figures being bandied around vary to such an extent that "big" cannot be defined in much more detail.
Even the size of the worldwide market in the past is a subject of some debate - figures of between $150m and $300m for 1999 have been cited. Moving into the future, market projections are somewhere in the region of $2bn and $20bn in 2003. With such an obvious disparity, Butler Group believes it is not wise to take too much notice of these figures, but accept simply that the market is going to grow significantly over the next two to three years.
Although the figures we have discussed above are in US dollars, the market is set to increase throughout the world. The ASP market had its origins in the US, but is now increasing in prominence in Europe and the rest of the Western world. For example, a couple of years ago the US and Canada was thought to be well over 60 per cent of ASP revenue and Europe was around the 20 per cent mark. In 2004, it is projected that Europe will be in excess of 30 per cent and the US will have reduced to the mid-40s. Although this is just one projection of many, it shows the commonly held belief that Europe is beginning to catch up on its American counterparts and the potential market is huge.
There has been a great deal of discussion as to whether Web-enhanced applications can run successfully over the Internet. One school of thought is for all existing applications to be Web-enhanced and run on a thin-client model. The reasoning behind this is that many organisations are unwilling to pay the expensive levels of access necessary for broadband (generally unavailable anyway) or the high bandwidth required for running Web-native applications.
However, the opposing school of thought is concerned specifically with performance and scalability. When an application is delivered through a thin-client model to hundreds and thousands of users, it is not always so easy for an ASP to add extra users or applications at the touch of a switch. These applications were originally designed for use on internal servers where bandwidth was not an issue.
Butler Group believes it is the responsibility of the Independent Software Vendors (ISVs) to produce Web-native applications sooner rather than later. This can only be advantageous for them because ASP delivery is fully monitored and the ISVs will get the appropriate licence fees through this delivery model. Piracy is a major headache for the software vendors and the ASP delivery model should help reduce illegal software use.
To add to this, by developing applications for delivery over the Web, the ISVs will be extending the market reach of the applications they produce. It certainly appears that ASP will be a model adopted by customers, therefore, it naturally follows that there will be casualties in the capital sales of applications. This market share needs to be retained through the development of applications for delivery as a service, rather than a product.
The huge ASP market value projections have generated many entrants into the arena. One thing is for certain about all the participants; there will be mergers, consolidations and bankruptcies. Not every player will survive. There are many ASPs offering a wide range of software and services, and it is likely that this variety will serve to put off many potential users until consolidation shows who the main players will be.
The industry consolidation will take a number of forms. Firstly, some players will fail to stay in business because of investors withdrawing funds and/or the company is making insufficient money to stay afloat. Mergers will take place when two (or more) companies see complementary services being offered, which can help each other increase sales/profitability if offered together. Acquisitions could take place in a variety of circumstances, but certainly weaker companies could be acquired by stronger counterparts if the assets (such as customer-base) are desirable enough.
Early Adopters or Late Movers?
Are the early adopters in the ASP market place going to be successful, or are the late movers going to learn the lessons of their earlier counterparts and deliver a service faster, better, and more value for money?
Trust is an important element of the relationship between ASP and customer. This trust can be gained in one of two ways; primarily from having a recognised brand name through being in business a significant period of time. The other way is for a new company to come under the branding of a larger, well-established organisation. As such, Butler Group considers that the early adopters, that have been through very difficult growing pains, will be the winners in the ASP world, rather than the late movers.
To add weight to this claim, the experience that these ASP companies have built up will go a long way towards helping them understand the market in detail and appreciate their customers' requirements. Furthermore, if good service is being provided (and it has to be assumed that in general bad service will result in the ASP failing), then satisfied customers breed new customers and the client base grows.
It is not only early-adopter ASPs that will be successful; early-adopter ASP supply organisations should also reap the rewards. These are companies that have developed solutions for ASPs. However, Butler Group believes there will be more competition in the marketplace here because the trust element is not so important and the late adopters could achieve success.
So what will ASPs do to ensure they survive over the turmoil anticipated in the next year or so? What factors will affect those that do survive? Butler Group believes partnerships will be key, but there will also be other enhancements that can be made over and above any issues defined earlier in this section:
- Target Market - There are some applications delivered by ASPs that are having more success at adoption than others. ASPs could enhance their range of applications to include ones with more market take-up, such as Sales Force Automation.
Technology - Delivery of applications as a service is a complex undertaking and, over time, the ASPs will become more adept at doing this, increasing opportunities for economies of scale to be realised.
Market Understanding - The negative press that has surrounded the ASP market will continue for some time yet. However, it is anticipated that eventually the potential customers in the market will have a more informed appreciation of the industry and its benefits.
Integration - ASPs offering multiple applications are likely to provide integration between those applications to encourage customers to take up more services.
Of course, there will be more ways in which an ASP can improve their offerings, and other factors that will affect their survival in the marketplace. However, Butler Group considers the above to be important elements that will see plenty of development in the future.
The future of ASP as a software delivery model is viable and sustainable. The needs of businesses that spawned the ASP evolution are still valid today and, some could argue, more critical than ever because of the advances in technology. Take-up has been slow in Europe because of negative publicity and a general misunderstanding of the marketplace. Yet Butler Group is firmly of the opinion that organisations using an ASP will find it beneficial in terms of cost and availability, and possibly many other reasons as well.
Who knows which of the huge projections for the value of the ASP industry will be accurate? Only time will tell. What is important is that, in general, there is agreement that the industry will increase and achieve growth through the acquisition of customers and refinement of the market. The market is set to increase not only in the US, but also in Europe (and the rest of the world) as well; it has been suggested that by 2004 Europe could be spending two-thirds of what the US does on ASP.
On the downside, the market consolidation already evident today is likely to continue. This time next year a number of the ASPs we have today will no longer exist. However, there could well be some new players in the marketplace that have an eye on the market projections and see an opportunity to build a successful, profitable organisation. The longer-term survivors from this year and last are likely to have a stronger brand awareness and be building the necessary trust among potential customers. It will therefore be difficult for these new players to compete.
Potential customers are still going to find it difficult to determine which ASPs are going to stay in business and which will not. There are a number of options the customer can take, the most obvious one being 'research' of the potential suppliers. The marketplace is gaining a greater understanding of ASP and its potential, therefore, Butler Group believes that this process should become easier over time.
ASPs are beginning to understand their customers' needs and wants. It is most definitely the time to take customer comments and requirements into consideration and deliver these to grow the market. Without this, the ASPs will be lucky to struggle on and deliver the success required to achieve the profitability they so desperately need.
In general, the early-adopter ASPs are likely to achieve the most success if they survive the turmoil of the consolidation in the marketplace. This is because their established position in the market means customers have a sense of trust in these companies; something ASPs require to obtain the customers to make a turn towards profitability.