Ghost town?

A year after E-Business Review first looked at the ASP market, Nick Booth asks if it has lived up to the wild expectations

A year after E-Business Review first looked at the ASP market, Nick Booth asks if it has lived up to the wild expectations

It's always funny to look back at previous generations' visions of the future; 20 years ago, we imagined that by the year 2001, we'd all be going to work on personal helicopters, to a paperless, clutter-free pod that resembled the Starship Enterprise, our only company would be through video conferencing machines (that worked instantly) and we'd feast only on protein pills.

Still, that's not half as ludicrous as some of the predictions that were made for the application service provision (ASP) market. According to the 'intelligence', produced by the Phillips Group in April 2000, by now Europe should be a $5.4bn market. This is all being driven, apparently, by the massive need for co-location facilities. Since the prime target market for ASPs are e-businesses (be they start up or Old Economy) that should mean that hundreds of companies are out there putting their entire business systems in the hands of companies like Cable & Wireless Communications' a-services division.

So why is it so hard to find anyone who uses an ASP? In a new market like this, which vendors are desperately trying to kick start, a showpiece system has unlimited commercial value. It gives potential customers a practical demonstration of how the applications work and, more importantly, calms any fears potential customers might have about this unexplored territory. So it's unusual that CWC's a-services' vice president of global marketing, Stuart Keeping, is unable to talk about a single specific case. It's commercially sensitive, apparently.

This, says analyst Maxine Holt at the Butler Group, is why there are so few people willing to trust an e-commerce project to an ASP. "There's been too much negative coverage about the whole thing and people have got cold feet," says Holt. "The Gartner Group, for example, predicted that 60% of all ASPs will fail within a year and that can't exactly inspire confidence. A lot of buyers want to give the market a year or two to consolidate before they trust someone to hold all their data."

Three years ago, when IT vendors agreed that the ASP business model suited them down to the ground, Sun's CEO Scot McNealy said that in future (meaning now) all CEOs with a head for business will outsource all their IT. Unless you concede that Britain doesn't have many CEOs with a head for business, that statement has to be nonsense. In fact, the CEO with a head for business isn't going to trust an entire company's intelligence to an ASP who might not be around in a year's time and whose assets, including servers, could be seized.

The question of data ownership wasn't the only issue raised when ASPs were first mooted, but which is yet to be resolved. Integration is another stumbling block. It's widely accepted that an ASP, through its accumulated expertise and experience and economies of scale, will be able to build a system quicker and more efficiently than anyone who attempts to do this in house. Initially, it was argued that this would lead to e-businesses being hosted more cheaply than if companies did the work themselves, but this has been abandoned. Now the main advantage being touted is speed to market.

The problem remains that the online part of a business can't exist in isolation, which means linking the back-end systems with the Web system. Such system integration is time consuming and can eat into an ASP's profit margins. AMR Research analysts warned that an ASP could only be profitable if it built something that could be sold over and over again. But few off-the-peg IT systems will fit an established business, so some configuration will be involved. Which hasn't really happened.

Those companies that have integrated their traditional business with an e-commerce system tended to use specialist integrators like Aris or Silver Bear Technologies. Indeed, some integrators, like Aris, have even extended their business to web hosting. But straight ASPs haven't made much progress. "We haven't moved on much have we?" jokes industry analyst Nigel Montgomery, research director for e-business at AMR Research. "It would be alright if ASPs could host everything off site, but they can't in the majority of cases, so that means integrating something that's off site with something that's on site."

Where the ASP has made a difference to the industry is in changing the way businesses think about buying IT. "They've accelerated the change in mind set," says Montgomery. "We've gone from thinking about the old model, where you'd pay a licence for the software and the support fee, and gone to a pay-per-usage model. It's a lot more flexible. And you can spread your expenditure out over time."

The good news for ASP vendors, is that there's a recession on the way. The recession may help ASP vendors, argues Holt, because people will want to manage costs and using an ASP will help them do that.
The biggest breakthrough is that ASPs are changing their business model. "They're getting much better now at understanding the customer's requirements," says Holt. In other words, the market drivers for using ASPs are the same as ever. The objections to using them are too, but they're gradually being eroded, only very slowly.

Leader of the pack: the UK is way ahead of Europe

Research by IDC indicates we're ahead of the rest of Europe in adopting hosted services.

  • The proportion of hosted websites in the UK is 57% compared to 40% in France and 29% in Germany.
  • E-commerce websites constitute the fastest growing segment of the Internet market in the UK and the rest of Europe with 46,100 sites in the UK in 2000 forecast to grow to 121,390 in 2002.
  • 443,000 primary websites were forecast to be in activity in the UK at the end of 2000 with increases of 17% and 12% over the next two years. This compares to just 380,000 in France at the end of 2000.
  • 57% of all UK corporate websites are being hosted by specialist services companies.
  • The total number of e-commerce sites will grow by 77% in 2001.
  • The UK Internet Service Provider (ISP) and Hosting Service Provider (HSP) market consists of over 320 companies, with a comparatively high level of segmentation and specialisation of specific services.
  • The type of customers using hosting services is also changing. The initial users - early portals, business-to-consumer e-commerce sites and traditional content providers - are now being over shadowed by a much larger second wave 'clicks and mortar' companies with less internal resources and Internet expertise and much broader needs.

What's on offer?

Partnerships with Compaq and Microsoft, global coverage and an impressive infrastructure, uses their resellers rather than e-commerce specialists.

BT Ignite:
Global coverage, but questionable levels of integration and customer service.

Netstore: Specialist in managing Microsoft Exchange and messaging for clients.
Internet billing with a strong vertical market focus and utilities expertise.

Global coverage, back-end integration, system building and hosting.

Data Return:
Provides managed hosting services for Microsoft-based applications.

Source: IDC

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