From hype to reality

First-mover ASPs have come unstuck by failing to understand what customers are willing to pay for

First-mover ASPs have come unstuck by failing to understand what customers are willing to pay for

As 2001 progresses, the much-hyped application service provider (ASP) business model appears tarnished. Europe's prominent pure-play ASPs continue to shed staff, even dropping the ASP tag from operations. Has the ASP model been damned? The short answer is, "No".

The ASP phenomenon is not unlike the growth of PC usage in the 1980s when hardware became a commodity and software grew in importance. ASPs represent the growing significance of the network as software migrates on to the network - in effect becoming a service.

The concept of delivering a technological capability or set of business functions as a service is not new. Outsourcing, a service that provides some or all of an organisation's IT, is a large and active market. ASPs will follow. Analyst company IDC has estimated the value of the ASP market in western European will be $5.8bn (£4bn) by 2005.

Today's struggling ASPs are first-movers that lack money. With avenues of funding closed off they need to prove that they can make money. Mistakes have been made. Outsourcing a software service to a third-party provider such as an ASP is attractive to the small and medium enterprise (SME) sector, but most sales efforts have been directed towards the blue-chip space.

Corporates prefer ownership of their data and applications and require strong proof of adequate security from any potential bidder to run them. Also, ASPs that do target cost-sensitive SMEs offer applications not written for use on a one-to-many basis via Internet protocol. As a result, ASPs are forced to offer separate racks of servers in their datacentres for each customer, limiting economies of scale - most ASPs are too expensive.

The "cheap" sell has failed and applications cannot be supplied cheaply enough to attract the critical number of users through a one-to-many model. So ASPs need to emphasise the ease of implementation that is starting to attract custom.

This situation could reverse - the possibility of recessionary pressure will push cost-cutting to the fore. But waiting or hoping for a full-blown recession points towards uncertain business strategies. It is more relevant to talk about the ASP effect. ASP definitions centre on one-to-many applications, which work well for commodity applications but in the UK one-to-many application deals are rare.

You would expect that as the industry progressed the term ASP would become clearly understood but ASP has changed into a number of propositions for software suppliers: for some, it is about delivery, for others monthly pricing, location or ownership.

The ASP effect, therefore, applies to the infrastructure used to host the application. The one-to-many condition is moving from applications to the middleware, security and other infrastructure requirements all ASP operations must have. Customised one-to-one application environments are found on top.

Pioneers will always capture "mind share" but second movers learn from their mistakes. The large software companies are actively devising ASP strategies: Microsoft has endorsed the model with its .net initiative, launched in June 2000 and targeted at the developer community producing applications residing on the network.

The transition towards ASP business models will be difficult, but the larger players like Microsoft, SAP and PeopleSoft can fund it. Most software companies are geared towards the distribution model where one-time revenue recognition and quarterly results lead to equity valuations. Changing to an ASP model, based on annuity, represents a huge commitment.

Clarification is on its way as second movers resolve these issues and convince users of the benefits of utility computing. This shift toward a utility model for delivering access to technology and information has been anticipated for decades. The IT, comms infrastructure, supplier needs and buyer demand are lining up to make it a more pervasive reality. ASP represents its first tentative steps.

Euan Davis is senior analyst of European services at IDC

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