ASPs Not to Be?

By Rawlson O'Neil King, theWHIR.com

December 5, 2000 -- (WEB HOST INDUSTRY REVIEW) -- The application service provider (ASP) market won't disappear, but many of its participants might.

A recent report by the Gartner Group is predicting a massive consolidation of the market. The industry shift toward delivering software as an online service has created a "gold rush" stampede of vendors entering the ASP market, but most of them have no idea what it will take to survive.

Today, there are 480 retail ASPs competing in the emerging $3.6 billion industry, with more entering the market every day. By the end of next year, 60 per cent of these ASPs will be gone because of bankruptcy, lack of venture capital, mergers and traditional competition. By 2004, only 20 of those 480 ASPs will remain as enterprise-class, full-service retail ASPs, and less than 100 will offer successful point and product solutions, sharing what will grow into a $25.3 billion industry in 2004.

Why will the application service provider market suffer a meltdown in which only four per cent of industry participants survive?

Well, clearly, many in the industry will crash and burn because no formal strategy for market growth exists and no support from traditional backers is forthcoming.

Indeed, there is no doubt that the ASP market has great prospects, but too many telecommunications providers have been burnt by a similar business model in the past to embrace it with open arms.

Despite this, ASPs are still a natural choice for managers looking to reduce their information technology costs.

Using them to rent popular back-end and e-commerce software online provides several advantages, including reduced upfront capital expenditures in information technology (IT), lower operating costs and faster implementation of new technologies.

Because IT has been heralded for increasing productivity growth in the U.S. economy by leaps and bounds (by an annual rate of 2.5 per cent to be exact), the automation of IT processes themselves have been trumped as necessary.

By instilling intelligence into the network through centralized applications and computer utilities, industry analysts are prophesying larger revenue streams and increased savings for recipients of ASP services. While recipient businesses might eliminate the need to make long-term IT investments, ASPs will need to find fast and effective ways to provide IT infrastructure without going broke.

Telecommunications giants are thus wary of the ASP approach because they previously pumped millions of dollars into a similar network intelligence model to no avail. In Canada during the 1970s and 1980s, telcoms experimented with the computer utility model in two forms and both were an abysmal failure.

The Telidon, which made its debut in 1978, was the world's first sophisticated videotex device: a system that digitally encoded and decoded graphic information for electronic transmission. The motive behind the machine was to create and distribute a household information appliance, which when tied to central computers would make many mundane tasks such as ordering movie tickets obsolete. While technically genius for its time, Robert Babe, a University of Windsor (uwindsor.ca) communication professor, described the system as a "fiscal fiasco". The cost to develop the system was $100 million, but it never gained any real popularity.

A similar system called Alex was also introduced in 1988 but suffered the same fate.

Because this model had already burned the telcoms, most have decided to avoid the ASP market like the plague, albeit that their own network application products were directed at normal consumers.

Due to this fact, ASPs will continue to lack copious amounts of cash. Telcoms will make investments into ASPs by proxy, as we observed with SBC Communications' (sbc.com) $100-million investment stake into Toronto-based Inquent Technologies (inquent.com), but don't expect this trend to be the norm.

Too many problems still confront and confound the ASP market including privacy issues surrounding the centralized nature of data storage. The marketplace is also an expensive proposition for start-up ASPs because most have to build both a complex network and software architecture while building a customer base.

For these reasons, I suggest that you take extreme caution before enlisting the services of an ASP. Due diligence is a must before you purchase services in a market that will experience a steep decline akin to the present dot-com meltdown.

As the industry matures and consolidates, expect telcoms to move in. In the meantime, be very careful not to enter into extremely long-term contracts with ASPs unless they have very deep pockets. Remember, the market is still in its formative stages and many industry participants will go belly up: so be very careful.

And be even more cautious if you're a personal investor. Think of ASPs as being the next round of dot-com companies. A lot of money was sucked into a vacuous black hole when the Nasdaq tanked in April 2000. Don't repeat history and bet the farm on the ASP industry until the forthcoming market shakedown arrives.

About the Author
Rawlson O'Neil King is a managing editor and analyst at the Web Host Industry Review. Before joining theWHIR, Mr. King was Director of Corporate Communications at WebHosting.Com. During his tenure at Canada's most successful Web host, he established ineedsupport.com, the first branded destination customer care site in the shared hosting industry. He has prior experience as an IT consultant who served non-profit organizations, government and private industry. He holds a Bachelor of Journalism degree from Carleton University. Mr. King's column appears in theWHIR weekly.