Those exploding ASPs Featured

9:37am EDT July 22, 2002

Sometimes, even in the world of high-speed computing, the new becomes old and, well, the old becomes new again.

Not too terribly long ago, companies that needed to crunch lots of numbers and create lots of reports but couldn't afford their own mammoth mainframe computers could rent space on a computer at a local data center. Back then, they called it computer time-sharing.

The days of mainframe time-sharing may be all but gone, replaced by high-speed personal computer networks and the Internet. But the concept behind it has re-emerged, live and well with an Internet twist, re-establishing itself in what has become perhaps the hottest and most attractive growth sector in business today, application service providers, or ASPs.

In some respects, the concept remains simple: Companies that don't want to create their own information technology departments and staffs to develop and manage Web-based operational applications no longer have to. They can now "rent" space with an ASP, which rents its customized applications to customers, then manages them at the ASP site.

ASPs are cropping up everywhere, providing everything from industry-specific products and services to broad-based services that will convert almost any business software application into a password-protected, Web-based program accessible by any employee, customer or supplier any time or anywhere. Call it Internet time-share.

If you haven't considered moving some of your computer applications to an ASP, you more than likely will over the next couple of years, predicts Dataquest Inc., a subsidiary of Gartner Group Inc., a Stamford, Conn.-based high-technology research organization. According to a report released by the organization in August, at least 480 retail ASPs are competing in the emerging $3.6 billion industry. By 2004, the ASP market is expected to climb beyond $25 billion worldwide.

"The ASP market represents a major computing revolution with the power to dramatically redraw today's IT ecosystem based on the delivery of application services over a network," says Dataquest analyst Ben Pring in the report. "Software licensing models, application and networking architectures and vendor strategies will all be impacted greatly."

So it should come as no surprise that the likes of Stargate Industries, which dominates the local market as an Internet service provider, or ISP, would see a profitable future in the ASP market.

On one hand, says Drew Falcione, vice president of Stargate's application services group, the ISP market has become a low-priced, high-volume commodity game with limited room for aggressive growth locally. On the other hand, more and more ISP business customers have been asking Stargate to do everything from developing and hosting their Web sites to hosting their servers and, ultimately, many of their business applications.

"Clearly, our ISP business is a cash cow and still is a primary focus of our company," Falcione says. "But clearly, we also see the revenue contribution (from the ASP business) flip-flopping to 70 percent to 30 percent, in favor of ASPs."

The average size of one ASP contract, he says, runs about $8,500 a month in recurring revenue. It would take 425 customers paying $20 a month for Internet service to equal one ASP contract.

For business owners, ASPs are all about "outsourcing your technology infrastructure, which you don't have to maintain," according to Tim King, who owns a 19-franchise license in Southwestern Pennsylvania for Zland.com, an ASP company based in Southern California.

Zland offers a number of suites of semitemplated Internet solutions that range from e-mail and e-mail response forms to password-protected team rooms, where companies can post information and communicate regularly with project team members away from the main office.

Gary Lininger, director of sales and marketing at Zland, divides the company's business into three Internet-driven categories: e-marketing, which uses the Internet like a giant brochure for businesses; e-commerce, in which companies set up transactional, revenue-generating product exchanges; and e-operations, designed to run many of a company's operating systems. Within those categories, Zland offers at least 19 semicustomized application solutions.

"This is really cutting edge stuff and very exciting," Lininger says.

While companies such as Stargate and Zland take the more horizontal application approach, some experts believe the real future lies in companies that can provide vertical application solutions for specific industries or business functions. Case in point is the fast-growing eToll Inc., which focuses entirely on marketing applications for what its president and CEO Sergio Radovcic describes as the "best of breed" or the "brand elite."

The Green Tree-based eToll provides outsourced Internet-driven applications such as sweepstakes, promotions, loyalty programs, product sourcing, survey products and others to companies including American Express, Hewlett Packard, 3Com, Heinz and British Telecom.

Radovcic offers a word of caution about the more broad-based ASPs.

"In order for an ASP to be successful, it's going to be very hard to be an ASP for everything," he says.

He stresses that the more successful ASPs have to understand the business processes behind the applications they offer and how they adapt to particular industry sectors.

"ASPs are really evolutionary, not revolutionary, because businesses still have to acquire customers, make sales, develop lead sources and create products and services," Radovcic says. "If [an ASP application] is not going to make you money or save you money, then don't buy it."

Good advice, perhaps. But another Gartner report released in August paints an even more cautious picture for businesses that may consider turning over some of their IT functions to an ASP. Of the 480 ASPs doing business worldwide, the report predicts that as many as 60 percent will fail by next year because of bankruptcy, lack of venture capital, mergers and traditional competition.

It also predicts that only 20 of those 480 will survive as full-service retail ASPs, and fewer than 100 will offer successful point and product solutions. For businesses turning over many of their sensitive computer functions to an ASP, that could prove devastating.

"Today's dot-com collapses will pale in comparison to the effect that the pending ASP meltdown will have on organizations that use these ASPs," writes Audrey Apfel, vice president and research director at Gartner. "When dot-coms collapse, they implode and have little effect on their customers and other industries. The ASP consolidation will have a domino effect, affecting business systems like ERP and accounting systems for companies that have outsourced these functions to ASPs. Then, those failures can quickly spread the damage along supply chains."

Like Radovcic, Apfel cautions that the weaker ASPs will try to tackle too many applications and related services.

"Many of today's ASPs make the mistake of trying to do everything, including owning the data center," she writes. "We believe this is a critical mistake and not a sustainable strategy in most cases."

Where would that leave ASPs as a viable solution to the IT challenges of businesses? Apfel predicts, "There will be few viable vendors, the vendors will be different, the offerings will be different, and then we fully expect that the term ASP will no longer be used to describe these vendors."

Is Stargate worried? And should you be? Stargate is considered one of the region's fastest-growing companies, although Falcione acknowledges the predicted consolidation. Furthermore, the firm's ASP division is fully supported by software platforms created by Oracle, Sun, Compaq, EMC, Microsoft and Cisco.

"It's a market right now that is poised to go through a significant shakeout," he says of the ASP sector. "But our business model is somewhat conservative, with controlled steady growth."

And the ASP model has proven successful in an earlier technological era. As Falcione says, "What's old is new again." How to reach: Stargate, www.stargate.net; Zland, (412) 788-1120; eToll, (412)921-2900; Gartner Group, www.gartner.com

Daniel Bates (dbates@sbnnet.com) is editor of SBN magazine.