Affordable asp hosting

Telecoms companies queuing up for a slice of the potentially lucrative ASP market, first need to take stock of the part they will play.

When the biggest and most influential technology stocks all come tumbling into a market, you know there's going to be some action.

Microsoft, Compaq, KPMG, BT, Nortel Networks and SAP are among the big hitters already lining up to take a piece of the nascent applications service provider (ASP) market. And with revenues worth hundreds of billions of dollars a year from software sales set to be converted to revenues from rental, there's a lot at stake.

Applications rental, the art of delivering relatively standardized software over a wide area network on a one-to-many basis, offers many visible benefits: IT directors are promised the prospect of renting applications for a fraction of the cost of buying; the responsibility of software upgrading and integration is pushed out to a third party; small businesses can access powerful enterprise applications that previously only corporates could afford: and all businesses get to choose "best-of-breed" solutions.

It's a blend of the late-nineties trend for client-server applications, hurried on by an impending bandwidth explosion. And it's the way of all things: the move away from a focus on product towards service.

Traver Gruen-Kennedy, chairman of the ASP Industry Consortium, of Wakefield, Massachusetts, is adamant that software hosting is the future: "It's the most important change in technology since the birth of the PC," he claims boldly. "Businesses will see a wider, more diverse set of applications, and the hardware cycle will become slow while the software speeds up. And all the user needs is a simple device with simple connections."

It's this potential that is causing operators, Internet service providers, outsourcers, software and hardware developers all to see dollar signs, but as yet the fledgling market for ASPs has yet to bear fruit, with current revenues a fraction of forecasts for the future.

For all the column inches of coverage, the current market for ASP services yields less than $3 billion. This is tiny in comparison to revenues of $154 billion in 1999 for worldwide packaged software, according to figures from International Data Corp., of Framingham, Massachusetts, and compared with an outsourcing market with revenues in excess of $100 billion.

"The cost structures most ASPs have currently are not delivering profits," explains Mark De Simone, vice president of global marketing for Global Service Provider business at Lucent Technologies Inc., Murray Hill, New Jersey. "I know of no existing ASP making money, but that's not to say they won't. We're about to enter a completely different capacity game. That and the emergence of applications designed for the ASP model will see things really take off. It's small today, but tomorrow it will be the whole industry."

The early pace setters of applications rental are beginning to emerge from the 100 or so U.S. start-ups devoted to the ASP market. Corio Inc., USInternetworking Inc., FutureLink and US Web Corp. are among those that have already gained a significant mindshare among IT and IS directors, and their market valuation reflects a great deal of expectancy. Annapolis, Maryland-based USInternetworking, for example, is capitalized at $6 billion, but lost $103 million on revenues of $35 million in 1999.

But the signs are it should enjoy its time in the spotlight, with few of the early bloomers set to survive. The Gartner Group, of Stamford, Connecticut, believes up to 60% of current ASP brands will be dissolved in mergers, acquisitions, failures and liquidations. Poised to clean up, technology heavyweights such as Hewlett-Packard Co. and SAP AG are waiting in the wings.

Partnerships will be as crucial as the applications themselves (see box on p.20), and the next 18 months will see operators, ISPs and service providers jostling to add value. Many incumbent operators and business ISPs will want to exploit existing relationships with business customers by offering the support and systems integration that defines their role as ASPs, while wholesale IP carriers will be the silent partners in the background of multiple ASP alliances.

As yet, however, the business case for ASPs is still to be proven. Lucent's research, yet to be published, with management consultancy Booze Allen & Hamilton. of McLean, Virginia, reveals that on average large corporates each pay roughly $40,000 per month for rented applications, while the average total cost to ASPs of delivering the service to each corporate is $160,000 a month. "The cost structures currently are just not delivering the profits--and these are the low hanging fruit, the easiest applications to sell and deliver," says De Simone.

Allen Scott, business development director at Vivao plc, an ASP based in Maidenhead, England, believes that high operational costs are inevitable. "ASPs should never underestimate the amount of investment required. In fact, if an ASP's costs are not running into millions of pounds, it's doubtful whether a fault-tolerant, scalable and backed-up system is in place," he argues.

But no amount of data center investment will overcome the inherent connectivity bottleneck which hinders the ASP market, at least for the time being. Most industry observers are adamant that affordable bandwidth remains an issue.

Bob Jones, chairman of Internet server appliance company Equiinet Ltd., of Swindon, England, has other reservations: "The ASP bandwagon has been heavily hijacked by organizations that promote the use of thin client software. They are merely taking into the WAN the concepts which they have sold into the LAN," he says.

And Lucent's De Simone believes the qualities of the LAN need to be replicated in the wide area before applications rental is viable. "Outside the LAN, things come to a screaming halt. In the LAN, gigabit [throughput] is very common, ten gigabit [will be] with us soon, and not long over that horizon is hundred-gigabit networking. That would have to be matched when you break out into the wide area," he maintains. He believes applications rental will only really take hold in the enterprise when end-to-end lit fiber is available.

Charles Briggs, U.K. sales and marketing director at AboveNet Corp., Santa Clara, California, agrees that data has to be managed end-to-end: "It's not just the pipes, but the peering that makes the difference. Quality networking means moving data from network to network efficiently."

Bandwidth, and good traffic management, will come, and technologies including DSL could leverage much of the latent demand for applications rental. But a report from London-based Ovum Ltd. states that for ASPs to be successful in a capacity-rich market, mind-share needs to be gained now. It's crucial that service providers identify where they want to be in the value chain, and prepare themselves for the bandwidth revolution, says the report.

Some commentators also believe that many emerging ASPs will need to diversify their interests. While many existing ISPs will be trying to add value and move up the chain, some ASPs will be trying to move down the chain in order to maximize their value. "Most ASPs want to play in the ISP marketplace--they want a slice of the communications pie," says Phil Jackson, senior director for IP/gateway services at long distance IP carrier Level 3 Communications Inc., of Broomfield, Colorado. "I'm quite happy with that. Our position is to enable ASPs, whether they want to use our data center or buy bandwidth wholesale."

Roger Walton, associate analyst with Ovum and author of the report Application Service Providers: Opportunities for Telcos and ISPs, concludes: "No telco or ISP can ignore ASP. It's a huge opportunity to provide new services, but let's not forget that it will exert a growing influence on network traffic. Telcos and ISPs...must either move up the value chain and offer services themselves or partner with an ASP."

For all the potential in the ASP market, however, take-up of services still threatens to remain latent. Ben Pring, associate analyst at the Gartner Group is not convinced that early marketing campaigns have benefited the concept of applications rental, and could in fact be doing it harm in the long run.

"Too many presentations focus on how great the Internet is and how exciting e-commerce will become. The ASP argument needs to be made independent of anything to do with 'e'. The ASP case should focus much more on areas like reduced time of implementation, reduced cost of maintenance or resolution to skills shortage," says Pring.