Asp call function

As one of the first to make a pure play in the nascent application service provider market, USinternetworking has a dull name but a hot business model.

True story about Christopher McCleary, president and CEO of USinternetworking: A month after founding the company, with no staff and headquarters in his lawyer's office, he sent a letter to then-president of PSINet, Peter Willis, offering to buy the company.

"That was a long time ago, back in early January '98, when I was ramping up," McCleary recalls. "I saw that PSINet was extremely undervalued. So I put together an investment group to possibly acquire it, sell the connectivity business to a [competitive local exchange carrier] and use the Web hosting platform as the base to launch USi. It was rejected, but they made some changes based on that experience that have benefited their shareholders. They became more marketing-oriented, which was my biggest complaint."

No one can make the same complaint about either McCleary or his company, generally considered to be the first pure play in the white-hot application service provider (ASP) market.

A former chairman and CEO of Digex, McCleary shepherded that Internet company to a 1997 buyout by Florida telco Intermedia, then handed over the keys and looked for something else to do.

By examining case studies of networked applications - including some Digex clients - he detected a systemic problem with the way those applications were being delivered, to wit, the responsibility gap between the applications and the hardware, operations and communications layers that enabled them.

McCleary's idea was that a lot of mid-market companies wanted to get in on the Internet bonanza - selling over the Web and running back-office functions from a desktop PC - but didn't have the time to assemble the tools and recruit the IT talent. McCleary's notion: Buy and install the software to manage sales forces, human resource programs, supply chains and Web stores from high-profile application partners such as PeopleSoft, BroadVision and Siebel Systems; keep the programs at USi's own data centers; and let clients pay monthly fees to access the applications over the Internet.

Smells like paradigm shift

It's an idea that strikes many analysts as sensible. "People have compared the software market today to the hardware market 25 years ago," says Edward Lovingood with Telus Strategies. "Back then, companies first began realizing that they didn't have to rent time on a remote mainframe computer; they could bring computing inside the office with desktop PCs. Now, those same desktops are the key to moving software out of the office."

And it's also a hit with other providers. USi was almost alone when it started up about two years ago, but industry estimates put the number at about 100 ASPs today. And although total revenues for the ASP industry are pegged at only about $150 million in 1999, those numbers will hit $2 billion by 2003, according to Clare Gillian, an analyst for International Data Corp.

As you'd expect of an industry that touches so many trends - outsourcing, the digital corporation, the e-commerce boom - and generates such high-flown projections, the ASP industry today is a mongrel, with new entrants coming in from all corners. Aside from a few pure plays, such as USi, there are facilities-based carriers that also provide voice and Internet connectivity a la GTE Internetworking and Qwest Communications (see sidebar on this page).

Systems integrators, ISPs, telcos and computer manufacturers are potential competitors for rent-an-app dollars. Hardware maker Sun Microsystems announced last September that its new software purchase, StarOffice, would move productivity applications over the Web.

Last November, Oracle became the first large software company to create its own ASP, Oracle Business Online, complete with a $100 million venture capital fund for ASPs that employ Oracle technology. Microsoft, too, has made feints in the direction of renting its applications over the Internet.

One sign of the maturation of software over the Web is its fragmentation into categories. ASPs license software systems written by outside developers and rent them, usually to a broad range of business clients. This is the way of USi, GTE Internetworking and Qwest Cyber.Solutions. Business service providers usually develop their own applications and target a narrow industry - such as Tibersoft, which rents food service supply chain software. And computer service providers run data centers that act as server farms and distribution channels for the first two categories - such as Exodus Communications, which hosts both Tibersoft and ASP Corio (see sidebar on this page).

Double vision

What gives USi an edge, McCleary says, is its drive to excel both as a networker and as a solution integrator. "To design, build, operate and scale best-of-class, telecom-driven data centers and to implement, support and scale packaged apps from best-of-breed suppliers - these are our `co-primary core competencies,'" he says. "Until now, anybody that's attempted this has not really given them equal priority."

The dual focus is important because, increasingly, the value of an application these days is inextricable from the communications system that delivers it. Without interconnection, a sales force automation app such as the one provided by Siebel is no better than a calendar and a Rolodex.

"The boundary between applications and communications is getting very blurry - just an artifact of the fact that these two industries grew up separately," says Andrew Stern, chief operating officer for USi. "The value of these functions comes from the integration between the application and communications layers. And it makes sense to have a single vendor responsible for both."

On the network side, USi practices what it calls PriorityPeering - avoiding network access points in favor of direct links with 12 of the top Tier 1 global Internet backbones. Users don't have to hop from one backbone to another; 90% of them can stay on the same link all the way from their location to USi's data centers, says Kurt Gastrock, vice president of engineering for USi.

Those relationships are contractual, McCleary emphasizes, and mean priority service from the backbone provider with service level agreements covering availability and response time. "When I was at Digex, we had a terrible problem with one of the major [interexchange carriers] in our peering agreements, and they got to fixing it when they wanted because it wasn't a client trouble ticket," he says. "I want to be able to call John Sidgmore [vice chairman of MCI WorldCom] at home when I'm having trouble because we're a customer, by God."

Two things mitigate the higher cost of this architecture. U S West has a 10% equity stake in USi and the right to market the company's services in its territory. In return, USi got funding and the right to buy its bandwidth through U S West, usually at a 40% discount. Second, because it provides so many other services, bandwidth is only 10% of USi's recurring monthly cost.

So premium bandwidth is part of USi's business model. "We want clients to treat the Web like the telephone," says Jeffery McKnight, executive vice president for operations and client services for USi. "If dial tone seems to come from God, we want Web tone to come from God, too."

Those 12 backbones are wired into each of USi's four data centers by T-1 and T-3 links. If an ISP or a link goes down, traffic is routed through another backbone. Customer data is mirrored in at least one other data center with daily incremental backups and weekly full ones.

And because the Internet is not always the appropriate medium for very confidential communications, USi also offers end users the option of connecting to its data centers via USi-Link - the closed virtual circuit capability of frame relay and ATM. This is most likely used for an application such as core financial data, where security needs are high and the need for remote access is low.

"We're not necessarily zealots of the public Internet so much as of whatever communications layer makes the best sense for the application," McCleary says.

The applications run on servers linked to meshed routers in four data centers: two primary ones in Annapolis, Md., and Milpitas, Calif., and two secondary distribution sites in Amsterdam, Netherlands, and Tokyo that currently handle global distribution for U.S. clients (Figure 1). USi expects to upgrade those to primary sites as it expands in Europe and Asia.

The company manages its data centers and its customers' networks out of a global enterprise management center in its Annapolis headquarters.

Apps on tap

Infrastructure is only half the equation for USi. The other half is the applications it can push down those pipes and the services that integrate them with a customer's systems.