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Some providers use ASPs to reduce IT costs; others boost revenue by becoming ASPs.

In times of steep competition and shrinking profit margins from long-distance services and Internet access, one way for service providers to boost revenues and maybe even reap additional benefits is by becoming an ASP (application service provider) or MSP (managed services provider).

Despite optimistic predictions about the potential market for hosted applications and services in the two years since the term ASP was officially recognized, user and analyst responses have ranged from euphoria to skepticism and even confusion about what an ASP is. Given the current depressed state of many world economies, new ASPs are finding it even more difficult to raise capital. In the next 18 months, the ASP and MSP markets will likely experience consolidation as the model matures.

Yet even in the face of today's telecom shakeout, tremendous opportunities exist for companies with the right mix of know-how and dedication to providing quality service with managed applications. Those who understand the challenges and have the skilled personnel and infrastructure in place have a good shot at expanding revenues and realizing a better return on their previous investments. Becoming an ASP or MSP may even help some service providers avoid layoffs resulting from the high cost of rapid growth.

An ASP/MSP Primer

The ASP Industry Consortium (ASPIC) defines an ASP is an entity that supplies another company with leased applications, IT infrastructure and support services. Instead of buying hardware and business software from vendors and using its own IT staff to implement and maintain the system, a customer contracts with an ASP for applications and services that may include system administration, upgrades and day-to-day operations such as backup, recovery and security.

This arrangement enables customers to focus on getting value from leased applications, free of the need to administer, maintain and upgrade them. Leasing rather than buying provides a financial advantage, since such services are treated as operating expenses, rather than capital investments.

An MSP, on the other hand, provides systems and network management software on a subscription basis, Some MSPs follow the ASP model, leasing off-the-shelf network management tools to end users, such as corporations, which then use them to manage their networks. Alternatively, an MSP can offer the "NOC-for-hire," an expanded service that leases people (staff and consultants) and processes, in addition to management tools.

In the latter case, MSP staff manages the network on a day-to-day basis so the customer can focus on its core competency, for example, banking or health care. By relying on an MSP to monitor the availability and predictability of its computers and networking infrastructure, a hospital or bank can concentrate its resources on providing high-quality patient care or financial services.

Organizations reap several significant benefits from using ASPs and MSPs. These include a solution to the scarcity of IT staff, rapid application deployment, and a lower total cost of ownership. By avoiding the time and cost of developing internal systems, customers also save money that would otherwise be spent on maintenance, updates and training, raising their overall productivity. Finally, ASP and MSP customers are protected from technological obsolescence and benefit from the latest applications and services.

It is evident that companies are willing to pay for these advantages. For example, one large U.S. provider of integrated networked communications solutions to small and midsize businesses recently signed a $22 million agreement with Qwest Cyber Solutions. Qwest's customer expects the hosted applications services to connect its sales, service and marketing teams seamlessly with its financial systems for higher quality customer service, revenue and productivity.

The Ecosystem

To understand how leased services and infrastructure can boost a company's bottom line, consider how the ASP/MSP delivery model works. As in any hierarchical system, each functional level builds on the one below it. The foundation for the ASP/MSP model is the AIP (application infrastructure provider), most often a separate company that provides data center facilities to host the business applications of an ASP or traditional enterprise. Some AIPs (e.g., Nupremis, Wavve Telecommunications, Sprint, EDS) own their hosting facility while others (e.g., Avasta, formerly known as Chapter 2) use a colocation provider such as Exodus.

By providing the basic hardware, software and networking infrastructure to run the business application, AIPs supply the necessary bandwidth to carry the hosted software's data traffic. This enables the ASP to focus on meeting the needs of the end customer by managing the software it provides. Some ASPs, such as USinternetworking, have their own hosting infrastructure.

As partners or vendors in the ASP/MSP market, service providers can expand their revenues in specific ways:

AIPs and ASPs as bandwidth resellers. Companies such as UUNet and Level 3 provide network bandwidth to AIPs, and several have developed partnerships with them to resell it. Price is a key motivator for the AIP in this relationship, particularly with bandwidth approaching commodity status. As partners with service providers, ASPs and AIPs can also resell network access (e.g., frame relay, VPN) to their customers.

Providing additional value as an AIP. Some service providers have partnered with leading AIPs or taken equity stakes in these network infrastructure providers. Others, such as Qwest and AT&T, have taken a more direct route to profits by opening data centers of their own. Sprint recently announced plans to build data centers worldwide. A service provider's strong balance sheet and long operating history may appeal to customers looking for a company to host their applications. In addition, the stock prices of many AIPs have suffered reverses, along with other telecom stocks, and this depressed valuation may present a good buying opportunity for providers considering entering the AIP marketplace.

Telecom companies as ASP channels. Many service providers already count large corporations among their ASP customers. With private voice or data networks in place, such customers may be interested in subscribing to additional application services. Such arrangements represent a win-win for both parties because providers boost bandwidth use and generate additional revenue when they resell an ASP's services. Likewise, the partner ASP benefits from the telco's larger presence and marketing reach.

Telcos as ASPs. To succeed as ASP or MSP, service providers need:

* Expert knowledge of a specific domain (e.g., network management, ERP) and industry (e.g., healthcare);

* Expertise in the hosted application (e.g., NETeXPERT, SAP);

* A team focused on delivering quality services.

Building partnerships may reduce the burden of developing expertise in applications and domains. Consider the case of QCS (Qwest Cyber Solutions), the result of Qwest's partnership with SAP and KPMG. Although KPMG recently pulled out of QCS, a trend in this direction is not indicated. Many "domain experts" are eager to be partners as long as everyone wins. One way to limit vulnerability is to focus on a select vertical market.

The expansion of 3G wireless communications will eventually open up a new source of revenue for many service providers. Limited so far to providing low-bandwidth applications such as stock quotes and headline news on wireless networks, this technology can potentially serve as the foundation for large-scale, high-bandwidth applications offered by wireless ASPs such as GiantBear and Centerpost. As in the wired-ASP model, service providers can provide the necessary bandwidth and also develop and host applications on their own to generate higher revenues.

Providing management services as an MSP. This is where the telecom giants can really shine. Thanks to years spent managing their internal and commercial networks, service providers have acquired the know-how to manage other people's networks, resulting in additional revenue. WorldCom, for example, has dedicated a team to managing third-party customer networks for a monthly fee, With a skilled operations staff and the right set of tools, such a company can manage customer networks, even leveraging its widespread NOCs. Utilizing their infrastructure and inherent expertise, they can manage noncompeting and large enterprise networks to generate significant revenue--not a bad idea, given shrinking revenues from long-distance services.

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