Companies are rushing to rebrand themselves as application service providers, but customers are reluctant to commit to this new way of doing business. How soon will the ASP model take off and how will it affect the industry? Caitlin Fitzsimmons investigatesThe IT industry is set for a massive shake-up with the dawning of the application service provider (ASP) era, according to analysts and key industry players.
Analyst International Data Corp (IDC) predicts ASPs will take off in 18 months to two years, resulting in massive change to the IT industry, including who the major players are, how they do business and the role of the reseller.
The advent of the ASP will spark new and unconventional business partnerships, pose new threats and opportunities to the channel, and could topple some industry leaders if they are not aware of its implications, according to IDC.
`Behind the simple value proposition for customers is a complex business model,' states an IDC report. `The ASP model calls for numerous vendors, partnerships and alliances to put all the pieces together.'
IT companies here and overseas are jumping on the ASP bandwagon, with a steady stream of announcements of new ASP initiatives and partnerships. Solution 6, IBM, Lotus, Microsoft, Oracle, Progress Software, Inprise and Mincom's new subsidiary Tequinox are just a few of the players to enter the ASP arena in recent months.
But Kent Duston, general manager of ASP services at Solution 6, said there was a big difference between `product release and product release by press release'.
`At the moment the number of organisations that are profitable with real customers are less than the fingers on one hand,' Duston said. `But within 12 to 18 months every Internet service provider (ISP), every telco and every independent software vendor (ISV) will have to position themselves in the ASP market, whether by themselves, through partnerships or through facilitation by IBM.'
Senior IDC analyst Merv Langby said that ASPs would constitute a multibillion-dollar industry worldwide within a few years.
`By 2003 the ASP market will be worth $60-120 million,' Langby said. `That's just for services, not for software provision and that's just for Australia. Worldwide I'd predict $2-4 billion. I suspect that predictions of up to $20 billion worldwide for the same timeframe probably include software sales.'
Frank Prestipino, Oracle's marketing manager for applications, said he expects 20 per cent of ASP take-up to occur between June and December 2000, 50 per cent in 2001 and 30 per cent after 2001.
`It will really start to take off in the second half of next year,' Prestipino said. `Organisations will find they have to make a decision between cranking up capabilities in their own organisation or taking the fast track to that by going to an ASP. After Y2K and the GST are over, the agenda will shift to a focus on competitive market share.'
IDC's Langby believes the ASP model offers significant advantages to big business and SMEs alike.
At the low end of the ASP market, advantages will be decreased cost, flexibility in financing, optimised access to software, flexibility in access to software and less reliance on IT staff, Langby said.
The higher end of the market will gain the same benefits plus scalability, guaranteed risk and continuity, competitive business engagement terms, state-of-the-art technology, scale of economy and the core advantage in accessing expertise in technology, applications and business.
Langby claims there are no real disadvantages to moving to an ASP model, and the risks of losing data or confidentiality were, by most users' admission, seen as `more perception than reality', but he concedes `perhaps the Federal Police or the Tax Office might not be too keen'.
Langby said many organisations were waiting until their peers make the jump to an ASP model and the technology proves itself.
`The hurdle is getting customers to believe that they can expect consistency and a continued level of capacity,' Langby said. `It's a one-to-many model servicing many clients. When the honeymoon period is over, will the reliability and capacity be continued?'
Graham Sowden, managing director of Progress Software in Australia, said that service providers and application suppliers were already at the stage of talking about price, but customers are yet to be convinced.
`Major organisations have shown very little interest so far in renting applications because they have invested heavily in infrastructure,' Sowden said. `But I think it will eventually get to the stage where there is a community of people subscribing to the same applications who can trade electronically, and if you're not part of that, you'll find you can't trade because you're not integrated with everybody else. ASPs will facilitate supply chain management.'
Oracle's Prestipino said that IT companies were falling over themselves to rebrand as ASPs, but nobody had `tested the waters to find out what customers really want. The market will expect a fair amount of service and sophistication,' Prestipino said. `ASPs are looking to provide a basic vanilla-style service for a broad range of clients, but the clients want a specific tailor-made service.'
But not all ASP companies agree on what ASPs are capable of. Ray Bradbery, vice president of Inprise Asia-Pacific, said ASPs can help companies compete more effectively because they can be customised to respond to changed circumstances very quickly.
`ASPs are building blocks that businesses can integrate very quickly,' Bradbery said. `To use the analogy of a racing car, if it's raining you use wet weather tyres, if it's dry you use dry weather tyres. ASPs have the ability to change very quickly. Why go to the expense of buying something if you can rent it and pay as you go?'
But Prestipino disagreed, saying ASPs don't have the ability to change quickly enough to meet all situations.
`Companies can now run their infrastructure fairly cost-effectively so why would they go to an ASP?' Prestipino asked. `It's important to offer ASP delivery but it's not always appropriate. It's inappropriate in areas where organisations feel they have capability needs that have to change rapidly to meet market demand. They need to build the infrastructure themselves rather than link to an ASP. ASPs are rudimentary offerings. They can't be reactive enough to be all things to all people.'
Prestipino said ASPs were more appropriate in cases where an organisation wishes to go into a new market, but the cost of doing it themselves is prohibitive, for example a company going on the Internet for the first time.
According to Progress' Sowden, ASP delivery is `not just taking an application, making it ready for the Internet and then renting rather than selling it'. Products should be re-engineered rather than just Web-enabled.
`There will be less brand recognition and that has big companies like Microsoft scared,' Sowden said. `Microsoft has decided it will rent out Office, but they're just making noises because they rely on brand recognition. You can buy Microsoft Office at Harvey Norman for $450 and they're going to rent it for $10 or $12 per month.
`Why pay for the service and all the Internet connections when the product is exactly the same?'
There will be less emphasis on brand names, Sowden argues, because customers will pick the service provider rather than the application.
`It will topple industry leaders indirectly,' Sowden said. `The major ASPs value-add services. It will marginalise players' traditional forms of delivery. I can't believe any of the majors would ignore it.'
Oracle's Prestipino makes a distinction between the high and low ends of the ASP market. He believes resellers have the opportunity to fill the lower to mid-market niche with a generic `vanilla-based' model, but the higher end of the market would require specialised applications tailor-made for their organisation.
`Resellers will play an aggregation role,' Prestipino said. `They'll connect all the bits and put partnerships and contractual arrangements in place. They'll have a variety of services in the wardrobe.'
Sowden also believes there is still a role for the reseller once ASPs take off, but possibly not for the distributor.
`There certainly is a role for the reseller in our channel model,' Sowden said. `We take a percentage of the business application as a fee. There's probably not a big role for distributors, as opposed to resellers, but that is because of e-commerce not ASPs. How Progress will handle distributors is still being worked out.'
But Sowden said the role of the reseller would change from buying and on-selling to professional services, and the market was likely to see substantial consolidation.
`Software prices will start to fall and resellers will have access to a larger market,' said Sowden. `Not as many of them are going to survive and we're going to see massive consolidation.'
IDC's Langby predicts ASP technology will be sold by a third party or `reseller', but that that third party could be an alliance of several organisations.
A successful partnership would be between a company that provides infrastructure and a company that provides expertise, for example a telecommunications company and a systems integrator, Langby said.
Inprise's Bradbery agreed, saying partnerships would be key, and resellers will play a brokering role selling services rather than a hard, physical box.
`It's more and more the way things work, rather than someone who specialises in everything,' Bradbery said.
`The reseller will be the broker. You'll see partnerships where virtual organisations are created to give competitive advantage. A number of organisations come together to give a service, and to the outside world it appears as one.'
Bradbery believes the advent of ASPs could overthrow some industry leaders if they are slow to react to the new technology.
`A number of organisations will disappear if they're slow,' Bradbery said. `A couple of years ago Packard Bell was one of the largest computer companies in the US. There were quality issues but they disappeared largely because they were slow to come up with an Internet strategy.
`You can't assume the competition will come from traditional quarters. Particularly in Australia, the potential for a competitor from overseas is quite incredible. When Amazon.com first arrived on the scene, they were dismissed by Barnes & Noble for having no experience in books!'
Prestipino confirmed Oracle would be working with partners to provide customers with what they want. He said the industry was likely to see partnerships of telecommunications companies, third-party call centres, banks, hardware vendors and software vendors.
He predicts there will be an ASP acquisition war based on the ISP model, resulting in four or five major ASPs in each geographical region, some ASPs in all regions and a plethora of boutique ASPs.
`Every organisation is now claiming to be an ASP company, but you only know if they're serious if they've gone through the 'oh s***' phase where they panic about how they're going to deliver,' said Sowden.
Sowden predicts the smaller application partners (anyone not a member of JBOPS, which comprises JB Edwards, Baan, Oracle, PeopleSoft and SAP), will either be consumed by service providers or become the service providers themselves.
`Some of the software developers want to deliver more of the applications themselves,' Sowden said. `They will become ASPs themselves, rather than leave it to the ISPs [to host their applications].'
Industry players and analysts have conflicting theories on just how the ASP model will affect the IT industry, but they all agree the new technology has the potential to significantly alter the IT landscape - and with the flood of ASP companies entering the marketplace it seems they're not taking any chances at being left behind.
IDC report: What the analysts say
IDC's report highlights the effects of ASPs on the IT industry from five perspectives: services, software, hardware, communications, and channels and partnershipServicesASPs will have a significant effect on the way services are delivered, and traditional services firms will be pressured to include elements of an ASP program.
`The biggest threat that a services firm faces from application service providers is ignoring them,' wrote Meredith Whalen, manager of IDC's ASP research program, in the report. `Application service providers will force a fundamental change in the way services are delivered. They'll be more standardised and have an operations component.'
The major challenge facing software vendors in the ASP world is figuring out who their customers will be, and deciding whether to become an ASP or sell their applications to and through an ASP.
The impact on the hardware industry could be enormous because hardware platforms will be crucial to an ASP's ability to leverage a one-to-many delivery model.
The ASP model presents an enormous opportunity for network companies.
The whole point of ASP delivery is to use high-speed networks to reduce internal spending on systems, software and support staff.
ASPs are both network-based and network-delivered, so network service providers must prove their networks are up to the task in terms of performance, reliability and customer service.
Channels and partnership
The success of the ASP model will come from the partner- ship networks that are built to include communications, hardware, and software vendors as well as professional service firms.
Rather than rush to form ASP partnerships, vendors should select strategic partners to perform specific functions, build market presence, and then use this success to develop policies and programs to allow them to expand their ASP networks.