ASPs not as good as they sound

ASPs not as good as they sound

If Martians were looking in on human affairs, they might get the impression that Earth people actually buy software. Take the simplest example. You walk into a store. You find a suitable application. You take it to the cashier. You hand the cashier money. The cashier hands back some change and a receipt. You take the software and leave.

It certainly seems like you bought something, doesn't it? Technically, you did, but in most cases all you purchased was the licence for the software. The publisher (that is, the vendor) still owns the product itself.

I don't know about you, but I've always taken this arrangement for granted. And it never really bothered me much until I started thinking about how it may affect the trend toward renting software over the Internet.

Under the software rental scenario, instead of selling your company 1000 licences for a word processor, the vendor leases its software to an application service provider (ASP). The ASP turns around and rents the word processor to your company at a higher price in order to pay rent to the vendor and still make a profit.

On the plus side, this arrangement discourages vendors from producing bloated, useless upgrades. (It also decreases the incentive for improving software, but I'll be optimistic about that.) Right now vendors have to crank out an upgrade every year or two in order to keep the cash flowing. If they lease applications, however, they'll get a steady revenue stream without having to artificially generate upgrade fever.

On the downside, vendors will be tempted to entice the ASP with a sweet rental deal and then jack up the price when the contract comes up for renewal. If this happens, the increase will almost certainly be passed on to you, and there won't be much you can do. That's because when you rent software from an ASP, you give away the bargaining power you had with the vendor.

For example, right now you can go to Microsoft and dicker over an upgrade price for Office 2000. Realistically, you probably can't threaten to change brands. Microsoft knows how difficult it would be to make a wholesale switch to another office suite. But you still have a bargaining chip by threatening to keep your users on Office 97.

But suppose you're renting Office 2000 instead. You'll have almost no recourse if Microsoft decides to raise the lease price to your ASP.

In the first place, you're at a disadvantage because you are no longer dealing directly with the application vendor. You're dealing with an ASP that has little or no power over the lease price of the applications it rents to others. And it's every bit as difficult (if not harder) to move your entire company to another product (as if it would matter to your ASP, anyway). Even worse, you can no longer threaten to keep your users on an older version. What alternative do you have but to fork over the cash?

In theory, free software could provide an answer to this dilemma. If an ASP can get its customers to rent free software instead of commercial software, then it will get to keep most, if not all, of the revenues for itself. Furthermore, because the ASP will not be at the mercy of a commercial-software vendor, it cannot be forced to raise prices. And because it has to compete with other providers of the same free software, your ASP will be motivated to keep prices down.

But there's something wrong with this picture. To begin with, there has to be a free alternative to what you're using. The most important category is the office suite, and there is currently no free office suite comparable to the de facto standard, Microsoft Office.

Even if a great free office suite emerges in the next year or two, I would guess that corporate officials will be even less likely to migrate the entire company to another suite when they realise they have to take the extra step of coordinating the switch through an ASP. Unfortunately, most businesses tend to be too shortsighted to anticipate these kinds of changes.

So you tell me: Is your company entertaining the notion of renting its software over the Net? If so, have you thought about the long-term consequences of renting the suite that you're now using?

Nicholas Petreley is editorial director of LinuxWorld. Reach him at nicholas_petreley@infoworld. com

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