Application service providers (ASPs), which see themselves as IT replacements for some organisations, are suffering from a lack of profits and business fragmentation that could stop market growth in its tracks.
So said industry analysts, vendors and application service providers themselves at last week's ASP Summit here, as they wrung their hands over the future of their nascent market.
In his keynote address, Rich Caruso, vice president of IP network applications at Canada's Nortel Networks, warned that profitability for application service providers is a major issue.
"ASP margins are thin," he said. "The most important thing in the next year is to make ASPs profitable, or else growth won't be there."
To that end, companies like Nortel and Newbridge Networks, another Canadian-based company, have devised revenue-sharing purchase and lease options specifically for application service providers, so those companies' initial investments in technology will be minimised.
Malcolm Stewart, a vice president at US-based application service provider Verio, said costs for running a data centre are substantial. Just a single OC3 link to the Internet and 30 servers, for example, could run between $72,000 and $158,000 per month, he said.
Most agree that those costs are only the beginning. "Hardware is not the real cost issue," said John McCrory, CEO of Applicast, an application service provider in California. It's really about such things as a provider's service and support staff, he said.
"No one can handle everything well," McCrory said. "You have to focus on your core competencies."
This kind of focus, however, means that organisations that seek to outsource their IT operations have to either juggle multiple application service providers for special functions or select only special applications for outsourcing.
For example, application service providers such as Oracle Business Online, a division of Oracle, and eGain Communications in California, offer only their own software running on their own data centres. Still others, such as Conxion, in California, provide only infrastructure and no software. This fragmentation has caused problems for application service providers that don't have the expertise to handle all the IT-related queries their services generate.
Marsha Blake, a vice president at San Diego-based application service provider V2 Commerce, said her company is dependent on other service providers in its supply chain. "If any other one goes down, we are the ones getting the black eye," she said.
Application service providers that aren't willing to invest in either technical staff or a robust infrastructure will have a difficult time competing, according to Deb Mielke, an analyst at Treillage Network Strategies in Texas.
"It all comes down to the cost issue," she said. "How much are you willing to pay for?"