From hero to zero

Aggressive forecasts for the Applications Services Provider (ASP) business were commonplace during last year. However, the market has not developed as quickly as predicted. Investors have become more cautious, particularly in the wake of the rapid decline in technology stock prices. The ASP model has also been found to be more complex to run and generate revenue from than many had anticipated. As a result, during the past 6 to 12 months the ASP proposition has gone from being one of the most attractive market opportunities on the horizon to yet another uncertain business model in the communications industry. Questions are now being asked, for example:

-    Is the SME (Small and Medium-sized Enterprise) market really the target market?

-    What role will corporates play in developing the market?

-    Can the ASP business really make money?

-    Do users really want to outsource their mission-critical applications?

-    Will the Internet ever be secure enough?

-    Will the Internet be able to offer the guaranteed quality of service levels required to manage the delivery of applications end to end?

Who’s driving who?

From an industry perspective, early interest in the ASP model came from software vendors wanting to extend their user base, whether appropriately or not, into the SME sector. For service providers, particularly ISPs faced with commoditisation of Internet access and consequent decline in margin, the ASP model also represents a move up the value chain to services with more encouraging profit potential.

From a market perspective, though, there are clear reasons why applications hosting is likely to be popular. IT services skills, for example, are becoming increasingly difficult and expensive for businesses to retain inhouse. E-business is also becoming an essential requirement: the splitting up and outsourcing of more parts of the value chain makes it more important for businesses to use compatible applications, preferably sourced from the same point.

Even the supply of software itself is driving the need for change. Partly encouraged by software vendors but also due to the rise of IP-based activities, application software releases are becoming more frequent. It makes more and more sense to decouple the need for continual upgrades from the cost of acquiring them, so that every time an application is used it is the latest version that is being used. This cost (total cost of ownership) is becoming a sensitive issue for users.

Lifting the barriers

However, whilst in theory the ASP model may make increasing sense, in practice there are currently a large number of significant barriers that need to be removed before the market in Europe can take off properly. For example, users are generally not familiar with the ASP model and currently find it hard to relate its benefits to their own particular situation. The advantages do not appear to be significantly compelling for many. Coupled with this, early marketing messages have often been highly confusing and simply contributed to the hype.

There is also scepticism towards outsourcing, particularly among smaller and medium-sized organisations. This is coupled with the current unpredictability of IP networks. It is currently impossible to put in place the Service Level Agreements an ASP would need to guarantee the same level of performance as applications that are managed in-house. Bandwidth constraints in access networks as well as the very nature of the Internet, with sometimes a large number of hops between peering ISPs’ networks before the traffic can reach its destination, are some of the reasons behind this.

Further, many ASPs today specifically target the SME market, which means that they are dependent on the access network to this market segment in order to reach the client. As the SMEs usually do not find it cost efficient to buy a direct connection from the network provider, this means, in most cases, the local loop. Even though local loop unbundling (LLU) is on its way in most countries, it is still unclear how long it will take for the low end of the market to have access to high speed Internet services.

Other concerns include security, lack of trust in ASP start-ups and, quite simply, a lack of web-architected software. Early ASP advocates believed that any existing software would be suitable for remote access. This has proved not to be the case – most applications today have been created for LANs, not for being accessed remotely over a network. To build up powerful applications tailored for a network-centric environment will be crucial for the take-up of the ASP market. Many ASPs are today struggling with building up an attractive service portfolio due to lack of software suitable for this new business model.

Summing it up

Several of these inhibitors are significant and will take time to overcome. The industry is not standing still on this though. IP network performance is developing rapidly, together with delivery of quality of service. Major software vendors are also, understandably, highly active. Oracle has its "software is a service" for e-business, Sun has recently announced its Sun ONE strategy. Microsoft too has introduced its .Net initiative and announced Hailstorm during this month.

ASP infrastructure needs are also increasingly being addressed as Application Infrastructure Provider (AIP) packages that ASPs can simply buy off the shelf. This ability for ASPs to outsource their infrastructure needs completely and focus entirely on the development of their service business is clearly crucial.

There is little doubt, then, that the ASP market will one day be large. Not just yet, though.

© e-principles 2001

Robin Duke-Woolley

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