A Lesson from Service Provider History

There is nothing new about ASP. It isn't new in terms of technology, and it isn't new in terms of service. The industry needs to look around at what history can teach us. There is a lot to learn, and with luck we can avoid repeating past mistakes.

Thirty years ago, as an eager and (obviously) very young graduate, I joined a time-sharing company based in London's West End.

For those of you who weren't around at the time, what time-sharing companies did was to install some powerful computers and storage in a central location. They then went out to companies of all sizes and talked to them about IT. Once it was clear what they required we would go back to the office and either partner with the owner of an application — or more likely write one ourselves.

Then we would deliver a teletype to the customer's premises, and deliver the application to them over telephone lines, charging them a monthly rental for the privilege.

Does this sound even a bit familiar? I suppose in today's terms we would be called a pure-play with customisation capability. Of course the technology was primitive compared to today, but the principle was the same. Anyway we were very successful for a time, and then we all went out of business.

So what changed? And what lessons can today's ASPs learn from the demise of the time sharing industry?

As always the answer is never as simple as a single cause, but I think I can identify three main reasons.

Technology developments

First and most obvious, the technology just got a lot easier to use. The PC came along, and — when the applications industry got its act together — it gave people the ability to do for themselves what they previously had needed an expert to deliver. Once that happened then the benefits of doing it in-house outweighed the benefits of sharing.

And what was it the applications industry did? Well, it created applications that would run out of the box, and that were good enough for people to use without extensive tailoring. And what are all the ASPs urging the application vendors to do? Very much the same.

Of course I'm not saying that exactly the same will happen. For a start we are talking today about major multi-user applications whereas back in the 70's these were mostly single user applications. But the issue today is the same. Every development in software technology makes it easier for you, the ASP, to deliver a better service and an easier implementation. And each of those developments at the same time makes it easier for your customers to do it for themselves.

So could customers decide after a year or so that they no longer need an SP and want to run the systems for themselves? Very possibly. And will we see as we did with bureaux and outsourcers that some of the smarter customers set up in-house ASP services and use that to generate external revenues? Very likely.

However the good news is that I think this cycle will take a good 5 years — plenty of time for ASP fortunes to be made and lost.

Financial factors

So what other factors contributed to the end of the time sharing bureaux? The second key factor probably does not apply today and it's the cost of capital. Certainly in the UK (and I think at that time in the USA) the time sharing business needed hardware, which meant capital. The participants over this period had become really smart at making IT systems work efficiently, and be useable. Many of them realised they could use those skills without investing in hardware and they went off to become the first generation of systems integrators.

I don't think this issue is relevant today. There is so much venture capital being thrown at the ASP industry, and so many hardware and network vendors ready to charge on the basis of usage without up-front investment, that ASPs are unlikely to run out of capital.

The third and final problem was what today we would call "burn rate", although the term itself was unheard of thirty years ago. However the activities weren't! The profligate manager, the high-profile offices, the big advertising campaigns were very well known even then. And the companies that were only set up for the benefit of the founders — with no real staying power — they were known too. Last week I walked around an exhibition in which ASPs had spent upwards of $200,000 to operate booths to appeal to no more than a few dozen real spending customers.

It felt just like the 1970s all over again.

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