ASPs Go Head-to-Head with Integrators

The consensus view among analysts these days seems to be that there will be a major shakedown in the ASP industry. They predict only a few will be left standing. Have they got it right?

There are two separate factors behind the ASP failures we've seen so far. One factor is the collapse of the dot-com boom. Especially among Internet-native ASP startups - Red Gorilla and HotOffice are cases in point - business strategies were based on a 'landgrab' designed to win as wide a user base as possible, and worry about revenues later.

The dot-com strategy was fine as long as venture capital was available to finance it, but now that the ready supply of cash has dried up, such companies are left exposed. There's a knock-on effect among more traditional ASPs, for whom the dot-com community have proved to be avid early adopters. Now those customers are either going out of business or cutting back operations (in which case their per-user per-month payments dwindle proportionately).

But the other factor is that most ASPs have ended up not as online providers of computing, but as integrators of computing solutions. This was not what the first pioneers had initially imagined. The original idea was that ASPs would deliver individual applications or suites as a self-contained service, operated from their own data centres, and offered more or less in an identical form to as many customers as possible.

Destined to fail

Clearly, this was destined to fail - on several counts. To get real economies of scale would require huge data centres and massive user populations. Yet individual companies all have their own special needs, so the market for any preconfigured application offering would be relatively small, unless the offering was so limited in scope as to have a generic appeal. But if it had only a limited scope, it would need to be integrated with other parts of the customer's computing infrastructure. And who would do that for the ASP?

Well, no-one, obviously, so the ASPs have ended up doing it themselves, either by offering integrated bundles of applications, or by customising their offerings to individual customer requirements. In the process, ASPs have become integrators, while a whole host of other types of businesses have decided they too might as well take on the same role.

Traditional IT services providers have added hosting capabilities and renamed themselves full service providers. Independent software vendors are introducing hosted offerings and subscription pricing so that they, too, can claim to operate their own ASP divisions. There are ASP aggregators, a new form of integrator that specialises in patching together externally-delivered online applications. Even ISPs, telcos and portals seem to feel they should be getting in on the act.

The only providers that still hold true to the original concept don't actually like to call themselves ASPs. These are the new-wave independent software vendors who have developed applications from scratch to deliver from their own websites. They have opted to deliver single-function applications with broad appeal to large volumes of users. Yet there's an integrator angle here too, because increasingly they rely on third parties to integrate their services with other elements of the customer's computer set-up.

Application integration

So instead of ASPs being some new and distinct entity in the computing landscape, the ASP model has turned out to be just a new source of business for IT consultants specialising in custom enterprise application integration (EAI). The only difference is that the applications are delivered as services, across a WAN connection, rather than installed as systems. Instead of systems integrators, the providers and their implementation teams become service integrators.

Meanwhile application hosting will be moving back into massive Internet data centres that can serve thousands of customers from a single shared server farm. This will be a profitable sector for those ASPs who are big enough to become infrastructure operators, but they will have to forsake their direct relationships with end user customers to do it well.

Those ASPs who choose not to become part of the application hosting infrastructure will be left without any significant hosting role. Their only differentiation from any other kind of service integrator will come down to how well they have adapted their skills to providing integration as a continuous online service rather than using the old, batch-mode, project-based model. That is the sector where competition will be at its fiercest, and there will be many casualties.

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