Still Viable?

With customer adoption less robust than initially anticipated, coupled with plummeting stock prices, many are left pondering: 1) will customers actually utilize ASPs? 2) can ASPs become profitable? and 3) is the ASP model viable long-term?

To address these issues we have been asking: What has changed over the last 15 months? Have the basic IT needs of customers, as addressed by the ASP model's value proposition, changed fundamentally? In our opinion, the technology and business problems many companies face have only grown worse and more complicated - making the value proposition of the ASP model more compelling. Indeed, with the advent of the Internet and distributed computing, the overall computing environment continues to grow increasingly complex - creating challenges that are difficult for the medium sized company to overcome.

As a result, we believe the ASP model is viable and eventually will emerge as a multi-billion industry, as it solves some very important customer needs. However, per the issues enumerated above, we believe a variety of issues, in the short-term, are causing customer adoption to grow more slowly and ASPs' value-propositions to be less immediately compelling. It's also important to note that the ASP model is not as "sexy" as many people initially perceived, as it represents many IT plumbing services and is a utility model - however, long term, utility models tend to be relatively stable.

Against this setting, the market is entering a period of consolidation that many ASPs will not survive, as: they are denied access to additional capital; the flaws of their business models become apparent; they can't build effective distribution channels; and the competitive environment intensifies. Indeed, according to a recent Gartner Group forecast, approximately 60% of today's ASPs will go out of business over the next 12 months, with only a handful of full-service, enterprise class ASPs surviving, along with several dozen other point-solutions vendors. However, Gartner Group also noted that the surviving ASPs will inherit a market that could grow to over $25 billion in five years.

Over the next 15 months, we expect the ASP model to undergo a dramatic re-alignment that will shake out many old players and evolve beyond many of the issues plaguing it today, as:

1. ASPs become more technology focused and gain greater repeatability within their businesses, enabling them to lower their cost structure and pricing;
2. ASPs add business process capabilities/value to their apps, becoming more vertically industry focused while offering integration among multiple applications;
3. ASPs' offerings become more focused on applications that are easier entry points into customers;
4. Software architectures and the telecommunications infrastructure mature;
5. ASPs incorporate better pricing and contract flexibility;
6. ASPs establish networks of regional and local resellers;
7. Customer education improves and the marketing noise dwindles.