Weekly News Analysis: Economic Downturn a Boost for ASPs

Oracle Corp's warning last week that revenues and earnings will be lower than expected this quarter was accompanied by stories of customers cancelling orders they'd already placed amid an atmosphere of rapidly deteriorating business confidence. This detail is now becoming an all-too-familiar tale; last quarter's results from Cisco and several other technology bellwethers were already affected by a sharp and marked slowdown in orders during December.

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If the US economy is slipping into recession, where does that leave ASPs? Many in the industry believe that the model will thrive at a time when businesses are compelled to rigorously control costs and slash budgets. With executives nervous about committing large investments and many capital spending budgets frozen, enterprises will favour the drip-feed, pay-as-you-go, ASP subscription model.

As if to prove the point, Qwest Cyber.Solutions (QCS) last week landed another of its record-breaking ASP contract deals, this time for a massive $22 million with small business communications provider Expanets. Its previous largest mega-deal was with Redback Networks in September, for $18 million. See QCS Scores $22M Contract, March 1st 2001 and Qwest Cyber.Solutions Signs $18M ASP Contract, Sept. 25th 2000.

Certainly, there seems to be merit in believing that the pay-as-you-go model will enable ASPs to pick up some projects that would otherwise be cancelled. Their ability to take up those projects of course depends on their having the financial resources to fund a commitment their customers no longer want to shoulder. But then that is the ASP model — reducing risk by sharing it.

The attractions of gaining new competitive advantage for a lower outlay may soon sweep away today's commonplace objections to the ASP model such as security and data integrity. Recession has a habit of changing people's perceptions, bringing popularity to previously unfavored offerings.

Back in the 1920s, diesel engines were virtually never used for road transport and agricultural purposes. Trucks and tractors ran on gasoline, which was cleaner and quieter, albeit slightly more expensive. By the end of the 1930s, diesel's superior reliability, economy and ease of maintenance had made it the preferred engine choice among farmers and road haulers. Similarly, we may now see hosting become the diesel engine of the information age.

Greater adoption of ASP solutions during an economic recession unfortunately implies that ISVsrecognizingit by a double whammy. Not only will revenues decline because of the broader economic climate, but they will also be deferred by the move to an annuity revenue model. There is some consolation in that it is better to sign up a customer for an ASP implementation rather than none at all. But instead of recognising all of the revenue on delivery, ISVs will have to count the months before they start seeing the revenue mounting up on their bottom line.

xSP not ASP
Whatever the real prospects for the ASP model, some of its adherents are becoming less sanguine about being labelled as ASPs. To some extent, the definition of the term has narrowed since ASPnews.com was first set up to report on the industry. This writer has always used it in its broadest sense of a provider of any network-based, interactive, automated service — see for example this article from Apr 1999.

In mainstream use, the term has come to be associated primarily with providers of recognizable computing applications. This association with a narrower subset can be misleading, in that it makes it harder to spot significant developments such as this week's announcement of AOL's entry into the ASP market. AOL will now make its e-commerce technologies available to other businesses on an outsourced basis, hosted and managed by Loudcloud. See AOL, Loudcloud Announce E-Commerce Deal, Feb 27th, 2001.

In an effort to convey this broader perspective, many industry observers are now starting to talk in terms of xSPs rather than ASPs. Selecting a new term not only re-widens the definition, it is also a way of avoiding what some regard as negative associations with the ASP term, given some of the bad news about company failures and cutbacks that has been reported recently from the ASP sector. That bad news is overdone; it has been almost to the exclusion of good news such as the stories from QCS and AOL highlighted above. But some in the industry evidently feel that becoming an xSP is a better fate for an ASP than to become an ex-SP.

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