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January 22, 2001

Announcements from several of the ASP industry's founding pioneers marked the passing of an era this week, none more so than the decision by FutureLink Corp to return to its roots as an IT services business.

USinternetworking Inc bowed to what many had feared was the inevitable, announcing an 11% reduction in its 1350-strong workforce. See related story, USi Lays Off 150, Edges Closer to Profitability.

Throughout the past six months, USi has stood firm while all around in the industry have shed staff. That has mattered; as the earliest, largest and most prestigious pureplay ASP, USi is like the castle that's always up there on the hill. However much anyone disagrees with its business model, no-one wants to see it crumble, because that would make everyone look vulnerable.

This week's prudent trimming was a welcome move, neutralising the uncertainty that had hung in the air as long as USi had held out against making cutbacks. At the same time it confirms beyond doubt that no-one in the ASP industry is insulated from today's harsher economic reality.

KPMG stake

It seems that harsh reality has proved too much for KPMG Consulting to stomach; at least in respect of the traditional enterprise ASP model. It emerged this week that KPMG has sold out of its stake in Qwest Cyber.Solutions, the joint venture ASP it set up with telecoms carrier Qwest Communications in 1999. Papers filed with the US Securities and Exchange Commission (SEC) show that KPMG handed over its 49% stake to Qwest in late December "in exchange for a nominal amount". According to the filing, QCS reported a net loss of almost $65m for the period from its formation in June 1999 through the end of September 2000, and requires further investment to reach breakeven.

KPMG Consulting is in the midst of preparations for an IPO that will spin it off from the KPMG accountancy partnership, so its decision is less a verdict on the ASP model, more a sensitivity to the current view on Wall St that the initials ASP stand for "Awful Stock Pick". Divesting from QCS removes the potential for the association to have a negative impact on its IPO price target. But with belts tightening throughout the ASP sector, its decision may also be influenced by a feeling that ASP profitability will prove more elusive than originally envisaged.

Certainly that was the conclusion to be drawn from two other announcements this week, both from pioneers of the ASP model at the small business desktop end of the market.

Friday (Jan 19th) brought news of a restructuring at Telecomputing (OSE:TCO), which can legitimately lay claim to the title of the world's first ASP, having started using the term to describe itself as early as 1997. It was already acquiring customers by that time in its home base of Oslo, Norway, and subsequently expanded into the US. But it found it more difficult to market its Windows terminal-based offering to US customers and reseller partners than it had in Europe, and is now restructuring to give local managers more autonomy. See related story, TeleComputing to Restructure

Early expansion

Futurelink was developing a very similar ASP business model back in 1997, in its then base of Calgary, Canada. ASPnews documented the formal announcement of its finished strategy a year later in December 1998 - see Futurelink unwraps application portal. We subsequently published a more detailed examination of the company's business model and aspirations in a downloadable 15-page white paper, Futurelink: Building the Information Utility (PDF, 52k).

To fulfil its strategy, FutureLink set out on an aggressive expansion plan, buying up some half-a-dozen North American systems integrators, specifically targetting those with extensive skills in Citrix and Windows terminal technology. The first acquisition was the largest, a merger in June 1999 with Irvine CA-based MicroVisions, whose management subsequently took over the key positions at Futurelink.

The ever-present danger in pursuing such a strategy was that the volume of systems integration business being sucked into the company would drown out the ASP vision. FutureLink sought to keep the ASP concept front of mind by describing traditional on-site implementations of Citrix technology as "internal ASP" installations. This was on the grounds that its customers were using the same technology to deliver applications to thier own users as FutureLink was using to deliver services to its small band of true ASP customers. Meanwhile it continued to sink finance into building out its ASP infrastructure and marketing itself as an ASP.

Fading hopes

The strategy held up as long as it was still possible to believe that the ASP business would eventually take off. But as the months have passed, those hopes have gradually faded. The business is there - particularly in FutureLink's UK-based European subsidiary - but it's not growing fast enough. This month, finally, FutureLink's latest management team - installed as part of restructuring in December - decided to throw in the towel. FutureLink will now go back to being primarily a systems integrator that also happens to offer ASP delivery. See FutureLink Sheds Staff, Refocuses.

In doing so, it is folding itself back into the mainstream of the IT services industry, which mostly sees the ASP model as an option for those customers that prefer certain applications to be hosted. That's a perfectly valid viewpoint to have if you're an established IT services business. But it's an admission of defeat for FutureLink, which has spent all of its life (and most of its money) arguing that the ASP model is much more than simply an add-on to established IT practice. Now it seems its first-generation version of the model just wasn't enough to deliver on that promise.

This review of the week's news highlights is by ASPnews.com founder and managing editor Phil Wainewright. A comprehensive news digest is published every month in the ASP News Review newsletter, available exclusively to subscribers.

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