STRATEGIES

May 22, 2001

While many ASPs are caught in a major industry shakeout, Web hosting companies are increasingly finding that they are in an excellent position to profitably introduce hosted applications to their service portfolio.

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Initially buoyed by the hype and optimism of providing outsourced application delivery to small and medium size businesses (SMBs) and enterprises (SMEs), new ASPs crowded the market throughout 1999 and the first half of 2000.

Without fully baked business models, many of these pure-play ASPs are closing their virtual doors, the result of bankruptcy, lack of venture capital and stiff competition. Enter Web hosting companies.

"In order to successfully deliver application services, you must go up the value chain," said Greg McKown, president and COO of Web hosting provider and ASP Hostcentric. "You must already have the rack space, bandwidth, servers and the technical expertise."

And expertise and infrastructure is what many large Web hosting companies have. Hostcentric now manages 1,600 servers at three data centers connected via 8,000 miles of fiber. Another Web hosting company entering the ASP market, HostPro, has the financial backing of Micron Electronics and boasts five data centers, hosting over 114,000 paid Web sites.

Ready to Roll Out the Apps
Because expensive infrastructure and human capital is pre-existing, Web hosting companies are in the unique position of being able to roll out new ASP service for a fraction of the money a startup ASP would have to pay.

"We already had an advanced data center, skilled engineers and overall understanding of 21st century companies' technology needs," said Joel Schleicher, CEO of Web hosting company and B2B ASP Interpath. "Our research indicated significant growth in the ASP market, therefore, by repositioning ourselves to concentrate on B2B ASP services, we were able to take full advantage of our resources."

Dennis Cavender, vice president and CFO of HostPro said his company was in a similar position. "Besides installing new application servers, we completely leveraged our existing network infrastructure and expertise to develop and roll out our ASP services."

Large Web hosting companies can also launch ASP services in a fraction of the time it would take a startup because their existing business software is already capable of supporting a multi-faceted business model with a massive subscriber base. Hostcentric uses the Oracle 11i e-business applications suite while HostPro uses Inovaware's PRISM billing and customer lifecycle management system. With these software packages, ASP offerings can be configured and added to the service portfolio in a matter of hours, dramatically lowering the long time-to-market that plagues pure-play ASPs.

Hostcentric's internal use of Oracle 11i led to its offering the applications suite as a hosted offering. "By extensively using 11i internally, we figured out how to solve business problems out of necessity," said McKnown. "This gave us a lot of experience before selling the solution to our customers. Our customers will not be guinea pigs."

Currently, many ASP customers are finding out they have been testers, even if just for the fact that their ASP was small and the market environment volatile. In comparison, large Web hosting companies typically offer solid financials based on proven business models, a more diversified service portfolio and cash reserves.

Simply having extensive Web hosting experience before delving into the ASP realm has given many of these hybrid Web hosting/ASPs the ability to succeed and profit in at the application hosting market.

Under Schleicher's direction, Interpath shifted it business model to focus more heavily of ASP services than on hosting. However, he credits the company's current success to its prior experience with hosting. "Our hosting experience enabled us to better anticipate both customer needs and management challenges," said Schleicher. "The experience Interpath was able to gain through the company's evolution proved to be of immense value as we transitioned our model to include the delivery of ASP services." Hostcentric's McKown agreed. "Managing our own network and offering the full gamut of Web hosting services gave us the experience and credibility to successfully launch our Oracle 11i services."

The Magic of Cross-Selling
Synergy between Web hosting and ASP services has enabled companies like HostPro, Hostcentric and Interpath to cross-sell their ASP services to their existing Web hosting customers while promoting their hosting services to customers initially attracted to their ASP offerings.

"Our customers already entrust us with their Web sites and e-commerce applications, so adding other hosted applications is a natural extension of the outsourced relationship," said HostPro's Cavender.

"We think our large customer base gives us an advantage most ASPs don't have," Cavender said. HostPro's Advanced Messaging Service, a Web-based version of Microsoft's popular Exchange business-class email system was perfectly suited for HostPro's customer base comprised mostly of SMBs. "The number one application our customers have told us they want is email," said Cavender. "It's a perfect fit with our existing hosting services and customer base."

McKown said that although the majority of Hostcentric's 20,000 customers don't use the firm's high-end B2B hosted applications, it has been successful in cross-selling its managed services to its Oracle 11i customers. "As a technology infrastructure provider, our solutions work together to augment our customers' own capabilities," said McKown.

The Secret of Their Success
What does the future hold for these companies? After having a taste of success in the recently volatile ASP market, they believe they know the key to winning customer loyalty — and earning profits.

"Excellent IP infrastructure and thorough understanding of underlying technologies are prerequisites to offering hosted applications," said McKown. Patience is also key as evidenced by McKown's insistence on developing internal expertise and familiarity with a particular application from a user's perspective before offering it as a hosted solution.

Meanwhile HostPro's Cavender is simply waiting for the right applications. "It's important to understand that the ASP industry has been over-hyped in the past, and that by and large, the applications aren't yet ready," he said. Perhaps not all of Cavender's colleagues in the high-end Web hosting industry would agree, but if there is one constant, it is the experience and expertise of these companies. "If you solve a problem, the proof is in the pudding," said McKown. "People will come to you."

Jeff Stockton is the corporate communications manager of Inovaware, a supplier of billing and customer care solutions for providers of Internet and next-generation communications services.

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