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Research Firm Bullish on ASP Market

The Gartner Group Inc. believes the worldwide application service provider industry is poised for explosive growth.

Gartner's Dataquest Inc. unit predicts that the ASP market will grow from $1 billion in 1999, to more than $25.3 billion by 2004. The research firm forecasts that the worldwide ASP market is on pace to produce $3.6 billion in revenues this year.

However, Gartner believes the ASP market will grow at the cost of more than half of the current players in the arena. The group forecasts that 60 percent of ASPs operating today will fail by the end of next year. Only 4 percent of the companies that survive the fallout will be around to take a piece of the $25 billion pie.

Audrey Apfel, Gartner vice president and research director, said current dot.com collapses would pale in comparison to the looming ASP meltdown.

"When dot.coms collapse, they implode and have little effect on their customers and other industries," Apfel said. "The ASP consolidation will have a domino effect, affecting business systems like ERP and accounting systems for companies that have outsourced these functions to ASPs. Then, those failures can quickly spread the damage along supply chains."

Apfel said recent ASP failures, like Pandesic, is only the tip of the iceberg.

"We expect many other major ASP brands will fail during the coming months," Apfel said. "It's a lot like the television show 'Survivor.' Each month that goes by will see the departure of more ASPs with the remaining ones sharing this prosperous market."

Gartner developed a six-layer ASP survival guide as a tool for determining whom the winners and losers would be. Apfel said winners would be ASP businesses that offer a mix of neutral applications, scalable platforms, operational sound data centers, heavy-duty networks, legacy integration services, and customer relationship management.

"Many of today's ASPs make the mistake of trying to do everything, including owning the data center." Apfel said. "We believe this is a critical mistake and not a sustainable strategy in most cases. The successful ASPs will focus on no more than two layers of our model.

Apfel added that the post-ASP-collapse landscape would look nothing like the ASP marketplace today.

"There will be few viable vendors, the vendors will be different, the offerings will be different, and then we fully expect that the term 'ASP' will no longer be used to describe these vendors," Apfel said.

Ben Pring, Dataquest principal analyst, said the ASP industry would continue to show 80 percent growth rates through 2004, while it precariously transitions into a business service provider phase.

"The next 12 months may very well determine the future prospects of the ASP model, as ASPs scramble to position themselves in the market, chase down an ever-receding customer base and replace grandiose marketing claims with concise, sober-minded business propositions," Pring said.

Pring said eventually, business services wrapped around application functionality would be most useful to customers, but that software licensing models, application and networking architectures, and vendor strategies would all be impacted greatly.

The industry shift toward delivering software as a service has created competitive rush vendors in search of ASP profits. Unfortunately, the "build it and they will come" strategy positions most of the firms to fail, because they have no idea what it will take to survive for in the long term.

Currently there are some 480 ASPs vying for what remains to be a $3.6 billion industry this year. Pring said to expect a period of consolidations already emerging as new ASP initiatives diminish, existing ASPs merge, and others fail.

"We're still bullish on ASP market