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Analysts Send Mixed Signals to ASPs

Application service providers are finding that thriving in the marketplace is a lot like the dramas being played out on the popular television show "Survivor." Alliances are essential if one player is to outlive another, but be careful with whom you partner because the pact could take you out of the game.

According to IDC, more than 80 percent of ASPs currently inhabiting the island are actively seeking to chum up-with independent software vendors, resellers, telecom carriers, Internet service providers, and hardware vendors.

The study also found that partnering needs differ depending on what flavor of services is provided. In other words, IDC analysts recommend that ASPs choose their partners wisely in order to satisfy the particular expectations clients hold for their applications on demand.

IDC forecasts that spending on ASP services will grow to $7.7 billion in four years, from $300 million this year. It's not so much that this is new money pouring into the ASP market. Software vendor revenues will most likely diminish as businesses choose to allocate software budgets with ASPs.

Rival research firm Gartner Group, Inc. paints a different revenue forecast for the ASP market. Gartner's Dataquest division last week predicted that the ASP market will grow from $1 billion this year to more than $25.3 billion by 2004. See related ASP News story on internetnews.com, Research Firm Bullish on ASP Market, Aug 9th 2000.

Gartner contends that ASP revenues will grow exponentially at the expense of more than half of the current players in the field. The group forecasts that 60 percent of ASPs operating today will fail by the end of next year. Only four percent of the companies in operation today may survive the fallout.

IDC's conservative ASP forecast counters Gartner's prediction of doom and gloom by recommending that service providers merge businesses in order to survive competitive market pressures. But analysts warn that software vendors should be the first in line to leverage the distribution capabilities that an ASP alliance could provide.

Stephen Graham, IDC vice president of research, said ISVs that fail to build partnership channels to distribute their software on demand might not be around for the season finale.

"Partner programs are a vital mechanism for software vendors to effectively manage sell-through and sell-with alliance relationships," Graham said.

In support of IDC's take on the ASP market, analysts cited an example in which sales training is statistically significant for a service provider that intends to grow its business with a software vendor. The ASP builds online distribution while the software builder serves up technical expertise, but nobody specializes in sales.

The same is not true if an ASP partners with a value-added reseller or service-oriented partner, which are consumer centric businesses that already have a sales training infrastructure built into their core business mix.

IDC's Graham said it's critically important that ASPs select business partners that share common goals, which may build upon contrasting operational strengths.

"ASPs are seeking partnerships with a variety of technology product and service firms, with a particularly strong emphasis on software vendors" Graham said. "By understanding the ASPs' business needs, vendors can develop a more attractive value proposition and ensure they are easy to do business with."

IDC analysts believe that business alliances and partnerships are essential for an ASP to reduce the risk of failure while opening up new sales and marketing channels.

Which forecast is closer to