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

the mark remains to be seen, however it is safe
to say analysts agree that the ASP market will produce $7 to $25.3 billion
in revenue over the next four years.

The challenge remains for ASPs, ISPs, ISVs, resellers, telecom carriers,
and hardware vendors to figure out which alliance to build in order to
survive. Only then will full service providers be able to set their merged
and converged aspirations on fulfilling clients needs.

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