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
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 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

place as it morphs into a businessservice provider arena,” Pring said. “We’ll see number of big companies
buying smaller firms to move toward providing a full service business model.”

According to Pring, telecom firms poised at the fringe of the ASP market
are set to eventually become the big winners in the evolving BSP market.

“It will become a requirement for telcos, expect them to move soon,” Pring
said. “Smaller level firms are already seeing acquisitions and mergers online.”

But Pring said that moving forward no one single supplier can succeed alone.

“It’s a game of joint ventures and alliances that explains why we’ve seen
frenzied partnerships going on in a promiscuous market,” Pring said.

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