The E-Business Software Weekly is a series profiling trends and developments in software and applications that support e-business, the Internet, and other electronic communication channels. Look for a new story each week in this space.
Making Sense of ASPs
The slowing economy claimed another Internet casualty last week. According to the San Jose Mercury News, San Jose's AristaSoft, a company that sought to pioneer the delivery of business software over the Internet, had been unable to secure additional financing and had begun quietly shutting down.
Not that AristaSoft hadn't had a good run. The company had spent more than $100 million of investors' money over the past two years, and until recently had employed 300 people. Just last May, Upside Magazine named AristaSoft as one of the Internet's hottest 100 business-to-business companies. And as the premier provider of online enterprise software solutions to the high-technology electronics industry, AristaSoft counted among its customers several of the industry's leading players. Yet the B2B software company was a long way from profitability, and reportedly needed several million dollars more to carry it through the year.
AristaSoft's impending failure is all the more notable given the highly public circumstances of its birth. Convinced that business software would soon be delivered primarily over the Internet rather than as packaged or client/server applications, venture capitalist Richard Shapero of Crosspoint Venture Partners issued a public challenge in a 1998 interview in which he promised to write a $10 million check to the first business executive to devise a plan for supplying software in this way. In 1999, AristaSoft won Shapero's paycheck after proposing to deliver enterprise-class business software over the Internet on an industry-by-industry basis, beginning with high-technology firms.
So enamored were the venture capitalists with this approach that, according to the Mercury News, "Crosspoint even sought to replicate AristaSoft's model by investing in 15 other companies to serve other industries. The companies became known as 'vertical service providers,' or VSPs, because they aimed to deliver all of the software needs up and down specific industries. But the upfront expense has plagued some of the companies, and Crosspoint is faced with the painful choice of pumping more money in or cutting them off." In fact, another CrossPoint VSP, NexPrise of Santa Clara, Calif., was forced to obtain a $5 million bridge loan last December, and last week was sold to a competing B2B e-commerce company.
An ASP Paradox
The AristaSoft and Crosspoint experiences vividly call into question not just the vertical service provider model, but the whole application service provider (ASP) concept--the idea of delivering software of any kind as a service over the Internet. In fact, ASPs appear close to becoming the next dot-com blowout. Notes Laurie McCabe, vice president and service director of the Boston-based technology research group Summit Strategies, "in early 2000, ASPs were storming into the market with exuberant aspirations and extravagant backers. Hopes were high, and technology vendors and investors were rushing to associate themselves with the ASP movement, waging expensive battles to recruit ASPs to their platforms and portfolios."
But like the equally extravagant dot-com dreams, many of the ASP hopes have also fizzled. "In passing through the almost inevitable hype-curve, the ASP label has lost a lot of its luster," says McCabe. "Today, it's suffering through the almost obligatory casualties and fatalities that any new industry is bound to encounter. Though the basic premise of the model is still compelling, the ASP industry must evolve through a cumulative, experiential learning curve. As in any other new market," she cautions, "some will fail, and others will eventually succeed."
Such somber expectations notwithstanding, the ongoing tumult in the ASP sector has left some analysts unfazed. At the same time that AristaSoft was reportedly beginning to search for new service providers for its customers, Framingham, Mass., based IDC, a leading technology research firm, was predicting that ASP spending would reach $13 billion annually by 2005. According to IDC's July 2001 report, "Worldwide Enterprise ASP Forecast and Analysis, 2000-2005," ASP spending in 2000 totaled just under $700 million, implying a nearly 18-fold projected spending increase in just five years.
The two visions could hardly be more discordant. One expects to hear a Shakespearean character intone: "ASPs are dead. Long live the ASP!" It is, indeed, a paradox. And it raises an intriguing question: just what is going on?
Defining the ASP
The answer to this question begins with some definitions. In its report, IDC classifies as ASPs all those "companies that deliver managed or extended services around enterprise-resource management, industry-specific, customer relationship-management, and e-commerce applications." That's a pretty wide net, and would seem to catch a lot more than the school of fish that ASP discussants typically envision. By IDC's definition, almost any company providing business-related software services over a network could be termed an ASP. Since business's use of network-based software is expected to continue its strong growth over the next several years, it's not surprising that IDC could forecast a robust near-term ASP market.
While not attaching dollar values, McCabe offers definitions that are considerably more limiting--and more in accord with the traditional concept of the "software-as-service" model ASP. In an article entitled "Navigating the ASP Minefield," she proposes segmenting ASPs into four basic categories:
"Utility" service providers, also sometimes called horizontal service providers (HSPs), that can "sell high volumes of horizontal solutions that require little or no customization." As examples, she cites mail and messaging solutions, virus protection firms like McAfee, and web conferencing companies like Placeware and WebEx. "ASPs in this group," she notes, "can sell direct to end-user customers or act as wholesalers to other service providers, which then integrate and package them into tailored offerings for different market segments."
Vertical service providers (VSPs), like AristaSoft in the high-tech electronics industry or Citadon in the commercial building industry, that "create new solutions to fulfill target-customer requirements previously unmet by packaged software." Usually, she explains, "these solutions provide existing value chains with industry-specific workflow, collaborative, and extended-enterprise services."
Original-equipment-manufacturer (OEM) service providers, sometimes called managed application service providers (MASPs), "that create additional, proprietary value-add around popular small-and-midsize business solutions." By developing deep expertise in these applications, McCabe explains, MASPs "can become a preferred back-end provider to a customer-facing channel, be it a systems integrator, reseller, ASP aggregator, or other channel. Examples include ManagedOps.com and USinternetworking.
"Diagonal" ASPs (DSPs) offering horizontal business solutions but with a strong track record and an installed base in specific verticals. Such companies "can leverage their domain expertise both to convert existing customers to the model and to attract new ones within the same industry."
Distinguishing Among ASPs
McCabe's categorization helps clear up some of the confusion surrounding ASPs, VSPs, and the other SPs. And it helps illuminate the fairly substantial differences in structure and business model among the various types of application service providers--and make it more readily understandable why a company like AristaSoft could fail while other, more nimble application service providers like McAfee or WebEx could prosper.
Perhaps the sharpest distinction in form exists among MASPs and the other SPs. Because they primarily manage pre-existing applications, MASPs like USinternetworking are essentially outsourced IT departments. Rather than providing a different type of software, MASPs merely offer a new, putatively more cost-efficient method of financing and managing usually complex and expensive extant software applications. In fact, in its "CEO's Guide to Application Service Providers," USinternetworking highlights the fact that it assists customers "in extracting all the value possible from world-class application providers, such as Ariba, BroadVision, Lawson, Microsoft, Niku, Oracle, PeopleSoft, Siebel, and more."
The USinternetworking "CEO's Guide" goes on to emphasize that "shouldering total post-implementation responsibility and really delivering on service level agreements define the 'New ASP' and the standard for delivering on its promiseä" Hence, the MASP's core value proposition lies in the cost-efficiencies of operating an existing class of software, rather than in any new and unique business value presented by the form of the software itself. For companies strapped for IT funds and unable to find skilled IT employees, the MASP value proposition can be a real and powerful one. But because the MASP promise depends so heavily on the technical level of service provided, it's easy to see why the MASP category of ASPs--populated as it has been by so many small and inexperienced firms--has begun over the pass several months to witness a dot-com style implosion.
Both vertical and diagonal service providers offer a fundamentally different value proposition than MASPs that centers not just on more cost-efficient IT management, but on the easy anytime/anywhere access and real-time interactivity that are the exclusive province of Internet-centric applications. These are compelling advantages that can substantially reduce IT costs, sometimes even more than MASP solutions, because vertical and diagonal service providers usually find it easier than MASPs, who must support very labor-intensive customer-specific service requirements, to amortize infrastructure costs across multiple installations.
But vertical and diagonal ASPs also add significant end-user business value by consolidating and customizing applications for particular industry sectors, thereby producing efficiencies and capabilities beyond what standard packaged applications (or their ASP-delivered counterpart) can provide. Beneficial as this approach is to VSPs' and DSPs' customers, however, there is a significant downside: development and maintenance of these customized, sector-specific applications can be extremely (and sometimes unaffordably) expensive, as the AristaSoft experience shows.
The so-called diagonal ASPs have an advantage in this regard because they are adapting existing industry-specific applications, whose development costs usually have been incurred over a number of years, and so have been at least partially amortized over time. What ultimately doomed AristaSoft and his ilk was the competitive need to collapse this development time frame (and its associated costs) into a mere year or two, with no pre-existing foundation to build upon. The fact that its proposed solutions were designed to be delivered over the Internet added still more complexity, further increasing the development costs. But it was the need for extensive, resource-consuming, industry-specific customization that proved to be the weight that, in the end, broke the digital camel's back.
Surviving the Short Term
We are thus left with the first category of ASP that McCabe cites--the utility or horizontal application service provider. Although this ASP segment has witnessed its own share of high-profile failures, the HSP model holds out the greatest near-term promise of any of the four classes of ASPs. Because HSPs replace packaged software with fully web-based applications, they (like vertical and diagonal service providers) deliver significant end-user business value--anytime/anywhere access, online collaboration, and real-time data access, to name a few--that traditional packaged and client/server software applications cannot provide. At the same time, because horizontally focused web-based applications usually involve little customization, they are far less costly to develop and maintain (often, by orders of magnitude) than the industry-specific applications proffered by VSPs and DSPs, enhancing their financial viability in a capital-short market.
To be sure, most horizontal service providers are small and concentrate on a single business need or related suite of needs; they generally don't yet deliver the enterprise-class breadth of application portfolio available from the top-tier managed application service providers or the industry-specific depth tendered by the vertical and diagonal service providers. But size and scope do not always win the day. It's well to remember that, at the end of the age of dinosaurs, it wasn't the resource-hungry thunder lizards who endured, but the small, agile, and resource-efficient mammals who could survive on the limited food supplies that remained on the asteroid-denuded plains.
So, too, is it likely to be the case with ASPs, particularly in the capital-starved short-term. Those that survive will be small and nimble, with limited external resource needs and a value proposition that makes not just financial sense, but also powerful and practical business sense to the widest range of potential customers.
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