Brief mention of Interliant in WSJ today:
December 6, 1999
Special Report: Convergence
Hard Sell
'Apps on tap' -- the new wave, or just the newest hype?
By ANDY FAVELL
If you believe the hype engulfing the technology industry today, some businesses are on the verge of tossing out their computer servers and high-powered software. Why own computing systems, the thinking goes, when you can rent them for less?
This approach to corporate information technology, in which outside firms supply companies with the computer applications they need on a pay-as-you-go basis, has been the talk of the tech sector this year. But the danger is that the industry is being carried away by the buzz surrounding so-called "apps-on-tap," ignoring obstacles that may prevent application-service providers from catching on as quickly and successfully as their advocates predict.
In theory, ASPs have enormous potential both for software and hardware sellers and users. For customers, handing over the responsibility to a specialist promises reduced costs and hassles. For smaller companies in particular, the approach could remove a barrier to adopting sophisticated new technologies: The cost of recruiting and retaining staff to maintain hardware and software can be prohibitive, explains Winfried Hoffmann, president of sales and marketing for Fujitsu Siemens Computers BV, which is jointly owned by Fujitsu Ltd. and Siemens AG.
ASPs can use economies of scale to make applications for e-commerce, e-mail and customer-relationship management affordable to smaller businesses, advocates say. And that could mean big business: Gartner Group's Dataquest predicts the ASP market in Europe will grow to $7.15 billion (6.88 billion euros) in 2003, from $293 million in 1998.
Fear of the Unknown
In practice, however, there are numerous obstacles to apps-on-tap becoming the computing model of choice for smaller businesses within the next decade. "Sometimes even I get tired of the hype," says Mike Connolly, business-development manager at J.D. Edwards & Co., a software company. "With Oracle, SAP and J.D. Edwards put together, I doubt if there are 100 ASP sites world-wide." Nevertheless, he is convinced that by 2003, 30% of his company's revenue will come from ASP
business.
Interest from the target audience -- small and medium-sized companies -- remains fairly limited, even in the U.S., where the concept was spawned in the early 1990s. Most of these potential customers came of age in an era when in-house servers were the norm. Unlike many older companies, which had experience renting space on mainframe computers in the '70s and'80s, the concept of relying on a third-party host is alien to younger, smaller firms. "The biggest hurdle ASPs face is the cultural issue with smaller businesses," says James Eibisch, research manager at International Data Corp."This is due to both a lack of awareness of the potential benefits and a distrust of outside companies."
Business executives are unlikely to embrace application services until they are convinced of the safety and reliability of the Internet and an
ASP. "It should not be an issue," says Steve Burnett, director of outsourcing for Logica PLC, a U.K.-based IT company. "Many businesses already allow people to use the Internet to dial into corporate networks." Although security concerns might be overdone, adds Dataquest research analyst Nicole France, many CEOs still need persuading. As a result, ASPs sometimes take a less economical path to serve customers. For example, it is less expensive to host several customers on the same server; instead of trying to convince executives that using a shared, or partitioned server, is secure, many ASPs provide one server per customer.
Although apps-on-tap is often touted as an Internet-based system, many ASPs actually use more expensive dedicated lines. But the high cost of maintaining these lines to customers in Europe, compared with the U.S., presents another challenge. Some ASPs, including International Business Machines Corp. and ,Interliant Inc., have taken the unusual step of hosting applications at customer sites rather than on their own premises. Since the ASP theoretically only needs to dial in to the server a few times a day to conduct maintenance, installing servers at customer sites lowers telecommunications costs.
Mounting pressure from the European Union and increasing competition will likely prompt telecom operators to reduce bandwidth costs. But in some areas, government policies themselves are the biggest obstacle to the development of ASPs. In the U.K., for example, the government is currently investigating two other potentially thorny issues: intellectual-property legislation and taxation. In some cases, intellectual-property law is clear-cut: It would be considered a breach of copyright if an ASP rents out an application without the permission of the developer. But to what extent can an ASP customize an application, and what happens if the software -- as invariably is the case -- contains code owned by countless other vendors?"Copyright infringement all depends on the terms of the original licensing contract," says Kenneth Chia, an attorney at London law firm Hammond Suddards and co-author of "eCommerce: A Guide to the Law of Electronic
Business."
Tax issues, too, have yet to be resolved. If an overseas company sells a CD-ROM containing Microsoft Office software to customers in the U.K., for example, it is classified as a product and subject to a value-added tax. The tax status software provided online is currently being reviewed by U.K. regulators.
Clearly, it is still early days for applications services, and suppliers are sorting out what services to offer and how to structure contracts. Should clients pay for services based on the number of users or by the number of transactions? As they work through such questions, ASPs hardly get sympathy from outsourcing veterans, who see the newcomers' offerings as poor imitations of their own highly tailored services. "I subscribe to the analysts' view that the ASP market will take off, but it won't be in two or three years, as predicted," says Duncan Aitchison, executive director of information systems management at Cap Gemini SA. "It will be more like five or 10, and even then, it will only happen if there are more sophisticated services on offer than at present."
Logica's Mr. Burnett says the off-the-shelf applications offered by ASPs could be appropriate for technologically immature start-ups seeking low prices and easy implementation. However, he adds, companies with complex IT infrastructures or big growth plans should look at a host with advanced ystem-integration skills.
Host of Contenders
The hype swirling around the ASP market has attracted a wide spectrum of IT companies -- Internet-service providers, telecom firms, system integrators, even hardware and software vendors -- all eager to get in on the action. ISPs, with their background in hosting customers' Web sites, would seem strong contenders: They, however, lack a proven track record in implementing and maintaining back-office systems. Cost also counts -- few ISPs have deep pockets, and it could take years for an ASP to recoup its investment. Earlier this year, for example, U.S. based PSINet Inc., an ISP that has moved into the applications-service market, unveiled a 50,000-square-foot facility in London's Docklands. The firm's vice president, Valerie Holt, estimates that annual personnel costs for roughly 50 technical and 30 sales staff will total 2 million pounds (3.1 million euros). "I can't see many small ISPs adapting into ASPs without some form of financial assistance," she says.
Telecom operators, for their part, have yet to show that they can make the leap from providing telephony services to managing core IT systems. "Telcos have strengths, but their main weakness is a lack of credibility," says J.D. Edwards' Mr. Connolly. "Installing ERP is a challenge and needs qualified people. It needs a system integrator involved to persuade the customer that the service will work."
System integrators like Cap Gemini, with a history in outsourcing or private data networks, could have an edge in terms of credibility. But set-up costs might prove prohibitive for some of them.
IT vendors know that if the ASP model takes off, it will eat into their traditional hardware and software revenue. As a result, most of them are seeking a toehold in the market. Companies such as Oracle Corp., IBM and Intel Corp. have set up their own ASP practices. Others, including Hewlett-Packard Co., Informix Software Inc. and J.D. Edwards, are eager to help ASPs get off the ground by providing servers, software or consulting services in exchange for equity or a share of
the profits.
No single company can do everything, says Dataquest's Ms. France. "We are seeing consortia ... springing up, which you would never have expected a few years ago. Vendor success in this market will depend on how well they can partner." |
