Wall Street Starts Warming To
ASPs
(08/20/00, 11:31 p.m. ET) By Ken Schachter, TechWeb Finance
The buzz is growing louder on application service
providers.
ASPs are popping up faster than you can say "Orville
Redenbacher," prodded in part by high-end forecasts that
the market will reach $25.3 billion by 2004.
Wall Street is beginning to take notice and is initiating
coverage of some of the companies that are the big fish
in what remains a small pond.
How can investors play this nascent market whose
leading players are pre-IPO companies like Loudcloud
Inc., Sunnyvale, Calif., or small-cap public companies like
USinternetworking Inc. (stock: USIX)?
Geoffrey Stricker, an analyst at Lehman Brothers,
focuses on two key areas: increasing market acceptance
and "scalability" of the business model.
In other words, as Usinternetworking, Annapolis, Md.,
extends its customer base, he said, its profit margins will
expand. The key to that will be widespread acceptance
of the ASP concept by businesses.
ASPs--or companies that deliver software applications to
customers as a service--resolve some important
dilemmas.
By using ASPs, businesses can: eliminate the headache
of recruiting and maintaining large in-house IT staffs;
transfer the problems involved with complex software
upgrades for functions such as back office, sales, and
customer-relationship management to the ASP; cut
costs; and concentrate on core competencies.
At the same time, businesses have to cope with the
reality of letting business-critical data flow beyond the
corporate firewall and not having in-house accountability
when things misfire. In short, it's hard for a company to
entrust the family jewels--corporate data--to an entity
outside its walls.
Another possible roadblock on the ASPs' path is delay in
deploying broadband infrastructure, which would harm
software performance on a network.
Some analysts also foresee a shakeout among ASPs. A
Gartner Group study predicts that 60 percent of the 480
retail ASPs now existing will vanish by the end of 2001.
Stricker said it's too early to tell if a shakeout really will
develop, but if it does, it could add to the market share of
the leading companies.
In any case, the market will "evolve rapidly because the
value proposition and rate of technological change makes
the ASP model attractive," said David Mahoney, an
analyst at Wit Soundview.
What kind of prices do ASPs charge? In a research note,
Stricker said USinternetworking has said its average
per-customer pricing of applications from Broadvision
(stock: BVSN), Redwood City, Calif., is $60,000-$80,000
per month; Ariba (stock: ARBA), Mountain View,
$60,000-$100,000-plus per month; and PeopleSoft Inc.
(stock: PSFT), Pleasanton, Calif., $40,000-$60,000 per
month.
Despite the lack of momentum, Stricker rates USIX a
"buy" with a 12-month price target of $22 and Interliant
Inc. (stock: INIT), Purchase, N.Y., an "outperform" with
a year-end 2001 price target of $20.
A threat-or opportunity-for ASP investors involves the
expected entry of the big Web hosters, like Exodus
Communications Inc. (stock: EXDS), Santa Clara, Calif.,
into the business.
Those companies could pose a competitive challenge to
an ASP--or they could acquire an ASP and hand
shareholders a healthy profit.
"Eventually there will be winners and losers," Mahoney
said.
Investors would do well to concentrate on those
companies that solve the most business problems, he
added.
So are ASPs the next big thing?
Said Stricker: "I hope so." |
