Interesting article on ASPs from RedHerring.com:
redherring.com
ASP: anyone still paying?
By Matthew A. DeBellis
Redherring.com, November 20, 2000
If you remember the business model affectionately known as the application service provider
(ASP), start trying to forget it.
The business of hosting third-party applications for a monthly fee hasn't taken off. And despite
the news this week that one publicly traded ASP received hundreds of millions of dollars to stay
alive, those watching the young ASP market say the model is fatally flawed. Much like what is
happening now in the business-to-consumer (B2C) market, the ASP business is on the verge of
thinning out through shutdowns and mergers, analysts and venture capitalists say.
ASPs that have already shuttered their doors include Pandesic (see "ASPs: Easy come, easy
go"), once deemed a pioneer in the ASP industry, funded by Intel and SAP. Red Gorilla shut
down last month after less than a year in business, unable to raise additional venture capital.
Partners at Utah Ventures, believed to be Red Gorilla's sole VC backer, didn't return phone
messages.
Other ASPs are tightening their belts. Interliant (Nasdaq: INIT) in September laid off 300
workers in hopes of saving $12 million a year. Futurelink reported last month that it would cut
75 jobs, or ten percent of its workforce, to try to speed up the time it takes to break even by
four to six months. It now hopes to break even in early 2002.
Because dozens of ASPs have formed, sprouting like B2C startups did in 1999, it's likely that
more are in bad shape and on their way out. The companies in the worst condition are those
hosting software published by third parties, says Rich Shapero, managing partner at Crosspoint
Venture Partners. He suspects that investors may start to bail out on many of the hundreds of
ASPs that will soon be hurting "if all they're hosting is someone else's applications."
Several ASPs, realizing they can't make it alone, are in merger discussions, says Harry Fenik,
executive vice president at Zona Research, a technology market research firm. "We're going to
see a bunch of [ASPs] get married," Mr. Fenik says.
FALLING DOWN
It didn't take long for the ASP business model to fall from the heavens. A year ago analysts,
the press, and startup CEOs held the business model up as an example of how customers would
pay for software. Instead of licensing software and having in-house technology staffers
maintain it, companies would pay a monthly service fee to use software developed by
name-brand firms such as Oracle, Microsoft, and J.D. Edwards, pundits said.
Several unprofitable companies went public on those aspirations, including Corio (Nasdaq:
CRIO) and USinternetworking (Nasdaq: USIX). Corio's shares dropped 16 cents to $3.91 per
share on Wednesday; its stock price is down from a 52-week high of $21.75. USi's shares
dropped 27 cents to $4.73 per share Wednesday, down from a 52-week peak of $71.63.
"They are hosting stuff that was never meant to be hosted," says Gary Steele, CEO of Portera
Systems, a 90-customer ASP that designs and hosts its own software for computer services
organizations.
ASP cheerleaders were on target about how customers want their software delivered -- over
the Internet -- but mistaken about how to make money on such an arrangement. It's too
costly to host and expertly manage third-party software to build businesses that will continue
to grow, Mr. Shapero contends.
VERTICAL FEAT
One way ASPs can become profitable is to turn themselves into so-called "vertical service
providers" (VSPs), says Michael Sherrick, a consulting and application services analyst at
Morgan Stanley Dean Witter. "It's not just about hosting applications," Mr. Sherrick says. "It's
about offering application and business services for a specific vertical or horizontal market."
VSPs offer customers more than basic business software. They are the main contact for all
technology services that can be delivered over the Internet to a particular market.
Crosspoint has committed a whopping $350 million to 14 companies in this space in the past
two years. One of those companies, VitalLink Business Systems, provides almost 2,000
restaurants with faster credit-card verification, real-time cash register tallies, music, and video
surveillance over broadband Internet pipes, Mr. Shapero says.
Just this week investors propped up USi, pledging $300 million in equity and credit. Among them
are Microsoft, which invested $50 million; wireless services firm Aether Systems, which
committed $10 million; USi executives, who pumped in $60 million; and GE Capital, which
promised $50 million in credit. USi CEO Andrew Stern was unavailable to comment.
SMALL BUT FIERCE
Some small ASPs are showing signs that they can make the model work. Vation, based in
Chicago, will have 30 customers and become profitable by the third quarter of next year, says
chief operating officer William Ryan. The firm designs software that integrates software made
by Art Technology Group, Epiphany, and Interwoven.
Vation has six customers now and expects to sign four more before year-end. The company is
looking for $10 million in second-round financing, and when management talks about the
company's profit plans, venture capitalists are surprised, Mr. Ryan says.
Other ASPs are telling venture capitalists they will break even in 2002, he adds. Vation is
growing at a measured pace. It has 60 employees and will open a second office in the San
Francisco Bay Area this month; it will have a total of four or five offices when it turns
profitable next year.
"The market has put a lot of pressure on us to perform," Mr. Ryan says. "The expectations are
higher." |
