ASPs: Let's shrink again like we did last summer

The ASP industry is consolidating. Hurwitz asks if the term itself will soon be obsolete.

The ranks of prominent, independent application service providers (ASPs) have once again shrunk as ASP industry consolidation continues to take hold.

For example, Corio recently acquired the ASP assets of Qwest CyberSolutions (QCS) from troubled telecom giant Qwest. The combination of Corio and QCS, two of the largest and most prominent independent ASPs, will counter the newly reconstituted USinternetworking, itself the product of a merger of USinternetworking and Interpath and a cash infusion from Bain Capital, and other surviving ASPs including Agilera and BlueStar Solutions. Exigen Group purchased ASP pioneer Portera. Meanwhile, Interliant declared Chapter 11 bankruptcy while losing much of its senior leadership team.

These recent events serve as a reminder of the continuing dichotomy between the inexorable march of software-centric computing and the fate of individual ASPs.

Explanations for the difficulties of many independent ASPs have been plentiful. Enterprise-type ASPs have long been portrayed as fighting the last war in the sense of adapting non-Net-native software to network-based delivery.

But not all web-native ASPs are thriving nor are all enterprise-type ASPs floundering. Reliance on personnel-intensive business models has also contributed to high operating expenditures. Yet, rare is the ISV that does not possess a hosted delivery option and rarer still is an emerging software solution that is not offered in the same fashion, admittedly for a subset of eventual customers, but a growing subset.

What is an ASP anyway? ASPs are indeed outsourcers, at least in the sense that they provide services that customers would otherwise have to provide themselves.

However, the use of the ASP model to delivery functionality not already in hand strains the conventional definition of outsourcing (much as the use of on-site options contradicts the definition of an ASP). The ASP approach is ultimately both a way to add new functionality and a way to outsourcing existing functionality. With the lack of their once thriving customer base, enterprise ASPs have tended to emphasize the latter amid an overall industry outsourcing slump while many web-native and other solution providers emphasize the former. Even though many enterprises continue to prefer operating their solutions in-house, the cost and time savings made possible by the hosted approach are often too good to pass up.

The Hurwitz take: Customers have been remarkably pragmatic about the benefits and virtues of ASPs and continue to embrace them for both new and existing requirements.

The success of the hosted applications model is continuing despite the challenges experienced by ASPs. The ultimate success of the hosted approach will render the term ASP meaningless - as it increasingly is becoming.

ASP Industry: Let's Shrink Again Like We Did Last Summer
By Bill Martorelli
Originally published August 23, 2002

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