What is an ASP?

It's still anybody's game in the application service provider business, where hundreds of companies are chasing billions of dollars in projected revenue, and a profusion of very different business models are vying for capital and customer mind share. The players include big software firms, high-tech start-ups and newly public hosting companies, all claiming to have a line on what a real ASP looks like.

The overall vision is clear: "All software will be delivered as a service instead of a packaged product 10 years from now," says Tim Chou, president of Oracle's Business OnLine application services unit - and while his competitors might quibble that "all" should be "most" or "a whole heck of a lot," it's a widely held opinion. As application services begin to move into the mainstream, though, there is no consensus on what kind of company will truly define the market.

Users of application services, including a growing number of Fortune 500 companies, are motivated by the desire to focus on their businesses instead of managing software, according to a survey conducted for the ASP Industry Consortium by Zona Research, which also cited cost savings and speed of implementation as important factors. A majority of ASP customers surveyed are using two to six services, with 90 percent saying they are satisfied with the execution of their service-level agreements.

So far, the hosted software revolution has been as much about high-touch as high-tech. Early leaders in the field, including public companies such as Breakaway Solutions, Corio and USinternetworking, are seeking to establish themselves as brands as they integrate applications - many written for a client-server environment - for delivery over Internet Protocol networks. This new-age consulting practice works well for companies or verticals with highly specific processes, but while the hosted software industry is heading toward break-even on a cash-flow basis at several companies and may prove profitable in the year ahead, its customized, labor-intensive nature makes it an expensive business to expand.

"It's a slightly old-world vision of where this industry is going," says Ben Pring, an analyst at GartnerGroup. "These companies are facing a fork in the road. Do they really commit to a one-to-many model, or do they become another professional services model?"

In the long term, companies that aspire to the core Internet value of mass customization via technology may have the advantage. "Service providers that offer highly engineered solutions have a good chance at making it in this industry," says Rick Juarez, a services analyst at Robertson Stephens in San Francisco. He cites technology-driven companies such as Jamcracker, which ties together and delivers packages of application services via a purpose-built portal, for its ability to add customers without incurring large incremental costs.

Technology is also changing software itself, making it more suitable for delivery over the Internet and providing an opportunity for new software companies. "We're not delivering a big piece of software to thousands of users. We build to order like Dell [Computer] builds computers," says Jeff Tognoni, chief executive of commerce software company EC Cubed, sniping at better-known rivals Ariba and Commerce One. "Our service is not monolithic, off-the-shelf or controlled by product committee," he says.

The established software vendors, meanwhile, see themselves as the natural heirs to the ASP business. "We control the software, which is the central resource here," Oracle's Chou says. "This is about being able to scale reliably, cheaply, quickly, and it makes sense that we will be the ones to deliver it." Oracle says it has more than 100 customers for its own hosting business, but in a tacit acknowledgment of the market's slow progress, the company recently announced that its products will be available via third parties as well.

So far, the more mature software written for client-server networks tends to be richer in features than new, Web-native applications, but the new applications work better for ASP delivery. "Those distinctions are narrowing and will continue to narrow," a process that will benefit the entire industry, says Mark Terbeek, co-founder of Jamcracker. GartnerGroup's Pring predicts that some established software companies will not make the transition, but the ones that do will thrive.

There may be room for more than one type of service provider in a mature market, but the ASP industry has grown large enough that an eventual shakeout and consolidation are inevitable. GartnerGroup expects the winnowing to begin next year, with only dozens of ASPs remaining three years from now.