ASPs: Here today, gone tomorrow?

ASP market is predicted to be huge, however, even optimists are predicting a major shakeout that will drastically reduce the number of providers.
Written by ZDNet Staff, Contributor

Looking at the projections, it seems that the application service provider market will soon exceed the gross national product of a small Third World nation. Analysts are reaching different conclusions about the precise size of this market, but they all agree that it's going to be big, big, big.

The research group GartnerGroup Dataquest, for example, predicts that the U.S. ASP market will climb from about $1 billion in 1999 to more than $25.3 billion by 2004. For the near term, it would be hard to question their optimism. Previously cautious corporate customers seem ready to integrate ASPs into their day-to-day operations, and existing customers are investing more every day.

According to research done earlier this year by Zona Research, 45 percent of current ASP users expect 50 percent of the computing devices in their organizations to access ASP apps within one year. And 10 percent of all current users expect all of their computing devices to access ASPs within the year.

If investment patterns are any indication, there's little doubt that the ASP market will keep growing for at least another quarter or two. After all, ASP investments by venture capitalists (VCs) have been on a huge expansionist streak for the past six months and shown signs of continued growth.

In the fourth quarter of last year, for example, 38 ASPs took in about $367 million, according to PricewaterhouseCoopers' "Money Tree" survey. During the first quarter of 2000, the figures climbed to 52 ASPs and $559 million. And by the second quarter, the most recent period for which PricewaterhouseCoopers data exists, these numbers had climbed to 75 ASPs and $959 million.

But before drawing grand conclusions, it's worth asking: What is an ASP, exactly? The new trade group, the ASP Industry Consortium, defines an ASP as a firm which "manages and delivers application capabilities to multiple entities from data centers across a wide area network." Defined that way, an ASP can be any networking company delivering just about any server-based service, including Internet telephony, remote access to Enterprise Resource Planning standards such as that offered by SAP and specialized niche human resource apps used by small companies.

Clumping such varied niches into a single figure may make the industry seem more exciting. But there's a downside to this embrace-and-conquer approach: If any of these subsectors tanks, all of the ASP players could be in trouble.

"VCs tend to be sector-type investors," says Tracy Lefteroff, global managing partner at PricewaterhouseCoopers' venture capital practice. "When one sector falls out, a lot of stuff gets thrown out the door."

Unlike previous generations of Net businesses, ASPs won't have much more than a few months to get their acts together. Invest-ment funding will dry up if the ASPs aren't profitable, or close to it, within two quarters. The VCs have their fingers on the pulse, Lefteroff says. "If things aren't working out, they'll hear about it, and you're going to see a big drop-off. It could happen overnight."

Even the optimists are predicting a major ASP shakeout. Roughly 500 ASP players are in the marketplace, but within four years that number should plummet to 20, according to predictions by GartnerGroup. The ASP category is likely to be a casualty of the process. "The vendors will be different, the offerings will be different," says a GartnerGroup analyst. "Then we fully expect that the term 'ASP' will no longer be used to describe these vendors."

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