It's an ASP arms race

Find out what the future holds for the ASP market and the ASP strategies used by several big companies.

The application service provider market is rapidly transforming into an arms race fought by those with the deepest pockets and the longest list of allies.

But if the stakes of entry are high, so are the potential spoils for the winners. At stake is the future of software distribution, not to mention a potentially successful model for selling services to small businesses and a huge opportunity in data mining.

After two years of false starts, the ASP business is becoming real, and those that are not well positioned within the next few months are in danger of falling by the wayside. It is this struggle for survival that has set off a mad dash to cement relationships with the right partners--ISVs, data centers, integrators, resellers, and agents.

As we went to press, Microsoft executives were disclosing an ASP strategy at the company's Fusion conference in Atlanta. Meanwhile Intel Online Services on Monday is expected to announce an exclusive partnership with AppGenesys, an iXL Enterprises spin-off.

The challenge for ASPs is to deliver apps that are tuned for the Internet--rather than merely host legacy apps that weren't designed with the Web in mind.

"We as an industry didn't anticipate the Web taking off the way it has," says Mark Swanson, CEO of AppGenesys, which spun out of iXL Enterprises in March and unveils an exclusive partnership with Intel Online Services on Monday. "In late 1998 all the boards of the Fortune companies ordered an Internet strategy, and we [iXL and other Web integrators] were all flooded with business.

"But putting up applications was like putting out one-off [race cars] that were not tuned properly and had no gauges," he continues. "Then when the oil pressure goes out, the customer calls the race track owner and says the car isn't working. It wasn't that way in 1996, when I built a Web app, put it on a server in the corner, and if the server overheated I bought a fan."

Companies calling themselves ASP aggregators and ASP enablers are now handling customers' mission-critical business and those customers are demanding better service. Swanson says that too many are caught in a finger-pointing exercise as they run between the developers who created their applications and the data centers that host them, wanting to know why their applications get more sluggish the more they are used.

Already, casualties of this battle are emerging. An unconfirmed report last week had Global Crossing trying to sell its data center business to competitor Exodus Communications. A source at Exodus confirms that the company is mulling several data center acquisitions. Global Crossing declined to comment.

As Exodus expands its own floor space, potential rivals are pushing upstream. Feisal Mosleh, VP of the ASP aggregator Agiliti, says there is 1 million square feet of data center space sitting empty. "It's become a commodity, like sugar. Imagine the price drop," he says. "Unlike other aggregators we do have our own data center, but we sell high-end managed services."

Mosleh left Jamcracker, an ASP aggregator founded in 1999 where he served as VP of marketing, and joined Agiliti a few weeks ago. Agiliti's business model is more advanced, allowing him to focus solely on marketing. Mosleh is providing air cover for Agiliti's partners, which are reselling and implementing Agiliti's ASP services across the country as Agiliti continues to open new offices. ERP and hosted exchange services are doing especially well.

Mosleh says Agiliti and Jamcracker won't compete for at least a year because they offer different services and the market is large. In addition, while Jamcracker tends to focus on technology, Agiliti offers both established client/server applications like those from Great Plains and new Web applications like those from BizTone. "We look at what's selling well already and approach the market from that perspective," he says.

Jamcracker, meanwhile, is not standing still. Business development director Feyzi Fatehi says that some of Jamcracker's young founders had to learn to take their eyes off direct sales and focus on partnering to grow business. Jamcracker on Monday is set to announce its first partner program.

Jamcracker has technology that "glues" ASP services together. It boasts more than 50 partnerships with ASPs, ISVs like BEA Systems, business enablers like Support.com, and strategic partners like Solect, which has an IP billing engine. But it has not emphasized go-to-market partners until now. A new Channel Advisory Council will help Jamcracker develop that side of its business. The council includes a CLEC, two systems integrators, a Web integrator, and a technical VAR in addition to Sam Jadallah, who headed Microsoft's channels before he joined the Internet Capital Group and agreed to fund Jamcracker.

"We're working on vertical markets but it's too early for that," says channel director Robin Singh. "But we're very selective and we don't penalize our direct sales force for working with our channel." Adds Fatehi, "In a land grab that does not make sense."

AppGenesys, meanwhile, is the first reseller of Intel Online Services and will help Intel figure out what applications it should focus on. The companies are pooling their skills and have developed a multi-stage "landing process" that allows stress-tested, exact copies of applications to be deployed in any of Intel's data centers with the push of a button.