Survival of the flexible: the ASP shakeout

ASPs are dying one after another. While experts agree that the market is ailing, few believe that it is dead. But even those who will survive this latest battle will not remain the same for very long.

All the outsourcing know-how in the world wasn't enough to prevent ASP pioneer HotOffice from officially shutting down tomorrow, sending shivers through those betting their future solely on the ASP model.

The demise of HotOffice follows the fall of eBaseOne, Pandesic, Red Gorilla and others, whose ambitious plans went bust this year. Analysts who follow the market and vendors that are committed to it insist the pure-play ASP industry isn't dead. But it is ailing.

"We would very much say the industry is going to survive," says Pascal Aguirre, an analyst at Adventis. "But ... it may not survive with the current players out there."

Of the more than 1,000 ASPs in the market today, the race is on to carve out niches, cut expenses and gain enough recognition to turn a profit before funding runs out.

But even for those that have done their homework and positioned themselves well, restructuring of some sort will be inevitable in many cases. Summit Strategies analyst Laurie McCabe says eight major ASPs--including Corio, Cyber.Solutions, EYT, Qwest and Usinternetworking--need to restructure their business offerings and pricing schemes if they expect to survive.

Convergence Is Key
One factor that could seriously affect the outcome of this battle is the convergence of telecom and data hosting. Analysts predict this convergence will drive a slew of mergers, acquisitions and partnerships in the ASP space next year.

"Nobody has a leg up now, because it's a new kind of business," Aguirre says. "They need to blend knowledge in communication, knowledge in computing and knowledge in software. While many players think they have the secret ingredient that makes it all work, actually the secret ingredient is the ability to blend those things effectively."

Rene White, senior VP of marketing for eConvergent, a business service provider, says ASPs are attempting to differentiate themselves by offering a bit more than the mere rental of apps. "We're seeing ASPs trying to change. But they're simply still just aggregating a set of applications versus delivering a completely different architectural approach to a solution," White says.

Need To Change
While the key to survival for some ASPs is to stay alive until they're swallowed by a bigger fish, industry executives expect 2001 to be frenzied for the whole market segment. That means radical changes in direction for many of them.

Consider the case of Xuma, which began life as an ASP designing custom e-commerce packages. The San Francisco company now calls itself an AIP, application infrastructure provider. "We called ourselves a custom ASP," recalls Xuma CTO Jamie Lerner. "I think it was primarily because we were struggling to find a bucket in which we would fit."

Lerner figures the ASPs that survive actually will make the most of their money by also offering system-integration services.

At the very least, many ASPs are in the process of getting their business in order. Futurelink, for example, hired Howard Taylor as president and CEO on Dec. 5, believing that professional management can make a big difference. Taylor's goal is to bring Futurelink to the break-even point by this time next year.

"We will be more conservative in managing our growth in terms of people, data centers, operations and how we expand globally," Taylor says.

Part of getting their business in order also includes reaching a broader range of customers. Pradeep Khurana, chairman and founder of three-year-old ASP Surebridge, is glad he didn't listen to those who urged him to court dot-com customers.

"We focused on middle-market companies that were around a while, and we've had no churn," Khurana says.

But in business, that's simply a prerequisite to long-term survival. The next race will go to the long-distance runners.