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ASPs - Creating a New Business Ecology
BY Ilene Kaminsky

Appeared in Phone + Magazine, May 2000 Issue


According to the gospel of Cisco Systems, companies inclined to exist together within an "ecosystem" facilitate the imminence of Internet-based application delivery. This philosophy describes a retreat away from the "all-things-to-all-people" approach, towards a concentration on core competencies and strategies. Idyllic? Perhaps. However, in the new economy, created through an ever-increasing reliance on the Internet for business-to-business transactions and communications, dependence shifts to service providers, consultants, and specialists of all types. Hiring and retaining Information Technology (IT) talent, deployment and maintenance high-level networks, and concern over the initial expense of equipment as well as its obsolescence, comprise several significant factors driving businesses into an ecological system of partners and affiliates. These types of trends are also motivating enterprises to become early adopters of the ASP model.

The Application Service Provider (ASP) industry is based on centrally-managed, hosted, and provisioned applications, contracted to end-user(s). Payment for such applications may take the format of a utility-type bill (pay for what you use), a monthly charge per user, or some other type of "leasing" arrangement. ASP offerings range from large-scale Enterprise Resource Management (ERM) tools for core functions such as human resources and accounting, to unified messaging, to simple web-based email services. In each case, a user accesses the application over the Internet and/or over some type of public or private (i.e. Wide Area Network) connection to the host server. ASPs provide "an easy and cost effective way to obtain software and IT functions via the Internet or network at a monthly fee without the overhead of building an IT group and/or head count to support, operate and manage all technologies associated with deploying, managing, and delivering the application service," explains Neha Mirchandani of Cisco Systems.

The primary success factors for the ASP industry revolve around issues that impact both the suppliers to the ASPs and those enterprises utilizing applications and delivery mechanisms from the ASPs: reliability, scalability, cost, security, and Service Level Agreements (SLAs). On both sides of the equation, vendors must address partnerships and affiliations from the standpoint of solving these key elements. Network service providers, telcos, and resellers have a great deal of experience with protecting customers (wholesale and end-users) from the same types of critical functions as ASPs are experiencing now.

ASP ecosystem participants include a variety of partners including:

  • Independent Software Developers and Vendors
  • Hardware Manufacturers
  • Co-location and Data Warehousing Facilities
  • IT Consulting and Staffing Firms
  • Project Management Outsourcing Companies
  • Systems Integrators
  • Value Added Resellers
  • Network and Carrier Service Providers
  • Wireless Broadband Service Providers
  • Vertical Channel Experts
  • OSS Suppliers
  • Customer Support Systems
  • Network Support Services
  • Billing Platforms and Software
  • Training and Education
What's the Market Worth?
According to preliminary estimates by IDC, the ASP market's worth will hover at $4.5 billion by 2003. However, as the NASDAQ reached its 5,000 mark record in March, analysts realized quickly that most of the Internet- and technology-related market cap predictions were highly undervalued. Some industry experts feel there is a similar undervaluation of the ASP market. Ovum, an independent research and consulting company, stated in a recent press release that, "Driven by the Internet, ASP is set to become a commonplace model for companies of all sizes within the next few years, and the ASP market will be worth over $136 billion by 2006. The new ASP and remote outsourcing industry will have far-reaching effects on the IT supply chain of software vendors, system integrators, ISPs and telcos."

Big Bandwidth
The emerging communications ecosystem creates a new value proposition for wholesale service companies, such as carriers and network providers, and resellers, including VARs and ISPs, to participate in the ASP market in several ways. Primarily, ASPs require a host of telecommunications services, such as high-bandwidth connectivity, co-location facilities, data warehousing, and on-demand infrastructure provisioning. Industry consensus to date points to the strategic partner/affiliation model in order to continue market acceptance of hosted applications. Roger Walton, associate Ovum analyst, is author of Ovum's report Application Service Providers: Market Strategies for Telcos and ISPs stated that "no telco or ISP can ignore ASP. Of course it will be a huge opportunity to provide new services, but let's not forget that it will also exert a growing influence on network traffic. If telcos and ISPs are to retain that network traffic from ASP users, they must either move up the value chain and offer services themselves, or partner with ASPs."

In fact, a recent report on the ASP market by IDC found that "most ASPs rely heavily on partnerships for either the application or the network infrastructure. However, many are still struggling with the question of who to partner with." Further the report states that "while partners play an important role in the ASPs sales process, most ASPs are not utilizing all of their channel options." Broadband and wireless solutions wholesaled by carriers and network service providers may make some of these decisions easier and narrow the options considerably.

Since the cost of connectivity and access continues to decline, and the commodification of bandwidth continues to increase, the natural proclivity of carriers should tend towards striking deals to provide high-level network services, enabling resellers, ISPs, VARs, and integration companies to sell applications through already-defined customer channels. "There are many ISP's out there today that could greatly benefit from utilizing [bandwidth] as a resource. Carriers do all the heavy lifting, and the ISPs go out and sell it to their thousands of end-users. Offering speed to market for the smaller reseller or ISP and offering scalable, reliable services that the larger reseller or ISP demands," is crucial to the proliferation of the ASP model, states Joseph Cufari, Director of ISP Market Management for Global Crossing.

In support of systems integrators, VARs, and other "network" vendors, Enron Broadband's spokesperson Kelly Hansen states that "while the ASP model has been predicted for some time...only recently have high-bandwidth alternatives to the Internet become available. As application hosting becomes the norm, companies will benefit through cost savings, competitiveness, and access to the best applications for a particular need at a particular moment." Passing those benefits on to the customer, resellers can further penetrate existing customer bases with whom they've built a trust level. Trusting the source of the new application will be essential, especially where companies consider outsourcing enterprise-wide applications. However, where resellers have built a particular vertical channel, it becomes easier to institute a market-specific application that may address one or more of an industry's simple concerns. Resellers also possess a certain amount of expertise in the vertical channel, as well as the bandwidth already in place to deliver the applications.

Carriers and network service providers realize the benefits of the reseller and wholesale channel as the source for delivering applications that will utilize as much bandwidth as possible. Mr. Cufari points out, "[the ASP] market has not been dominated by carriers such as Global Crossing that can bring much more to the table. We see ourselves as ASP enablers not an ASP itself. We choose to support our customers not compete with them. The future only becomes brighter as we continue to build out our networks and offer more enhanced services," for both wholesale and resale channels. For instance, if your company considers itself "a reseller of an Independent Software Vendor (ISV), you have the option of becoming part of the ASP channel as a sales agent, or you have the opportunity to actually become an ASP," said Neha Mirchandani, through the integration of applications into ready-made channels forged by agents and resellers. "Resellers play a key role to the success of the ASP market. Resellers wanting to migrate from traditional product/solution selling to a service selling model and could potentially [deliver] ASP solutions to their customer base," stated Ms. Mirchandani.

Network service providers must also make adjustments to how they provision bandwidth. For instance, the Enron Intelligent Network's (EIN) embedded software intelligence, called the Enron Broadband Operating System (BOS), provides an extremely high quality of service. The Enron BOS includes the ability to make reservations for bandwidth usage in anticipation of application needs. Also, additional network capacity can be added in real-time as required by the applications. These features allow the EIN to differentiate service quality by type of application and will provide the users with a consistent level of service even in the event of heavy network traffic.

Big Business or Small Business?
Recognizing that there are indeed only 500 Fortune 500 Companies, all possessing considerable amounts of barely-navigable bureaucracy, it would seem that the small- to medium-sized business (SMB) market (companies with 50-500 employees) presents an excellent opportunity for resellers. First, distribution into the marketplace of services such as sDSL and other high-bandwidth solutions are quickly becoming the norm, through VARs, systems integrators, and ISPs. Second, SMBs mostly lack the necessary financial and personnel resources to institute IT departments to handle Internet-based applications and services. Third, SMBs require the same speed-to-adoption as large companies of enterprise-wide ASP services in order to remain competitive. The following technical and business ASP market drivers that will allow ASPs and application vendors to flourish in the SMB market:
  • Access to the best and latest technology
  • Faster deployment of applications across the network
  • Allows for focus on core competencies, rather than technology woes
  • Improves market positioning and competitive advantages
  • Minimizes cost of ownership of applications as well as cost of upgrading
Conclusion
With bandwidth and marketing channels in place resellers and wholesale providers have the chance to take advantage of the coming wave of hosted applications. As IDC stated in their ASP market report, "network service providers' sales staff will not be prepared to market and sell ASP services and that service providers will look to their Independent Software Vendor, systems integrator, and channel partners to drive demand onto their networks." The industry is then presented with the requirement to move towards an application delivery ecosystem: a symbiotic relationships between resellers, network service providers, and the end-user. As the telecom industry's prime product becomes more and more commodified and less profitable for resellers, a new ecological system will present itself for methods of delivery, sales and marketing, and solving day to day business needs of customers. It is up to the industry to remain balanced and focused on core competencies to make it work.
"Driven by the Internet, the ASP is set to become a commonplace model for companies of all sizes within the next few years, and the ASP market will be worth over $136 billion by 2006."

 

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