Threat of ASP meltdown as vendors stampede to enter market

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The worldwide application service provider (ASP) industry is poised for explosive growth, as the market is forecast to grow from $1 billion in 1999 to more than $25.3 billion by 2004, according to Dataquest. The worldwide ASP market is on pace to reach $3.6 billion in 2000.

“The ASP market represents a major computing revolution with the power to dramatically redraw today’s IT ecosystem based on the delivery of application services over a network,” said Ben Pring, principal analyst, Dataquest. “Software licensing models, application and networking architectures, and vendor strategies will all be impacted greatly. Eventually, business services wrapped around application functionality will be most useful to customers.”

Within the ASP market there is the emergence of a new architecture for web native software – software that exists purely on the internet and enables the delivery of business services.

“For enterprises of all sizes, the opportunity to secure Tier 1 application functionality while forgoing significant infrastructure, software and personnel investment is alluring, as is the lower total cost of ownership, which is estimated between 30% and 70%, depending on the application and the services provided,” said Pring.

The worldwide ASP market has been led by the North America region, but the market will become much more global in the next few years. Dataquest analysts said the internet is accelerating the adoption of new applications and technologies outside the United States.

“In the pre-internet world, it was common for the European and Asian markets to lag behind the United States,” said Pring. “However, by 2004, these markets will be as large and as mature in Europe and Asia/Pacific as in the United States. European and Asian markets will be more orientated toward mobile ASP applications than the United States. Mobile telecom operators will develop more sophisticated, business-user-focused applications, delivered via an ASP market. The greater penetration of mobile/cellular users outside the United States will produce a fertile worldwide marketplace to exploit.”

While the industry will continue to show strong growth rates through to 2004, the ASP industry is in a precarious phase in its development.

“The next 12 months may very well determine the future prospects of the ASP model, as ASPs scramble to position themselves in the market, chase down an ever-receding customer base and replace grandiose marketing claims with concise, sober-minded business propositions,” concluded Pring.

Gartner’s consolidation scenario for the ASP market is brutal. The industry shift toward delivering software as a service has created a gold rush stampede of vendors entering the ASP market, most of whom have no idea of what it will take to survive for the longer term.

Today, there are 480 retail ASPs playing in the emerging $3.6 billion industry, with more entering the market every day. By the end of next year, 60% of these will be gone because of bankruptcy, lack of venture capital, mergers and traditional competition. By 2004, only 20 of those 480 ASPs will remain as enterprise-class, full-service retail ASPs, and less than 100 will offer successful point and product solutions.

“Today’s dot-com collapses will pale in comparison to the effect that the pending ASP meltdown will have on organizations that use these ASPs,” said Audrey Apfel, vice president at Gartner. “When dot-coms collapse, they implode and have little effect on their customers and other industries. The ASP consolidation will have a domino effect, affecting business systems like ERP and accounting systems for companies that have outsourced these functions to ASPs. Then, those failures can quickly spread the damage along supply chains.

“The failure of Pandesic is only the tip of the iceberg,” Apfel added. “We expect many other major ASP brands will fail during the coming months. It’s a lot like the television show ‘Survivor’– each month that goes by will see the departure of more ASPs with the remaining ones sharing this prosperous market.”

Gartner has developed a six-layer ASP model that provides a tool for helping to understand where the winners and losers will come from.

“Many of today’s ASPs make the mistake of trying to do everything, including owning the data center. We believe this is a critical mistake and not a sustainable strategy in most cases. The successful ASPs will focus on no more than two layers of our model,” predicted Apfel.

The post-ASP collapse landscape will look nothing like the ASP marketplace today. “There will be few viable vendors, the vendors will be different, the offerings will be different, and then we fully expect that the term ‘ASP’ will no longer be used to describe these vendors,” concluded Apfel.

The future of the ASP industry will be analyzed during Gartner’s Symposium/ITxpo 2000, October 16-20 in Lake Buena Vista, Florida. This event is the IT industry’s largest conference, giving business leaders a look at the future of IT. Some of the speakers at this year’s event include Hewlett-Packard’s CEO, Carly Fiorina; Sun Microsystems’ CEO, Scott McNealy; and Microsoft’s CEO, Steve Ballmer.

More information on the ASP market is available in the Dataquest Market Trends report entitled ‘The State of Today’s Application Service Provider Marketplace’.

Gartner Symposium

Gartner

Dataquest

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