Wohl Associates ASP Market Study
A Major Report on the ASP Market

Executive Summary

Executive Summary

In this study of the emerging Application Service Provider (ASP) market, Wohl Associates is investigating the beginning of a new market.

• We see the ASP market, in its broadest sense, as an enormous business opportunity. It has been estimated by other market research organizations, variously, as being in the $2 to $10 billion per year range by 2003.

• More importantly, we believe it has the potential to fundamentally change the way in which software is offered, delivered, supported, and used. Such fundamental changes could carry within them the ability to profoundly change the marketplace, creating new market makers and carrying old market leaders away from their prominent positions.

Themes

When we completed the research on which our conclusions in this study are based, we found four important underlying themes. We believe that by summarizing these themes, we can summarize the important elements of this long and detailed study.

Theme I: What’s an ASP?

While the term Applications Services Provider (or ASP) is widely used, with new and old companies attaching this descriptor to their business model every week, we find much confusion in actual business models, revenue models, and marketing messages.

Many types of different businesses call themselves ASP’s. This study attempts to define the different categories and sort selected vendors into appropriate categories to help explain these definitions. We doubt that we have reached any final word here, but merely a useful step in an evolutionary process.

Theme II: The Partnering Model

A few (very few) ASP’s seem to think an ASP should do everything, providing everything from virtual private networks to data centers, consulting to full application customization, integration, and support. We believe this point of view flies in the face of the resource and expertise requirements which would be required to successfully execute and scale the model.

Most ASP’s see this business opportunity from a partnering point of view. They anticipate leveraging a particular core competency and partnering with others to provide the solutions customers need.

This is not a matter of leaving to the customer the role of system integrator or general contractor (which most customers would like to avoid). Rather, it focuses on the ASP as facilitator, marketeer, and application provider, while assuming he will often partner with other focused experts for infrastructure (data centers, networking), specialized software, expert consulting services for particular products or vertical markets, and advanced levels of technical support.

Theme III: The Architectural Perspective – The Pendulum Swings

Many vendors and ASP current and potential customers comment that the ASP concept "looks a lot like time sharing." It does and, in some sense, it is. Time sharing, 21^st Century Style, with The Internet as the network, distributed servers, and millions of users, many self-identified.

We’d say, it’s a cyclical thing. Information systems tend to move back and forth, like a swinging pendulum, between the extremes of over-centralized and over-distributed, with a self-correcting mechanism guiding them toward a central balance point.

• What we’re seeing here is a move away from the over-distributed excesses of a PC world where information got locked into islands of computing and users became their own, often unwilling, systems administration slaves.

• In the server-centric world of the Internet, information can be readily shared and support could come from anywhere. The ASP concept is using the Internet as its enabling architecture.

Theme IV: Fee not Free

Many observers are concerned that Internet business models are not sustainable because they assume the Net is free, a place where information and services are given away and rarely paid for. This is true today on a broad, general level, but often contradicted sharply in specific instances.

As in any market, people will pay for what they value.

In this study we found that only a small percentage of the vendors we studied were giving away their products or services.

• 6.3% of all vendors offered software or services for free.

• 13.3% of Next Generation Applications, built for the Internet, (we call them Net.Gens) are free.

• Providers, as a group, offer 11.4% of their services for free, but Suppliers offer virtually nothing for free – some of their fees, of course, are partnership arrangements which may require waiting for profitability.

There are, of course, a number of ways of providing for indirect payments even in "free" software or service transactions. Vendors may receive affinity revenues or commissions from other products and services sold through their site or ad revenue from banner ads or more sophisticated forms of targeted and embedded marketing communications.

Interviewing Vendors and Customers:

In this study, we met with over 100 vendors and interviewed more than 60. We also interviewed 50 user organizations who are potential ASP customers and are conducting an ongoing project, interviewing actual ASP customers. In these interviews we made some interesting discoveries which provided insights and pointed our future research in specific directions.

Differences: "There are those that have smelled the roses

and those that have not yet noticed them."

Not surprisingly in such a young market, we find that much of the ASP activity to date is vendor-based.

• While the ASP customers we have interviewed are enthusiastic, they are a small percentage of all IT users.

• Many ASP customers are themselves high-tech companies, ranging from marquee names to tiny start-ups. Ordinary businesses may represent a harder sell.

• The ASP’s are themselves the most serious ASP customers, an excellent example of "the dogs eating (and in this case relishing) their own dog food."

• Potential customers are interested but still relatively uneducated and unaware of the business benefits of partnering with various types of ASP’s.

Differences between Types of Vendors

We have made an important finding: the ASP market is divided into two kinds of vendors:

1. Providers sell services to user organizations
2. Suppliers provide infrastructure and services to providers.

Further, we have discovered that these two groups have quite different characteristics and needs. For example, Suppliers in our study are about 10x the size (in number of employees) as Providers.

In this study we explore these differences and discuss ways to exploit them in the marketplace.

In Summary

We are certain that the ASP Market represents a real and viable business opportunity that is already under way. We expect 2000 to be an important year for this market. Hundreds, perhaps thousands, of companies will enter the market, but far more important, the energy of all this activity is creating a compelling new platform that customers are beginning to notice.

We believe 2000 will be a year when vendors will be investing in educating the market and developing partnerships. In the years that follow the market will then open up and grow quickly as customers seek to take advantage of an opportunity that allows them to spend less, do more, and focus their resources and attention on their own businesses.

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Entire contents © 2000  by Amy D. Wohl. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden.