There's Something About ASPs - Industry Trend or Event

Application service providers are taking baby steps.

Trying to count how many application service providers are in business today is like trying to count flakes in a snowstorm: You can't keep up. Analysts' estimates vary from 400 to 1,300, with more startups and established companies entering the fray all the time.

Despite the constant influx of new competitors, some ASPs have begun to emerge as market leaders. At the top of the heap, companies such as Corio, eOnline, Qwest CyberSolutions and US-internetworking are going after major accounts from Fortune 500 companies. At the same time, other groups of ASPs offer services to specific sectors like health care. Still another bunch focuses on horizontal applications, such as human resources or business communications, marketing their services across industries.

Looming over these are various telecommunications companies that appear poised to get into the ASP game. Some, like AT&T, have already entered the ring through partnerships with providers. Others, like Qwest, have done deals with major consulting firms. Qwest CyberSolutions is a joint venture between Qwest and KPMG, the Big Five accounting and consulting firm.

What's drawing them all into the field is the lure of big greenbacks. Worldwide income for the market is forecast at $3 billion this year, up threefold from last year, says Ben Pring, a principal analyst at Gartner Group/Dataquest. He figures roughly 487 ASPs are competing for that money, with the top four - Corio, eOnline, Qwest and USi - taking in about $400 million in combined revenues last year.

Beyond that, ASP revenues are expected to reach $7.8 billion by 2004, says Amy Mizoras, a senior analyst with IDC. To achieve that growth, ASPs will increasingly need to find ways to establish brand identity for themselves, she adds. More providers will offer the same applications, so they're going to have to find other ways to stand out. It's all part of growing up for new kinds of businesses and customer needs. "It's still really early," notes Mizoras. "Companies are starting to come out on the high-end enterprise arena."

Getting to the top of the market has proven fruitful. For eOnline, alliances with major consulting firms like Arthur Andersen and Grant Thornton have produced 70 percent of business leads, says CEO Adrian lonel. The company has formed 24 such partnerships since its founding in May 1999. In that time, it's grown from 12 employees to 250, and now has 52 clients, It expects to sign up new accounts at the rate of 17 to 18 a month, lonel adds. As a full-service enterprise ASP, eOnline is going after market leaders in the Fortune 1000.

Competitor USi recently inked a deal with AT&T that will have Ma Bell selling USi services to potential customers, says Chris Walker, USi's director of communications. "You'll see more and more of these deals" as ASPs piggyback their growth on established telco brands, he predicts.

Although such partnerships will help growth, ASPs still need to distinguish their services from competitors. "Your ability to thrive is based on your ability to differentiate yourself and your core values," says Walker. USi is seeing 54 percent of its revenues coming from so-called large enterprises - those with 1,000 employees or more. It's snagged such traditional companies as Blue Cross/Blue Shield of Michigan, thanks largely to the cost savings and speed of implementation it offers, according to Walker. Blue Cross estimated taking on USi for a financial management solution was 72 percent cheaper than trying to install a system in-house. It took USi a few months to have the system running, compared with the two years required for internal development.

While some companies have found customers in the traditional economy, 2-year-old Corio has targeted the dot-com space as its market, snagging such big names as Excite@Home and Lycos, says Mitch Kristofferson, director of marketing. Fast-growing tech companies don't have the time or resources to implement major applications and so are natural prospects for ASPs. "The adoption in this space has been phenomenal," he adds.

But as it garners tech clients, Corio has decided to tap other industries that have the same need for outside IT help. First in Corio's sights have been professional services firms and manufacturers, especially companies moving to high-tech manufacturing processes, Kristofferson notes. "These are R&D, product development and marketing companies" that would just as soon outsource tasks such as IT support because it's not one of their core competencies, he argues.

Kneko Burney, director of e-business infrastructure and services with Cahners In-Stat Group, questions whether ASPs will ever become the provider of choice for IT services among large corporations. A recent survey she conducted for Cahners found that U.S. businesses with 100 or more employees are more likely to turn to stalwart technology providers and want more than just hosted applications. "You might see a lot of ASPs, but they're going to be very far in the background," aligned with major telcos, predicts Burney.

Some ASPs agree they can't immediately establish the level of credibility they need to go after large U.S. corporate business. That's why so many have turned to the small-to-midsize market to establish their reliability and operating credentials.

FINDING THE RIGHT SPOT

Tim Pickard, VP of the ASP Industry Consortium, a trade group for the ASP sector, points out the midmarket is the "sweet spot" for most ASPs. "Branding is going to be increasingly important" to reach this market as ASP competition heats up, says Pickard, who also is market development director for Vistorm (formerly Esoft Global), a British ASP.

FutureLink is one provider going after small and midsize companies "where the cost of IT is disproportionately high," says Roger Gallego, senior VP of its strategic business unit. But with so many competitors, FutureLink decided to stand out by partnering with Microsoft. Together, the two have held a Web seminar to discuss the function of an ASP. In addition, "we've aligned ourselves with Microsoft by selling through its channel," adds Gallego.

EAlity has been portrayed as aiming for the small business market as well. But Colleen Brodbine Boyarsky, VP of client services, says the company is featuring its high-profile clients in marketing efforts to increase its credibility and allow it to go after larger customers. "The market is very chaotic right now," she says. "We are trying to not be identified with this chaos."

Kim Crane, senior VP of marketing with Interliant, says her company is also targeting small-to-midsize businesses, but focusing on certain industries and markets. Her company offers customer relationship management, security, messaging, knowledge management and professional services applications.

Crane's marketing efforts are aimed at what she calls the four Cs -- CEOs, COOs, ClOs and CTOs -- along with IT directors. Interliant started its multimillion-dollar campaign in April and will advertise the rest of the year in influential business publications like the Wall Street Journal and Business Week, as well as in the tech press. "We're a pure-play ASP," says Crane. "We're using our branding campaign to say what we are."

Rather than focus on company size, Cirqit.com is pushing applications that relate to one area: business communications. "We cover it from end to end," says Judith M. Guido, chief marketing and communications officer. "We really want to be known as the people who wrote the book on our topic."

Enterprise ASPs, like eOnline and others, scoff at niche competitors, contending companies want to be able to deal with one outside provider across all areas, not one for each department. To that, Guido shoots back: "I always see a need for a specialist" In the long run, she may be right. Many analysts see the ASP sector as big enough to have major players at the top, some middle-market firms and some specialists further along the food chain.

For now, this remains a nascent facet of the Internet Economy. "ASPs are in version 0.5 of their business, not even to yet," says Bobby Patrick, VP of strategy at Digex, a host for applications service providers.

John Frank (john_n_frank@yahoo.com) is a freelance writer in Chicago.

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