The application service provider market is in such a state of flux that 60% of existing ASPs will fail by the second half of next year, according to an industry analyst speaking in Orlando.
Gartner Group ASP watcher Rita Terdiman says depending on how you define the term ASP, there may be nearly 500 such companies in existence. There will likely be only about 20 big ones by 2004, Terdiman says.
Why so much consolidation? One big reason is that most ASPs are still trying to figure out the best business model, one that will enable them to make money and satisfy customers at the same time. In the meantime, many of them will disappoint their early customers because of a lack of quality-of-service guarantees, among other things.
"This is a very immature model," she says.
But Terdiman expects customers to use ASPs in greater numbers to help reduce costs, address IT skills shortages and roll out applications more quickly.
Despite the demand for their services, many ASPs are struggling. Some have resorted to layoffs, others to mergers. Meanwhile, venture capital funding for ASPs has largely dried up after flowing into such service providers in recent years, Terdiman says.
Gartner defines ASPs as companies that provide for the online delivery of applications and services in a one-to-many fashion. The market has it roots in application hosting. Then came web-enabled versions of existing applications. What is emerging now, Terdiman says, are applications built specifically as ASP offerings, taking full advantage of being offered as services. She cites companies such as NetLedger and eAlity as being developers of these native network services.
"These guys have designed software from scratch specifically designed around the capabilities of the Internet," she says.
Among her other points:
ASP offerings today can be broken down into five categories: personal productivity programs; suites; native network applications; vertical application services; and collections of services from multiple ASPs.
Hardware vendors such as Sun have been among the most aggressive established companies in pursuing the ASP opportunity by offering to supply ASPs with infrastructure.
Traditional outsourcers, on the other hand, have been laggards. These companies are used to customising their offerings, whereas ASP offerings are typically generic. However, outsourcing firms such as EDS may actually be best positioned to do well as ASPs given the application support infrastructures they have already built.