ASPs Still Searching for the Right Mix

Vendors from all corners of the technology arena are jumping through hoops to be part of the developing application service provider (ASP) market. And in some cases, this means they're struggling to forge new identities while keeping their old ones intact.

Why this monumental effort? Market research firms are projecting a substantial revenue opportunity for ASPs. Dataquest in San Jose predicts the ASP market will create revenue reaching US$22.7 billion by 2003. Companies such as AT&T, Intel Corp., MCI WorldCom Inc., Microsoft Corp., Oracle Corp. and Sprint want a piece of that billion-dollar pie. Yet most vendors are still trying to figure out what application service model works best for them and their customers.

In November, Microsoft stepped into the hosted applications business through the creation of the Microsoft Office Online partnership program. Through the program, 15 service providers have agreed to host Microsoft Office 2000 software for business users. Pricing and target customers are chosen by individual service providers, which include Concentric Network, FutureLink, TeleComputing and USinternetworking. These service providers will offer their customers access to hosted Word, Excel or Access applications over the Internet, says George Meng, a Microsoft product manager.

Despite this program's launch, Microsoft seems to be struggling with how to cope with hosted applications and how to best address the market. It believes users at midsize to large companies will continue storing Microsoft applications locally. A business traveler may want Word or Excel right on his machine rather than dial in to an ASP for access, Meng says.

Plus, Microsoft believes some users might prefer buying the applications outright rather than from an ASP. So Microsoft plans to sell hosted Office applications directly to small business users through its bCentral portal (http://www.bcentral.com). In a sense, that will make Microsoft a competitor to its 15 Microsoft Office Online program partners. However, Microsoft has yet to determine how to set up software licensing on bCentral. Whether Microsoft or customers would own the Office 2000 software license is not clear.

The software giant is viewing the application services market conservatively.

"We do believe it is an emerging market and not something people will be switching to wholesale overnight," Meng says. "It will be two to five years before more significant changes will happen."

Oracle seems to have a clearer handle on how to provide hosted applications.

That's probably because Oracle isn't worried about cannibalizing its customer base by providing hosted applications, says John Repko, vice president of operations for Oracle Business Online.

Repko maintains the small to midsize business companies Oracle Business Online targets would otherwise not be Oracle customers. They couldn't afford the cost of buying, implementing and maintaining Oracle's high-end enterprise resource planning (ERP) and customer relationship management (CRM) applications.

What's more, Oracle Business Online offers no software customization, although the base software is the same. That means most Fortune 500 companies, because they change the source code of their ERP or CRM applications upon implementation, will find it virtually impossible to host an application with Oracle Online Business rather than buying the software from Oracle proper. And that, in turn, safeguards Oracle's traditional revenue source.

With the Oracle hosting service, a customer pays a software license fee based on the number of users who will access the application but doesn't worry about maintaining the application. Instead, the customer pays Oracle Business Online a monthly service charge.

Oracle's ASP model differs from the approach taken by competitors such as Corio and TeleComputing, both of which bundle the software licensing fees into monthly bills. While ASPs own the software license, customers own the content, these providers say.

Traditional data service providers make obvious ASPs, but that doesn't mean hosting applications come naturally to players in this market segment.

Sprint follows one approach, AT&T and MCI WorldCom subscribe to another. In October, Sprint announced that it's teaming with Deloitte Consulting to offer business users hosted ERP and CRM applications from software companies such as PeopleSoft, SAP and Siebel Systems. Sprint brings data center and network services expertise to the table, while Deloitte delivers application support and maintenance know-how.

Sprint and Deloitte will target Fortune 500 customers rather than smaller companies. They'll do so by pitching customization of the hosted applications.

Users would likely pay a premium for the tweaks because that software could not be used for other users, flying in the face of the one-to-many hosted application model, says Meredith Whalen, an analyst at International Data Corp., in Framingham, Massachusetts.

Meanwhile, AT&T is busily building data centers so it can host Web servers for business users and application servers for ASPs, says Oleh Danyluk, general manager of next-generation IP services at AT&T. In other words, AT&T will provide hosting facilities to ASPs rather than get into the ASP business directly.

UUNET is hosting application servers for providers such as TeleComputing, a worldwide ASP based in Fort Lauderdale, Fla. TeleComputing stores its application and database servers exclusively at UUNET data centers, and customers can only use UUNET's dedicated Internet access services to get to rented applications.

Analysts predict more ASPs will align themselves with specific providers. In fact, Applicast, an ASP in Mountain View, California, mostly works with GTE Internetworking, while Portera, an ASP in Campbell, California, works exclusively with Intel Online. Intel Online? Yes, even chip and processor giant Intel wants a piece of the hosting pie.

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