Application Service Providers: next step, survival

By David Walker (Google profile)

If 1999 and early 2000 represent the Internet's pre-Cambrian explosion - a blossoming of new types of life - then 2001 and 2002 feature a brutal Darwinian struggle for survival amongst Web businesses.

And nowhere is life more brutal than amongst the companies known as "application service providers", or ASPs for short.

ASPs offer a simple and enticing proposition: They provide the application code for selected pieces of your Web site - the search engine, say, or the Java chat service. They serve up the relevant Wep pages from their servers, but the pages look just like the rest of your site. They already have that code running for 20 (or 200) other clients, and they have already ironed out the kinks and added all the fancy features you need, so they can reap economies of scale. You sign a contract detailing what the ASP will provide, and then you send them a regular cheque - a cheque somewhat smaller than the one you'd have needed to write for a bunch of in-house programmers.

The usual Web hypesters spent 1999 and some of 2000 crowing about the coming ASP revolution. Meanwhile, a few uncomfortable details were emerging to spoil the picture.

• Individual Web site functions - the sort you might outsource to an ASP - often need to be linked together. Most of the products from today's ASP product won't talk easily to your Oracle database. Hired programmers can tie your Web site applications together much more easily.
• ASPs end up receiving data that both a site and its customer consider highly sensitive. So ASPs need rock-solid privacy guarantees, proof of data security and systems to transfer data into the hands of site operators. Surprisingly, many fail this test.
• ASPs need to create Web pages which deliver exactly the same look-and-feel as a site's own pages. Many currently fail this test, too.

On top of that, the past five months have seen one bigger issue emerge to threaten the whole ASP idea.

On average, the pundits say, your ASP is going out of business.

That's right. Out of business. Bust. Kaput.

That's what happened in August last year to Pandesic, one of the earliest and largest ASPs. Even backing from Intel and SAP couldn't save it from closure. And while Pandesic helped its customers find help elsewhere, other collapsing ASPs just disappeared. Customers of customer tracking and billing ASP Red Gorilla, for instance, suddenly found one October morning that the Red Gorilla Web site had disappeared and the phone and email weren't answered.

Pandesic's fall brought a wave of ASP scepticism. By late 2000, both Gartner Group and AMR Research produced figures claiming that 60 per cent or more of the current ASP crop would go bust. The market listens and reacts to that sort of forecasting.

So ASPs, still mostly short of customers, are spending 2001 and 2002 battling the disdain of many potential customers. And when they do find prospects, they have to respond to the nasty question: "What do I do if you go broke"?

That's the short-term picture for ASPs. The longer-term picture for ASPs looks much sunnier. The Web medium's low-margin nature will re-emerge through the first half of this decade. And as it does, Web firms will seek more and more ways to concentrate their expensive programmers on a small range of complex challenges. ASPs, meanwhile, will learn to slice costs while delivering the security and branding that users want, as well as a greater degree of integration with a site's home-grown applications. The ones that survive, that is.