ASPs making a quiet comeback

The Application Service Provider (ASP) model, which many had given up for dead during the dot-com bust, is making a comeback. This article from CIO Update reports,

In the late 1990s, the birth of the ASP industry was marked by newcomers touting a radical, alternative software business model: selling the use of applications in a pay-as-you-go, a la carte model. Three-to-four years ago, at the peak of the dot-com boom, more than a thousand ASPs set out to change the IT world. Then, reality set in.

Vendors, exposed as being more hype than substance, were focused on growth rather than profit. And the quick signing of dot-com customers, which drove the financials of many early ASPs, proved to be the undoing of many service providers as the Internet bubble burst. By 2002/2003, the ASP market seemed all but dead, with a whopping 90 percent failure rate, according to industry analysts.

Despite the doom, a handful of players survived, because the basic software-as-service concept was viable despite poor execution. Pioneering pure-play vendors such as USinternetworking (USI), Corio, BlueStar Solutions, and Surebridge retrenched quietly as a number of mergers and acquisitions helped reshape the market, according to Gartner.

The pure-plays, however, aren't alone in this market. There is a second-wave of ASPs represented by vendors who deliver software over the Internet, or net-native service providers, such as Salesforce.com, NetSuite and Salesnet to name a few.

Rounding out the ASP industry are independent software vendors (ISVs), such as Oracle, PeopleSoft and SAP which have had their fits and starts in this market. "In the past, ISV hosted applications was done more as an obligation of doing business. Today, it's a growing piece of their business," said Jeffrey Kaplan, managing director at ThinkStrategies.

Although all three types of ASPs are enjoying an uptick in business, I have long felt that greatest potential was in that second category--the "net-native service providers." To me, for the ASP economic model to really prosper, it needs web-based solutions that are built from the ground up for delivery by an ASP. In other words, a single instance of the application serving multiple clients. I never saw the economic benefit of taking an application that is normally delivered as a software license, and moving it to an ASP, with a separate instance of the application required for each client. There is too much overhead required from the ASP for the numbers to make sense.

But when a single instance of the application can support multiple clients, the entire implementation effort, not to mention infrastructure costs, are cut dramatically for the ASP, allowing a true pay-as-you-go model.