Posted: 05/2000

Application Service Providers:
Creating a New
Business “Ecology”
By Ilene Kaminsky

According to the gospel of Cisco Systems Inc.
(www.cisco.com), companies inclined to exist together within an “ecosystem” facilitate the imminence of Internet-based application delivery.

This philosophy describes a retreat away from the “all-things-to-all-people” approach, toward a concentration on core competencies and strategies.

Idyllic? Perhaps. However, in the new economy–created through an ever-increasing reliance on the Internet for business-to-business transactions and communications–dependence shifts to service providers, consultants and specialists of all types. Hiring and retaining IT talent, deployment and maintenance of high-level networks, and concern over the initial expense of equipment as well as its obsolescence, comprise several significant factors that drive businesses into an ecological system of partners and affiliates.

These trends motivate enterprises to become early adopters of the ASP model.

The ASP industry is based on centrally managed, hosted and provisioned applications contracted to end user(s). Payment for such applications may take the form of a utility-type bill (pay for what you use), a monthly charge per user, or some other type of “leasing” arrangement.

ASP offerings range from large-scale enterprise resource management (ERM) tools for core functions such as human resources and accounting, to unified messaging, to simple web-based e-mail services.

In each case, a user accesses the application via the Internet and/or over some type of public or private (for example, WAN) connection to the host server.

ASPs provide “an easy and cost-effective way to obtain software and IT functions via the Internet or network at a monthly fee without the overhead of building an IT group and/or head count to support, operate and manage all technologies associated with deploying, managing and delivering the application service,” explains Neha Mirchandani of Cisco Systems.

The primary success factors for the ASP industry revolve around issues that impact the ASP suppliers and those enterprises using applications and delivery mechanisms from the
ASPs: reliability, scalability, cost, securityand SLAs. On both sides of the equation, vendors must address partnerships and affiliations from the standpoint of solving these key elements.

Network service providers, telcos and resellers have a great deal of experience with protecting customers (wholesale and end users) from the same types of critical functions that ASPs are experiencing now.

What’s the Market Worth?

Preliminary estimates by International Data Corp.
(www.idc.com) indicate the ASP market’s worth will hover at $4.5 billion by 2003. However, as the Nasdaq reached its 5,000-mark record in March, analysts realized quickly that 

most of the Internet- and technology-related market cap predictions were highly undervalued. Some industry experts feel a similar undervaluation of the ASP market will occur and is occurring.

Ovum Ltd.
(www.ovum.com), an independent research and consulting company, stated in a recent press release that “driven by the Internet, ASP is set to become a commonplace model for companies of all sizes within the next few years, and the ASP market will be worth over $136 billion by 2006. The new ASP and remote outsourcing industry will have far-reaching effects on the IT supply chain of software vendors, system integrators, ISPs and
telcos."

Big Bandwidth

The emerging communications ecosystem creates a new value proposition for wholesale service companies, such as carriers and network providers, and resellers, including VARs and ISPs, to participate in the ASP market in several ways.

Primarily, ASPs require a host of telecommunications services, such as high-bandwidth connectivity, collocation facilities, data warehousing and on-demand infrastructure provisioning. Industry consensus points to the strategic partner/affiliation model in order to continue market acceptance of hosted applications.

Roger Walton, associate Ovum analyst, is author of Ovum’s report, “Application Service Providers: Market Strategies for Telcos and ISPs,” which states “no telco or ISP can ignore ASP. Of course, it will be a huge opportunity to provide new services, but let’s not forget that it will also exert a growing influence on network traffic. If telcos and ISPs are to retain that network traffic from ASP users, they must either move up the value chain and offer services themselves, or partner with ASPs.”

A recent IDC report on the ASP market found that “most ASPs rely heavily on partnerships for either the application or the network infrastructure. However, many still are struggling with the question of who to partner with.”

Further the report states that “while partners play an important role in the ASP’s sales process, most ASPs are not utilizing all of their channel options.”

Broadband and wireless solutions wholesaled by carriers and network service providers may make some of these decisions easier and narrow the options considerably.

Since the cost of connectivity and access continues to decline, and bandwidth commodification continues to increase, the natural proclivity of carriers should be to strike deals to provide high-level network services that enable resellers, ISPs, VARs, and integration companies to sell applications through already-defined customer channels.

“There are many ISPs out there today that could greatly benefit from utilizing [bandwidth] as a resource. Carriers do all the heavy lifting, and the ISPs go out and sell it to their thousands of end users. Offering speed to market for the smaller reseller or ISP and offering scalable, reliable services that the larger reseller or ISP demands” is crucial to the proliferation of the ASP model, states Joseph
Cufari, director of ISP market management for Global Crossing Ltd. (www.globalcrossing.com).

In support of systems integrators, VARs, and other “network” vendors, Enron Broad-band Services’
(www.enron.net) spokesperson Kelly Hansen states that “while the ASP model has been predicted for some time … only recently have high-bandwidth alternatives to the Internet become available. As application hosting becomes the norm, companies will benefit through cost savings, competitiveness and access to the best applications for a particular need at a particular moment.”

Passing those benefits on to the customer, resellers can further penetrate existing customer bases with whom they’ve built a trust level. Trusting the source of the new application will be essential, especially when companies consider outsourcing enterprisewide applications.

However, where resellers have built a particular vertical channel, it becomes easier to institute a market-specific application that may address one or more of an industry’s simple concerns. Resellers also possess a certain amount of expertise in the vertical channel, as well as the bandwidth already in place to deliver the applications.

Carriers and network service providers realize the benefits of having the reseller and wholesale channel as the source for delivering applications that will utilize as much bandwidth as possible.

Cufari points out, “[The ASP] market has not been dominated by carriers such as Global Crossing that can bring much more to the table. We see ourselves as ASP enablers, not an ASP itself. We choose to support our customers, not compete with them. The future only becomes brighter as we continue to build out our networks and offer more enhanced services” for wholesale and resale channels.

For instance, if your company considers itself “a reseller of an independent software vendor (ISV), you have the option of becoming part of the ASP channel as a sales agent, or you have the opportunity to actually become an ASP” through the integration of applications into ready-made channels forged by agents and resellers, says Mirchandani.

“Resellers play a key role to the success of the ASP market. Resellers wanting to migrate from traditional product/solution selling to a service selling model could potentially [deliver] ASP solutions to their customer base,” Mirchandani says.

Network service providers must also make adjustments to how they provision bandwidth. For instance, the Enron Intelligent Network’s (EIN) embedded software intelligence, called the Enron Broadband Operating System (BOS), provides an extremely high quality of service.

The Enron BOS includes the ability to make reservations for bandwidth usage in anticipation of application needs. Additional network capacity can be added in real time as required by the applications. These features allow the EIN to differentiate service quality by type of application and will provide the users with a consistent level of service even in the event of heavy network traffic.

Big Business or Small Business?

Recognizing there are indeed only 500 Fortune 500 Companies, all possessing considerable amounts of barely navigable bureaucracy, it would seem the small to medium-sized business market (companies with 50 to 500 employees) presents an excellent opportunity for resellers.

First, distribution into the marketplace of services such as sDSL and other high-bandwidth solutions quickly are becoming the norm through VARs, systems integrators and ISPs.

Second, these companies mostly lack the necessary financial and personnel resources to institute IT departments to handle Internet-based applications and services.

Third, they require the same speed to adoption as large companies of enterprisewide ASP services in order to remain competitive.

The following technical and business ASP market drivers will allow ASPs and application vendors to flourish in the small to medium-sized business market by accessing the best and latest technology, deploying applications across the network faster, allowing for focus on core competencies rather than technology woes, improving market positioning and competitive advantages, and minimizing cost of ownership of applications as well as cost of upgrading.

Conclusion

With bandwidth and marketing channels in place, resellers and wholesale providers can take advantage of the coming wave of hosted applications. As IDC stated in its ASP market report, ” … network service providers’ sales staff will not be prepared to market and sell ASP services and service providers will look to their independent software vendor, systems integrator and channel partners to drive demand onto their networks.”

The industry is presented with the requirement to move toward an application delivery ecosystem–a symbiotic relationship among resellers, network service providers and the end user.

As the telecom industry’s prime product becomes more commodified and less profitable for resellers, a new ecological system will present itself that will provide delivery, sales and marketing methods, and will manage customers’ day-to-day business needs.

It is up to the industry to remain balanced and focused on core competencies to make it work.

Ilene Kaminsky is marketing vice president for HTE8 (www.hte8.com), a single-source broadband ISP working in the business-to-business market, as well as VARs and other resellers and agents. She can be reached at
[email protected].