Gartner Group, a leading monitor of IT sector trends, has predicted a sharp fall in the number of Application Service Providers (ASPs) in the $3.6bn (£2.4bn) global market. The research company's claims are given credence in the light of the recent failure of Pandesic, a major ASP brand in the US.
Pandesic, the first high-profile ASP to go under, announced that it was winding down its operations on 28 July, following the resignation of its president and chief executive. The company, which employed about 400 people in the US, Japan and the UK, continues to operate a skeleton staff to honour contractual obligations to its existing clients, but is seeking to transfer users to an alternative ASP. The announcement read: "Pandesic does not see a timely road to profitability due to slower than anticipated market acceptance of business-to-consumer e-commerce solutions."
Gartner's analysis identifies an industry shift towards developing software as a service, which has created a gold rush-style glut of vendors entering the market.
Currently there are about 500 ASPs in the world renting out software to consumers via the internet. Gartner anticipates that 60% of these companies will cease trading by the end of 2001, having fallen prey to bankruptcy, lack of venture capital, mergers and the forces of competition. Plus, according to Gartner, by 2004 only 20 or so of today's contenders will remain as full-service retail ASPs and fewer than 100 will offer a successful business-to-business service. By then Gartner expects the global ASP market to be worth about $25bn (£16.8bn), compared to its $1bn (£671m) value at the end of last year.
Dataquest, a wholly-owned subsidiary of Gartner, has also conducted research into the market. According to Ben Pring, principal analyst for Dataquest's Application Services Worldwide programme, the next 12 months might very well determine the future prospects of the ASP model.
"We will see ASPs scrambling to position themselves in the market, chasing down an ever-receding customer base and replacing grandiose marketing claims with concise, sober-minded business propositions," he says.
Audrey Apfel, vice president and research director at Gartner, said Pandesic's failure was just the tip of the iceberg. She warned that when ASPs began to fail, their customers would be badly hit. She also said that, while the implosion of dotcoms had little effect on their customers and other industries, the ASP consolidation process – which she likened to Survivor, the US version of hit TV series Big Brother – would have a domino effect.
According to Apfel, the failure of a large number of ASPs will affect clients' outsourced business and accounting systems, so the disruption will propagate itself along the supply chain. "Today's dotcom collapses will pale in comparison to the effect that the pending ASP meltdown will have on organisations that use these ASPs," she says.
Heidi Izzard, UK business development manager for Elite Information Services International, one of the largest companies to enter the legal ASP market says: "Everybody seems to be starting up ASP services at the moment and it is probably very true that some of the small companies will fail." Elite has already signed up one medium-sized firm in the US, San Francisco-based Murphy Pearson.
The company's vice president, Daniel E Tacone, says there are another 40 proposals in the pipeline relating to large US firms. "We initially thought the biggest play would come from the small to medium-sized firms," he says.
"But we have had tremendous interest from large firms that have conducted ROIs [Return On Investment studies] and decided they could save money on applications and focus their investment on e-business." Tacone says he expects about half a dozen large firms to buy Elite software products via an ASP by the end of the year.
Tacone and Izzard maintain that established companies entering into the ASP market will be more robust because they have not had to create new products from scratch but are instead using application service provision as a new means of delivering their tried-and-tested solutions.
Izzard admits that companies offering exclusively web-based solutions might run into trouble before application service provision becomes embedded in the market. She also says Elite is in a strong position because of its continuing commitment to more traditional means of delivering functionality.
"Some of our clients will move over to ASP delivery and some will not," she says. "We are not dependent on the success of application service provision – it is just a different delivery model."
Gartner has developed a six-layer ASP model that it says provides a tool to help understand where the winners and losers will come from. It maintains that "many of today's ASPs are making the mistake of trying to do everything, including owning the data centre". It describes this approach as a critical mistake and claims it is not, in most cases, a sustainable strategy. "The successful ASPs will focus on no more than two layers of our model," it says.
Izzard agrees that a company trying to build, maintain and secure its data centre in-house could run into problems. To this end, she says, Elite has outsourced this core function to Exodus Communications, a company specialising in data hosting and security implementation.
Elite's service, e-Connect, allows law firms to outsource practice management systems. Using web-based billing and time-recording applications, users can save time and money that is traditionally spent implementing and supporting a system in-house.
Tacone, on whose shoulders rests the final responsibility for e-Connect, says he is suspicious of predictions from Gartner and other analysts that the ASP industry is set for a 25-fold increase in gross revenue during the next four years. "No-one can say for certain what will happen," he says. However, he suggests that these forecasts may be borne out if e-commerce giants continue outsourcing core applications to hosting companies such as Exodus, which already provides the service to two of the largest new- economy companies in the US,
e-Bay and e-Trade.
Gartner's research also suggests that, following the predicted meltdown of vendors, application service provision may have to be re-named in order to restore public confidence. "We fully expect that the term ASP will no longer be used to describe these vendors," it says.
Despite the doom and gloom of Gartner's short-term forecast for some ASP suppliers, its sister company Dataquest is forecasting a rapid globalisation of the ASP market. In terms of gross revenue, North America currently dominates the market, accounting for 65% in 1999, but Dataquest predicts this figure will fall to 45% by 2004. Europe accounted for 20% of the ASP market in 1999, and the region is projected to have 32% of the market in 2004.
Dataquest analysts say the internet is accelerating the adoption of new applications and technologies outside of the US. "In the pre-internet world, it was common for the European and Asian markets to lag behind the US," says Dataquest's Pring, who claims that these markets will be as large and as mature in Europe and Asia-Pacific as in the US by 2004.
Another driver in these regions is the enthusiasm for 'mobile' ASP applications – a passion lacking in the US. Pring says he expects mobile telecom operators to develop more sophisticated, business user-focused applications, which are delivered, in essence, via an ASP market. "The greater penetration of mobile and cellular users outside the US will produce a fertile worldwide marketplace to exploit," he says.