ASPs struggle with costs, limited capabilities

Application service providers, which see themselves as replacements for large parts of the IT department at some organisations, are suffering from a lack of profits, and business fragmentation that could stop market growth in its tracks.

At the ASP Summit here this week, industry analysts, vendors and ASPs themselves wrung their hands with concerns about the future of their nascent market. In his keynote address, Rich Caruso, president of the ASP Market for Nortel Networks, warned that profitability for ASPs was a major issue.

"ASP margins are thin," he said. "The most important thing in the next year is to make ASPs profitable, or else growth won't be there."

To that end companies like Nortel and Newbridge Networks have devised revenue-sharing purchase and lease options specifically to help ASPs minimise the initial investment required for their technology.

Malcolm Stewart, a vice president with Verio in Coloirado, said costs for running a data centre are substantial. Costs for even a relatively small ASP with 30 servers and a single high-bandwidth, fiber-optic connection to the Internet could run between $US72,000 and $158,000 per month just for the infrastructure.

Most agree that those costs are only the beginning. "Hardware is not the real cost issue," according to John McCrory, CEO of Applicast , an ASP located in California. "It's really about manageability" for such things as an ASP's service and support staff.

No ASP can handle all aspects of the business well, so most have to focus on one specialty area or another, McCrory said.

The drive for profits that has prompted this kind of focus, however, has fragmented ASPs into niches so small that organisations seeking to outsource their IT operations have to either juggle multiple ASPs for special functions or select only special applications for outsourcing. For example, ASPs such as Oracle Business Online, a division of Oracle and eGain Communications offer only their own software running on their own data centres. Still others, such as Conxion, provide only infrastructure and no software.

Marsha Blake, a vice president with San Diego-based ASP V2 Commerce , said her company depends on other ASPs to supply services to her customers that V2 can't. However, "if any other one goes down, we are the ones getting the black eye," she said.

ASPs that aren't willing to invest in either the technical staff or a robust infrastructure will have a difficult time competing, according to Deb Mielke, an analyst with Treillage Network Strategies of McKinney, Texas. "It all comes down to the cost issue," she said. "How much are you willing to pay for?"

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