ASPs also need to pay as they go

The bandwagon has been trundling along for a couple of years now, but a lot more work needs to be done before the application service provider (ASP) business really gets anywhere.

Research firm Gartner Group Inc. defines ASPs as service providers who deliver application functionality and associated services across a network to multiple customers using a rental pricing model. There are multiple players involved in actually putting the ASP model into practice, such as the network providers, software vendors, hardware vendors and the service providers themselves.

In recent months, vendors have been waking up to the need for greater flexibility in the way they charge ASPs for hardware and software.

Sunil Devmurari, business development director of local ASP ecpod.com, says the high cost of infrastructure, whether hardware or software, is a potentially daunting barrier to entry for budding ASPs. "This, coupled with the need to come up with a compelling service offering and a workable pricing structure could very well make or break an ASP," he points out.

Nabeel Youakim, managing director of application server software provider Citrix Systems Asia-Pacific, agrees.

"Vendors have to be more flexible as to how they provide their products to ASPs," he says. "The way it is going to be paid for will be incremental, not in upfront payments, because ASPs get their revenues on an incremental basis. Independent software vendors will have to provide flexible licensing, while hardware vendors need to consider different pricing models, to make the ASP business more viable."

It is only now that pricing models from suppliers to ASPs are coming into place.

Devmurari says he has seen both hardware and software vendors starting to address the growing pains of new ASPs with financing and leasing schemes that help break upfront costs for hardware into smaller, more manageable payments, and software licenses which are charged based on the number of users.

The model will continue to change according to the demands of industry, he says. "It would have to be the ASPs themselves that initiate discussions to craft out deals that work. You'd be surprised how vendors respond in this highly competitive market space where they are continually trying to differentiate themselves from competition and gain market share. On the same note, vendors would also need to protect their exposures, so any deal that is crafted would need to keep in mind the risk element when payments are made over an extended period of time. Like any good deal, it must be win-win."

Recently, there have been offerings from hardware vendors like Sun and Hewlett-Packard, allowing ASPs to expand their hardware capacities while paying for whatever capacities the ASPs utilize. At the same time, more software vendors are willing to offer their products on a value-based model, that is, collecting revenues as each new client to the ASP comes on board, as opposed to an upfront fee.

For software, the pay-as-you-use model that ASPs push to their customers seems to be taking off for them as well. Under Citrix's iBusiness Application Service Provider programme, the iLicense scheme enables ASPs to install a full suite of Citrix software across all their servers for rental, without having to incur any upfront licensing fees.

In September last year, Microsoft launched a scheme which allows ASPs to "package" Microsoft products at a monthly fee, depending on what products or services are required by the user. The pay-as-you-use system does not require any upfront fees or commitment from ASPs, says Peter Ittenson, business development manager of the Network Solutions Group at Microsoft Singapore.

However, the package is also very dependent on other factors, and not simply software, notes Ittenson. "The pricing depends very much on the kinds of hardware, management, support and bandwidth needed for each business," he adds.

Another vendor, PurchasingNet, is spearheading the value-based model for procurement software on ASP. "We have developed strategic relationships with ASPs in Thailand, Australia and Indonesia which offer PurchasingNet solutions at a nominal fee, and will pay PurchasingNet whenever new clients come on board. This has resulted in a win-win situation where PurchasingNet can quickly penetrate new markets, while the ASP is able to provide a good offering to the market without having to first make a heavy investment into the software," says Martin Feuerhahn, vice president of PurchasingNet Asia-Pacific.

To Chee Eng, senior analyst, telecommunications and e-business, Gartner Dataquest, notes that pricing schemes are still evolving. "There's no single pricing scheme that fits the entire industry. It can be based on a monthly subscription service or usage basis or both. There could be other variations of the basic schemes above and a lot depends on service provider and end user," he said.

However, significant as they may be, To feels that high upfront costs are part of the nature of most Internet-based businesses, and not the biggest inhibiting factor for growth. According to To, the bigger challenges facing ASPs are:

-- offering applications that really cater to the needs of users, -- convincing users to change their current IT usage patterns - from running IT applications in-house to subscribing to external service providers, -- ensuring security, and -- providing service level guarantees.

Expanding on To's first point, Feuerhahn says: "As the ASP market becomes more sophisticated, ASP providers need to do more than be a host for servers. Not only must they have a deep knowledge of technology, but they also must have a strong appreciation and understanding of the applications they host. This is critical in enabling them to configure and support those applications. There is no such thing as a universal ASP who can host all kinds of applications. ASPs need to build expertise in technologies that fall into a similar cluster to provide good hosting support in that particular cluster."

Then there is the need to educate businesses on the merits of the ASP model.

Says Kwa Kim Chiong, chief executive officer and founder of justLogin.com: "A lot of companies are not aware of the availability of the solutions and the business model. We still need a lot of education and promotion, we need to create the market awareness."

Kwa notes that the Infocomm Development Authority has put in place its e-Business Industry Development Scheme (eBids) which is aimed, in part, at encouraging SMEs to use ASP services. However, a lot of companies are still not aware of the grant.

Associations like the ASP Alliance Committee (AAC) of the Singapore IT Federation can play a greater role in creating awareness, encouraging companies to look at ASP solutions and setting guidelines to ensure the integrity and reliability of players so that users will feel more comfortable, says Kwa. Just last month, the AAC released a draft service level agreement (SLA) to be used as a guide for the local ASP industry.

But gaining user acceptance involves more than putting an SLA in place. "I think the key things businesses look at is whether the applications suit their needs, the price, who is running it, what kind of support they will get, and basically they have to try it out to be convinced that it's not buggy."

Application performance is another key consideration. According to Michelle Loveday, marketing director of Firstwave Technologies Asia-Pacific, little actual action has taken place in ASP adoption because performance has not been validated, improved or communicated effectively to users, even till today.

"Many of the current ASP offerings in the market are simply service providers putting traditional client server applications on the Internet.

Unfortunately, client-server applications were not designed for the Internet but for either the desktop, local area network or wide area network, which have a much larger bandwidth than Internet connections. As a result, huge files of more than 200kb per page are sent over the Internet for each page the user wants to view," Loveday points out. "Most modems which users use for connection to the Internet can only accept smaller page downloads of less than 40K bytes per page."

According to Angelia Kho, IT services analyst at Gartner Asia Pacific, there are very few established ASPs who have earned the trust of the market. This makes potential buyers reluctant to try the ASP model. "Business models and legal precedents to support the ASP model are as yet unproven," she says.

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