ASPs Money Talks

Despite the fact that other O's are still trying to make sense of ASPs (only half of the top corporate officers surveyed in June by IDC--a sister company of CIO's publisher, CXO Media--said they had ever heard of application service providers), the IT community has accepted them and made them hot. The market's at US$10 billion this year and will soar to $48.5 billion by 2003, according to Deloitte Consulting. To make sense of the myriad vendors, we look to how they're differentiated by some of the most discriminating market watchers--venture capitalists.

Finn Caspersen Jr., founder of Gladstone, N.J.-based Bencas Capital LLC, says his company steers clear of horizontal ASPs, which offer customer relationship management, enterprise resource management and productivity solutions. "We're looking at companies in the vertical space," he says, "because [they don't] compete with larger players and are on their way up."

Fellow VC Mike Shanahan groups ASPs by their longevity and assets. Shanahan, managing partner at Boston-based Egan-Managed Capital II LP, says his organization does not invest in pure-play ASPs because they start from scratch, with no application or existing customers, and need too much money. Shanahan prefers ISPs and software vendors that have shifted from shipping to hosting their applications.

Tom Smith, partner at Mid-Atlantic Venture Funds in Bethlehem, Pa., says that ASPs are so new (and he hasn't seen evidence of universal success or failure in the field) that he takes them enthusiastically on a case by case basis. "The real challenge," says Smith, "will be in figuring out how the ISV [independent software vendor] and ASP models will coexist."

CIOs share similar concerns, and they indicated in a May survey conducted by the Information Technology Association of America that they're not ready to infuse the entire crop of neophytes with post-VC money. The survey of more than 1,500 CIOs and other executives reveals that in one year, only 18.7 percent of respondents said they plan to deploy ASP offerings. They cited integrating ASPs with other applications as a top concern. Get ready for another shakeout.


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