Study: ASP Market to Soar

FRAMINGHAM (08/09/2000) - Analysts at Gartner Group Inc. are predicting exceptional growth in the application service provider (ASP) market -- and enormous fallout as well.

The Stamford, Conn.-based market research firm said that last year, ASPs racked up barely $1 billion in revenues but that by the end of this year, the online purveyors of subscription software will generate $3.5 billion in revenues. And Gartner estimates that by the end of 2004, ASPs will top $25 billion in business worldwide.

Gartner analyst Benjamin Pring said user adoption of ASPs isn't limited to small businesses. He noted that Fortune 500 companies are rapidly using ASPs to augment their information technology operations, with both horizontal and vertical applications.

Competition among ASPs will create a number of victims. Take, for example, last month's announcement that high-profile ASP Pandesic Inc. in Sunnyvale, Calif., is ceasing operations.

Pandesic's demise is indicative of much more turmoil to come, according to Gartner analyst Audrey Apfel. She said that 60% of the ASPs in operation today will fail or be acquired by the end of next year.

Part of the reason for the upheaval, according to Gartner Group, is the ease with which ASPs can enter the market and the fact that most of the software being subscribed to is horizontal, or used in many industries. In fact, Pring said that 35% to 40% of ASP offerings are human resources applications. That means pricing pressure will be high for ASPs selling similar services.

ASPs essentially host and manage software for companies and provide technical support for that software. Companies can save money with an ASP by avoiding the purchase of copies of software and periodic upgrades for every computer in the office and by reducing the need to train technical staff to maintain the systems. ASPs reduce total cost of ownership for applications by 30% to 70%, Pring said.

But the downside is the dependence companies have on their ASPs to keep their applications running smoothly: Gartner predicts rough sailing in the ASP industry as providers consolidate or go out of business.

The struggle among ASPs, big and small, for the best position as the market grows places providers and their clients in a delicate spot, Apfel said.

Describing it as "the trough of disillusionment," Apfel said that ASPs must make good on promises of quality service and earn a top position in one specialized facet of the business, like customer relations management or what Gartner calls "end services," such as customization or integration. "The one-stop shop doesn't work," she said.

In the industry shakeout to come, many smaller ASPs, particularly those struggling to carve out a brand identity, will fall away, Apfel said. Sixty percent of the 480 or so ASPs in business at the end of this year will be gone by the end of next year because of bankruptcy, lack of venture capital, mergers and traditional competition, she said. The projected number of enterprise-class, full-service retail ASPs in 2004 is 20, she said.

Reporting by George A. Chidi Jr. at the IDG News Service bureau in Boston was included in this article.

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