Pricing Inhibits ASP Market

SAN MATEO (07/21/2000) - Microsoft Corp.'s announcement of two different pricing models for its Microsoft.NET strategy is adding to the confusion among potential ASP (application service provider) customers who are unsure of the most cost-effective pricing model to sign up for, according to industry observers.

With little guidance from ASPs and a growing number of companies entering the ASP market -- ranging from professional services firms to heavyweight software vendors -- the benefits of the ASP approach are becoming obscured, according to Bill Martorelli, vice-president of e-services and sourcing at Framingham, Mass.-based Hurwitz Group Inc.

"There's been a big amount of [pricing] variability and experimentation on the part of the industry," Martorelli said. "The benefits [of ASPs] may not be as intuitively obvious as people in the industry believe them to be."

News of Microsoft's two-option subscription licensing model for the ASP market is beginning to make customers question whether the ASP model may be more costly than buying software licenses, Martorelli said.

Set to roll out this fall, Microsoft.NET offers ASPs incentives to host its products and provides licensing schemes for hosting Office and Windows server products.

Pricing schemes for both sets of products will include options for payment on a per-user or per-CPU basis for increased licensing scalability, according to Microsoft representatives.

In general, ASP pricing models are based on a fixed price per user per month for back-end applications, or for transaction-based applications that have a low associated transaction cost. Where those transaction costs are higher, transaction volume-or dollar amount-based pricing models are more common.

Companies are choosing the fixed price model in greater numbers as e-commerce continues to shape and push ASP IT cost decisions toward upper business levels, said Dave Boulanger, service director at AMR Research Inc., in Boston. He said that auditing and verification concerns must also be addressed to satisfy the trust of ASP customers.

Complicating pricing matters further, analysts said that ASP partnerships, which are considered inevitable, could lead to skewed pricing and cost-tracking schemes as multiple vendors divide their profits.

This week, Oracle Corp. displayed a change of heart from its previous stance of noninvolvement with ASPs by giving hints of upcoming announcements and deals with ASPs to host its ERP (enterprise resource planning) and CRM (customer relationship management) applications. Emphasizing the uncertainty surrounding pricing models, Oracle gave no details on how these applications will be tariffed.

Tim Shou, president and CEO of Oracle Business Online, said, however, that users should not try to do a dollar-for-dollar comparison between software-as-service and software license models, because the ASP approach brings other advantages -- namely that users do not have to pay for deploying software and can start using it immediately.

"Time difference, speed difference, and reliability difference are available [on the Internet] with [the ASP] model," Shou said. "Pricing will be changed to accommodate that."

Luke Ford, manager of business development and marketing for Enterprise ASP Business at EDS Corp., in Plano, Texas, added that aside from pricing, ASPs have other issues to address.

"The problem [customers] have [is that] they understand the value of an ASP, but they're asking for more customization than the ASP should allow," Ford said. "That's a problem a lot of the ASP providers are getting into. They can't say no to customers and they're getting more into the consulting side and getting away from repeatability and leveragability, which are benefits of ASPs."

Kissing your ASP goobye

Enterprises that choose the right ASP for their business needs could find themselves in a lasting and prosperous relationship, but analysts are warning that they should not get too caught up in the euphoria of the initial honeymoon and ignore the possibility of a potentially messy divorce.

More and more ASPs are taking careful steps to draw up legally binding contracts -- or "prenuptial" agreements -- with their customers, just in case the marriage should ever go sour.

It is becoming a critical and standard procedure for all parties included in ASP agreements to have documented proof of a number of IT ownership issues that may come up, according to Dave Boulanger, service director at AMR Research, in Boston.

For example, agreements could include details of how systems integration will be broken up and who is entitled to receive accumulated source code and data.

A group at AMR specifically works on negotiating those types of ASP contract deals, Boulanger said.

Paula Hunter, president of the Wakefield, Mass.-based ASP Consortium, said a clear policy on who owns what could keep an ASP customer relationship running smoothly from its inception.

Still, she said, customers must face facts when it's time to dissolve the working relationship.

"They've always had to build in that escape clause for 'what happens if we don't love each other anymore,' " Hunter said. "Your hope is you never have to use it because the marriage failed.

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