Application service providers: An old idea made new again

Well, it had to happen. With the advent of the application service provider (ASP), the cycle of computing trends has come full circle.

The introduction of outsourced Web-based shared resource business applications has returned us to the bygone days of service bureaus and time-sharing. The computer applications have changed from payroll to enterprise resource planning (ERP), and the communications have changed from private-line SNA or TTY dial-in to IP-based Internet, intranet and extranet access — a new age but the same old idea.

Has Intel and Microsoft’s worst nightmare come true? Is this the end of personal computing and the enterprise? Is the ASP market real?

While ASPs may not have Intel and Microsoft cowering in terror, they do represent a significant concern for the Wintel consortium.

The main beneficiary of ASPs is the mid-tier market. For small businesses, outsourcing business application software and computing services to an ASP is cost-prohibitive. The business applications in this tier of the market are few and simple. The small business can make do with a small LAN and a PC-based desktop and server environment, using the Web for WAN communication and perhaps outsourcing home page and e-mail operations to an ISP.

The majority of large enterprises already have outsourced or are contemplating outsourcing internal IT operations to a third party and their Web applications to a content-host-based ISP. Economics drives this market, but application control, security and legacy data force the high-end tier to adopt a dedicated operations environment rather than a shared multicompany environment.

This leaves the mid-tier market. Most enterprises in this market cannot afford to outsource IT operations. In addition, this tier needs applications that exist in the large enterprise, such as ERP and customer relationship management. These factors make mid-tier companies the natural market for the ASP.

In addition, the mid-tier market is the home territory of the IBM AS/400 and S/390, as well as Sun, Hewlett-Packard and Compaq/Digital machines. These will be the computing platforms of the ASP, not Wintel, and the LAN-based servers will be downgraded to office application devices. Access to the ASP will be via the Web for extranet applications and a virtual private network (VPN) for intranet applications.

In the world of ASPs, both personal computing and the enterprise will survive — but with a twist. Small businesses will rely more on services from suppliers such as vendors, banks, accountants and associations. They will use the Web as a business tool rather than a communications tool. However, the main applications of small businesses will still be on the premises on a server and PC.

The mid-tier, though outsourcing to an ASP, will change its operational characteristics, placing less emphasis on IT operations and development, and more on business growth through the productive use of IT. Managing and monitoring the ASP’s performance will replace operations and applications development.

The large enterprise will flourish, with demands for increased bandwidth, reduced response time and new Web-based transaction/database applications driving the upgrade of the desktop, LAN/WAN and servers.

The ASP business definitely is real. In fact, most industry watchers see ASPs becoming a big business. International Data Corp. predicts that the compound annual growth rate of ASPs will be 91 per cent, going from zero in 1998 to US$2 billion by 2003. This estimate is low in comparison with the predictions of some investment banking firms.

My own firm’s research indicates that ASP market estimates on a worldwide basis are accurate in the short term but inaccurate for the long term. The mid-tier market — the target market for ASPs — is much larger overseas than in North America. As with all Web-based technological evolutions, the ASP business has started in North America, but it will become a booming business in Europe by 2001 and in Asia by 2003.

Corporate conservatism will dictate the rate of adoption throughout the world, but economic conditions and competitive market pressure are likely to accelerate adoption. The worse the economic conditions or the greater the competitive environment, the greater the adoption rate.

Whether ISPs will evolve into ASPs is open to debate. What is clear is that ASPs are a natural evolution of the computing market place, just as VPNs are an evolution of the communications market. They are here to stay and will serve the market well as an updated, more productive reincarnation of the past.