ASP consolidation begins

The worldwide application service provider market is expected to hit US$25 billion by the end of 2004, but analysts say not before an industry shakeout that will leave some ASPs in the dust and others partnering as a means of staying afloat. Already, troubles on Wall Street coupled with the high up-front costs of deploying new applications have led to some casualties. Pandesic LLC closed its doors this summer. Red Gorilla folded in October and HotOffice Technologies Inc. shut down earlier this month.

Now the consolidation is starting. This week, vertical ASP Inc. announced it would acquire Applicast Inc. in a stock swap, the value of which was not disclosed. The deal will bring manufacturing industry expertise to Agilera and will give Applicast a broader market reach.

Agilera president Robert Unger says he had just completed his company’s $85 million second round of funding in August when financial and industry analysts and investors began mentioning Applicast’s name. Agilera delivers enterprise applications to the financial and retail industries and knew it had to deepen its vertical industry acumen and expand its customer base to survive, says Unger. An acquisition was just the way to do it. “We had been looking for quite some time,” he says.

Applicast, which sells Siebel, SAP and Agile to the manufacturing industry, got a similar push from Wall Street when CEO John McGrory went looking for more funding for his company. At that point, McGrory says, he knew Applicast needed to build its customer base and a business combination would be just the answer.

“Especially among these more vertical providers, you’re going to see consolidation,” says Richard Young, an analyst with the Yankee Group. “Time is running out for many of these ASPs in terms of building the critical mass and getting the customers they really need to survive.”

He says the consolidation, which adds Applicast’s 27 customers to Agilera’s 39, creates the biggest customer base of any private ASP. The combined company, called Agilera, will be based at Agilera’s headquarters in Englewood, Colo., but will add an office in Menlo Park, Calif., where Applicast is based, the executives say.

Unger and McGrory say the combination is a perfect fit that will give their customers an expanded product list and deeper industry expertise. Applicast will provide the manufacturing industry know-how. While Agilera, a joint venture of CIBER and Verio Inc., will leverage Verio’s Web hosting infrastructure and services, and CIBER’s integration capabilities in delivering applications.

Customers of the new Agilera will continue to have access to applications such as Oracle Corp., Ariba Inc., PeopleSoft Inc., J.D. Edwards & Co., Lawson Software Inc. and Broadvision Inc., but will have SAP AG, Siebel Systems Inc. and Agile Software Corp. available to them with the acquisition. In addition, the new company plans to expand into new vertical markets, such as the health care and telecommunications industries and the public sector, Unger says.