Gartner: ASPs face shakeout as market grows

Application service providers (ASPs) are racing after a slice of what will become a US$25 billion market by 2004, but more than half will crash and burn or be bought out long before then, according to the GartnerGroup Inc., an information technology market research company.

Most of the ASP market – 65 per cent of revenue – is in North America, but that will change as the Internet and wireless communications expand globally. Gartner forecasts North America to represent 45 per cent of ASP revenue in 2004, while Europe is projected to have 32 per cent.

“We’re still very bullish on the ASP market,” said Benjamin Pring, Gartner’s principal analyst. Worldwide sales of application services are on pace to reach US$3.5 billion by the end of the year – growth of 90 per cent over last year, he said.

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

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

The wrestle among ASPs, big and small, for the best position as the market grows places providers and their clients in a delicate position, said Audrey Apfel, Gartner research director and vice-president. Describing it as “the trough of disillusionment,” Apfel said ASPs must make good on promises of quality service and earn top position in one specialized facet of the business, like customer relations management or what Gartner calls “end services” like customization or integration. “The one-stop shop doesn’t work.”

In the industry shakeout to come, many smaller ASPs, particularly those struggling to carve out a brand identity, will fall away, Apfel said. Sixty per cent 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 predicts, the number dropping to 20 enterprise-class, full-service retail ASPs in 2004.

As ASPs go under or change focus, their clients may experience systems problems which, unhandled, could ripple down the supply chain. “We felt the need to warn the market of the rocky road ahead,” Apfel said.