by Arik Johnson
As you might know, my day-job is to help clients better understand the competitive dynamics in their markets. Recently, we completed a project for one client, an up-and-coming Application Service Provider (ASP), hoping to make a big splash in the market with their new service providing all kinds of other companies' applications over the Internet to small- and mid-tier business customers that can't or would rather not invest liquid capital in ERP, CRM and other applications' rollouts. Our job was to identify the value proposition of various other companies in the ASP marketplace for comparison to their own core competencies and competitive advantage. The purpose of the project was many-fold - first, to identify true competitors and potential partners in what is becoming a very fragmented industry, produce a module for inclusion in their business plan (presumably for future rounds of VC financing) and to identify and better describe their own ability to compete in a rapidly changing marketplace.
Before we look more closely at the subject of the ASP market, it'd be helpful for those of you new to the area to better understand what we mean by that term. Software applications, just like Web pages or email accounts can now be "hosted" on remote servers across the Internet and delivered to users when they need them. The value proposition for users of software applications is that, rather than paying thousands of dollars per seat for complex and expensive software systems, they can lease access to the same applications over the Internet. It also helps them to avoid having to implement and deploy the software themselves or hire consultants to do the work.
What we found out about the market was a little less than they were hoping for, however. Now, I've always been an advocate of the role of the Competitive Intelligence professional as being the "Chief Truth Teller" for an organization - that's how I see our role for every client we engage. But, in the immortal words of Jack Nicholson, some people just "can't handle the truth!" Meaning, most leaders in contemporary American business, especially those who are pure-play Internet industries, have blinders on to the strengths, weaknesses, opportunities and threats they face. In fact, it could be argued, they're not interested in long-term competitive advantage much at all - they're interested as long as the VC cash chasing them is asking for it and are transfixed by the millionaire-making IPO and eventual exit strategy to their own personal island in the tropics.
This describes the environment ASPs finds themselves competing in today. In my analysis, the market has evolved from an initial set of leading-edge companies (Corio, USinternetworking, and a few other Web-service providers who didn't call themselves ASPs at the time, but do now) striving to penetrate a new segment of a marketplace where a need was identified through an alternative pitch for products and services than customers were accustomed to. Just as cars have largely moved from outright sales to leasing, so goes the software industry in the age of the Internet. There've even been a few so far, including USi, who've managed to go public on that business model. Consistent with my own reputation as an evangelist of the product life cycle in business planning - the old idea that products and services begin as a means of competitive differentiation and eventually, inevitably become transformed into commodities - it would seem the very companies pushing products into the ASP channel seem to be cannibalizing the market just as quickly as a means of fast growth. SAP, Baan, PeopleSoft, Oracle, Siebel you name it, the ISVs are charging ahead to offer their own ASP pricing and delivery models to the same target market.
The big difference with the ASP sector when compared to most industries, and the whole Internet economy for that matter, is the relatively accelerated nature of product life cycles in an environment with few or no barriers to entry. This is especially true because the companies whose software is being leased through ASPs have long-since sought a way to penetrate the under-resourced small- and mid-tier companies that previously didn't have the wherewithal to buy their products, but who needed them just the same.
Today, the ASP segment of the software/services marketplace is rapidly becoming just another means of delivering any kind of software. In our recent market survey, we found that there are more than 750 companies calling themselves an "ASP", for the most part, these are old-school software companies who've reengineered their products to be delivered over the network and managed to work out a leasing contract instead of a purchase agreement. Others are nothing more than Web sites providing database access to off-site storage of files and data that used to be stored on the PC or provided through shared drives on the LAN for sales and market personnel, financial and HR applications or email and messaging.
The tone of some of the companies has begun to change in realization of the facts of the matter. USi, for example, no longer touts its services exclusively as lease arrangements for access to ERP, E-Commerce and CRM software from major league companies. It has expanded its services to include setup and deployment of "managed applications" on its network for software companies (ISVs) of all kinds. USi is as much in the business of turning ISVs into ASPs as it is an ASP in its own right. Its positioning is one with substantial meaning for the marketplace. Rather than fend off competitive threats from its vendors' plans for forward integration into its market, it's embraced its true core competencies (those qualities that make it unique from competitors, valuable to customers and form the basis for new product introductions) in cannibalizing itself before competitors can.
This is a perfect example of Internet competitive dynamics - to continuously adapt its strategy to the ever-changing needs of the marketplace; in this case, the assumed and eventual threat of forward integration from vendors. These unique qualities being brought to market include the deepest knowledge of any firm in the ASP business (because they're one of the oldest in the category) - having yielded one of the best-developed data management networks and some of the deepest understandings of SLAs (service level agreements) in the industry. Service level agreements are likely to be the sole product differentiator for ASP service ranges.
While this market is expected to reach a size of some $23 Billion worldwide by 2003 according to recent studies, USi's 109 customers at the end of 1999 represented $158.3 Million in long-term contracts - equivalent to some 36 percent of the total market size as of today's most recent market statistics. That's a relatively small pie to get a piece of so far. But, through a strategy of diversification and, in effect, becoming the "ASPs' ASP", a company like USi might stand to make far more of a game of going after ISVs seeking to penetrate this new channel than in simply renting other companies' applications in competition with them.
Another ASP, one who refuses to answer to the moniker because Larry Ellison might get angry with them, is Portera Systems, leasing Oracle Financials and HR applications to professional service firms. Larry Ellison said he'd never let Oracle's applications be sold through the ASP channel - and, so far, he's stuck to his pledge with the exception of Portera, who numbers Oracle among its investors. Portera calls itself a "Vertical Service Provider" (VSP?), in order to keep Larry off their backs. Apparently, Larry's okay with it, because they're "Not really an ASP", according to Chief Executive Gary Steele. What's the difference? They will ONLY sell to professional service firms - and leave the rest to Oracle. A rose by any other name...
So, what's my advice to the up-and-coming ASP client of ours? Focus on competencies that are really in need of representation in the market that your company can provide. In this case, the market trend we're able to identify is one of forwards-integration by ISVs into the market on their own to capture segments previously unavailable to them. The value-add rings true - these are software companies not network service providers. When they can partner with a service vendor that can drive real revenue from unexploited opportunities only recently made available by the Internet, they'll have a winning approach to customers and vendors alike.
Arik R. Johnson is Managing Director of the Competitive Intelligence (CI) outsourcing & support bureau Aurora WDC. Learn more about Arik at his firm's Web site www.AuroraWDC.com/arik.htm.