Skip to main content

Maybe you're one of those people who believe application service providers, or ASPs, will change the face of civilization. Or maybe you believe ASPs are just the latest overhyped dot-com house of cards.

Whatever your view, it's hard to ignore this new industry. Magazines like


run huge

special sections on ASPs. Hundreds of ASP start-ups have come on to the scene over the last year or so. They and industry giants like


(MSFT) - Get Microsoft Corporation Report



(ORCL) - Get Oracle Corporation Report




are all grappling for a piece of the multibillion-dollar market that could grow nearly seven-fold over the next three to four years.

So if you're an investor, how do you get your bearings? For help, I've included a list of ASP Web sites at the end of this column. But let's start with the basics:

What's an ASP? In the broadest terms it's a company that distributes software to individual desktop PCs -- and soon to portable devices like cell phones and personal digital computers. Distribution can occur over the Internet or via high-speed private networks. Instead of buying the software, ASP client companies rent it and save money in costs, time and hassles. Here's one example: Instead of loading individual copies of a software application (such as an office suite) onto each desktop PC in the company, ASP client firms can let the hired help -- that is, the ASP firm -- sweat the details.

TheStreet Recommends

Advantages abound for ASP providers as well. As



Jim Seymour

wrote in

Part 1 and

Part 2 of a series last year on "How Application Service Providers Will Change Your Life," one of the principal benefits is regular income.

Right now, software developers pour millions of dollars into new upgrades. Each new software release must be trotted out to an uncertain reception in the marketplace. The upgrade could become a bestseller or it could bomb, depending on how many IT managers buy in. By contrast, with the ASP model the customer base is already locked into using the software. Upgrades usually come as part of the package. Predictable leasing revenues flow in monthly. Grow your customer base and earnings increase in synch. Sounds like a business model made in heaven.

And that business model can be applied to just about every kind of software imaginable.

Cognizant Technology Solutions

(CTSH) - Get Cognizant Technology Solutions Corporation Class A Report

, for instance, develops customized applications in areas like financial services, health care and restaurant management. (These and other companies mentioned in this story should not be seen as investment recommendations, only examples.) For instance, Cognizant rents one application that allows restaurant customers to order takeout via the Internet. Another Web-based application helps restaurant managers with worker scheduling.



applications run the gamut from customer relationship management to human resources.



is more of a picks-and-shovels play. It uses the Internet to help other companies distribute their software. Industry behemoths like Microsoft and Oracle are anxious to provide server platforms that ASPs can use. Earlier this month both companies mounted elaborate presentations at the

ASPWorld Conference and Expo in San Jose, Calif. Microsoft touted its .Net server architecture and Oracle lauded its Oracle9i due out next year as ideal platforms for ASPs.

They and other ASP players are anxious to get a toehold in a market that's still small and fledgling. In a report issued last August, the

Gartner Group

pegged the number of current ASP providers at 480. Revenues for the industry totaled roughly $3.6 billion.

But that market could mushroom to more than $25 billion by 2004, according to Gartner. Many industry analysts believe much of that growth will occur as ASPs sign on small to midsized companies. The theory is that those firms have only skeleton IT staffs, and those staffs will jump at the chance to outsource the headache-prone parts of their jobs.

Alternately, the consulting firm

The Phillips Group

believes companies with 2,500 or more employees will make up roughly half of all ASP clients in the years ahead. The reasoning here is that these larger firms lack the expertise to relaunch their businesses on the Web. Stiff competition will force them to use outside firms for help.

Now for Some Bad News

Large customers, small customers, who cares? In an industry targeted to grow from $3.6 billion to more than $25 billion in three short years, there should be plenty of winners for investors to bet on. Right?

Maybe. That same Gartner Group study predicts that only 4% of today's ASP start-ups will live long enough to enjoy the good times in 2004. More ominously, some 60% will fail next year. Scariest of all, the shakeout will have far greater repercussions than this year's string of dot-com collapses, as Audrey Apfel, Gartner's vice president and research director, explained in a story that appeared in

, a kind of online ASP trade magazine.

Apfel goes on to say that when dot-coms collapse, "they implode and have little effect on their customers and other industries." Not so with ASPs, she says. When they go down, they take all that rental software with them. That means client companies could be left without things like customer management software or online accounting systems, Apfel explains. And she predicts the resulting damage could quickly spread up and down an affected company's supply chain.

Talk about gloom and doom!

I'll say it again, whether you believe ASPs will change the world as we know it -- or end it -- here's a sector that needs watching. Check out the Web sites below.

Happy Halloween.

ASP Web Sites -- Visit this ASP portal site first. Contains an excellent collection of background articles, white papers, news stories and links.

ASP insights -- Articles on new products and other industry news aimed at ASP management. -- News stories, plus comprehensive links to ASP firms by category. The company behind this site also sells an application that enables developers to adapt their software for distribution over the Net.

All About ASP -- Home page for the ASP trade organization. An excellent source of market research white papers. -- Capsulated news stories, reports and press releases track industry developments.

Cherry Tree -- An ASP consulting firm that publishes monthly industry financial stats.

Mark Ingebretsen is editor-at-large with

Online Investor magazine. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback at