See the Future of Software: Oracle Dubs Exodus as Its Application Service Provider

As more software is used over the Internet, ASPs are the hot new trend for Web-hosting companies.
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SAN FRANCISCO -- Everybody's doing it.

It

is the latest trend to roil the software industry, applications service providers, or ASPs. In a nutshell, ASPs host and maintain software for a fee, enabling companies to use pricey applications without the large up-front licensing and implementation expenses.

ASPs are going to be so

important to the future of software that even

Microsoft

(MSFT) - Get Report

is scrambling to migrate its new

Office 2000

software to a renting rather than a licensing model. A renting model would let users dial into a server to use a program such as

Word

rather than relying on a copy on their PCs. It would also generate steady, monthly revenue rather than one-time product sales.

A little-known beneficiary of the ASP shift is the already burgeoning Web-hosting business. As more software is used over the Internet instead of from a computer hard drive, Web-hosting companies will profit by serving as the platform from which that software is distributed and maintained.

The most recent Web hoster to jump on the ASP bandwagon is

Exodus

(EXDS)

. On Tuesday, software giant

Oracle

(ORCL) - Get Report

said it named Exodus as its preferred hosting provider for the company's ambitious ASP initiative, called

Oracle Business OnLine

. Although Oracle said the venture only has 2,000 users from 30 customers, CEO Larry Ellison said the company is on track to hit 10,000 users by the end of this year.

The partnership, say analysts, is a welcome sign that Exodus is making inroads in this new and growing market. Without partnerships like these with software providers and professional service firms, they say, hosters will find it very difficult to build application delivery platforms.

IDC Research

estimates that the ASP market could be worth $4.5 billion by 2003. By contrast, the hosting business will be worth $20 billion by 2003, according to IDC. Other hosters making moves into the ASP market include

Frontier GlobalCenter

, a unit of

Global Crossing

(GBLX)

,

IBM

(IBM) - Get Report

, and

MCI WorldCom's

(WCOM)

UUNET. Yet, despite these sizable numbers, for now, both company executives and analysts agree that the market is more promise than reality.

"People are going to go to the network to get data services in the same way they go to the phone company for telephony services," says

IDC

analyst Steve Murray. "A company like Exodus will try to follow the curve of that natural evolution."

Exodus' ability to host applications will also help the company sell more managed services to its existing customers. Such services could include things such as Web-site consulting, project management and application development, which are often required to build an ASP service. "It allows them to add more revenue-generating services to their customers," says David Levy, an analyst with

Hambrecht & Quist

. H&Q, which has an underwriting relationship with Exodus, maintains a buy-focus list rating on the company, its highest rating.

In addition, Exodus CEO Ellen Hancock says the ASP trend will generate new customers for the company like the ones that will come through the Oracle partnership. Oracle Business Online will use Exodus to host and manage its customers' applications, as well as offer Web hosting services through Exodus. "It's nice business," Hancock says. "When Oracle brings in new customers you can assume they'll be hosted by Exodus."

The explosive growth will mean that Exodus -- which has

experienced a rash of customer service problems trying to keep up with the hosting industry's torrid growth -- will need to be prepared to handle the more intensive needs of an ASP. The company's acquisitions of firms such as

Cohesive Technology Solutions

are aimed at keeping ASPs and other customers happy. But the added growth from ASPs will mean Exodus will need to add even more resources.

Even though Hancock says the ASP market is worth going after, she notes the company never expected it to produce a lot of the company's revenue. "The market probably has not taken off as quickly as people assumed," she says.

If it doesn't take off so fast, Exodus will have that much more time to prepare for the ASP business.

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