Application Service Providers

Application Service Providers internet business models text and cases Tony Gauvin

Overview • Definition • Taxonomy • How do ASP’s create value? • Barriers to Adoption • ASP economics • GBF??

The Future of Computing Five years from now, if you’re a CIO with a head for business, you won’t be buying computers anymore. You won’t buy software either. You’ll rent all your resources from a resource provider. • Scott McNealy, CEO, Sun Microsystems • May 2000

ASP • An ASP is a organization that manages and delivers application capabilities to multiple entities from a data center across a Wide Area Network • Software is “rented” for a recurring fee • Can add multiple service offerings • Application Software • System Integration Services • Data Center and Connectivity Services • Application Monitoring, Metering/billing, and End-user support • Defining characteristic was that an ASP is the sole owner of the customer relationship • Expected 6-fold increase from 2000 to 2003 • $1,964,000 to $11,311,000

Taxonomy • Four dimensions • Solution Focus • Internal <> external • Horizontal <> vertical <> enterprise • Customer focus • Age, size, growth rate, complexity • Breath of application solutions • Single application <> portfolio • Applications sourcing strategy • Internet enabled vs. Web-native

Solution Focus • Application classified along two vectors • Externally versus internally focused • External connects a company with outside partners • CRM, Supply Chain, • Internal used by company employees • HRM, Financials • Horizontally, vertically or enterprise focused • Horizontal is across a wide range of industries • E-mail • Vertical is for a specific industry • CollegeNET • Enterprise is for large complex organizations

Customer Focus • Characteristics of Customers • Size • Small <100 employees • Medium >100 < 999 employees • Large >1000 < 4999 employees • Very Large > 5000 employees • Pace of Growth • Business Complexity

Breath of Application Solutions • Single applications • SAP R/3 • Portfolio of products • May not be their products but that of another vender (Microsoft)

Application Sourcing Strategy • Internet-enabled applications • Originally built for client/server and then retooled for the Internet • Often only had a web based front end • Web-native applications • Designed from inception to operate only over the Internet

How ASPs Create Value • Create “Frictionless commerce” • Reduce high-cost of shrink wrap software • Reduce difficulty of recruiting and retraining IT staff • Reduce the need to build and maintain IT infrastructure • Compensate for lack of in-house expertise • Low up front investment and predictable cost • Speed of deployment • For ERP – 90 days versus 3 years

Barriers to Adoption • Security • Internet • Outsider Data Center • Lack of personalization and customization • Generic (one size fits all) solutions • Untested business model • What happens if the ASP goes under?

ASP Economics • Tough to collect data • Diversity of ASPs activity • Only a few ASPs were publicly traded • Sources of Revenue • Rental fees for software • Long term • Fees for Professional Services • Short term

ASP Cost Factors • Cost of Services (mostly personnel) • Network operations • Data Center operations • Customer support • ? Licensing fees if using other vendors • Sales and marketing • Direct sales reps • Product Development • Depends on whether the ASP developed or bought Applications • G&A

GBF or GIRF? • Network Effects • Varies based on application sourcing strategy • Higher for Web native then Internet enabled • Scale economies • Good if ASP developed their own applications • Operations costs vary with transaction volumes • Incremental gains • Customer retention • Very HIGH • First mover advantage • Lower for Web native then Internet enabled

Application Service Providers