The State of the ASP Market

Surely no one's surprised to hear that the expected shakeup in the application service provider (ASP) market has already happened. If you haven't heard from a particular ASP for a while, the ASP might have less money to spend on public relations than it once did . . . or it might be history. What keeps an ASP on the winning team rather than the losing team?

First, the news stories from the past year or so tell a specific story. Today, adding customers isn't the point; maintaining profitability is. Running an ASP involves fixed costs for employees, equipment, and licenses. Although more customers might increase those fixed costs, fewer customers doesn't necessarily reduce the fixed costs; costs can only go so low. WebMergers, a research firm that specializes in Internet and technology properties, recently published a paper that examined the question of which companies are on their way out. WebMergers saw six ASPs shut down in 2000; since the beginning of 2001, fourteen ASPs have shut down. May alone saw several shutdowns, including small-business accounting ASP eLedger, customer relationship management (CRM) company, and sales-support ASP ShortCycles. According to WebMerger's Tim Miller, ASPs that offered free services and ASPs that offered services for small businesses stood out among those that failed. Loss-leaders won't work for ASPs unless they can find investors willing to support them while they develop their businesses—a proposition that's more difficult than it once was.

Second, making potential customers change the way they work is difficult. ASPs that offer applications that supplement a business tend to do better than those that offer core applications because outsourcing a "sideline" application is less risky and causes less change than outsourcing the main company tools. The exception to this rule is ASPs that offer applications customers can't (or prefer not to) support themselves. Generally speaking, however, if you're an ASP that offers something other than scientific or very complicated applications, you'll probably do better to offer an application that your customers would like to have but aren't betting the company on right now.

Third, ASPs need to exploit existing relationships. An ASP can more easily convince existing customers to buy new services than get new customers to buy existing services. Let's say that my company has a relationship with yours, and you know I'm dependable. If I come to you with a new product, you know what to expect from working with me and have a sense of whether I'll be around in 6 months.

The bottom line is that the ASP market hasn't finished shaking out its weak points. The ASPs that make it will be those that focus on building solid businesses, don't expect customers to make too many changes to their existing environments right away, and exploit existing customer relationships. Some ASPs are doing just this, and they're still with us. Those that don't could inflate the number of failed ASPs for 2001.

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