What's Happening to the Gold Rush?

Since their peak on March 10, US technology stocks have no longer been the apparent safe bet that they were. Following the story in the papers is like following a tennis match: Now stocks are up! Now they're down! Now they're recovering from Friday's dip! Now they're sliding again! I'm not an alarmist, but I do think the mood has changed from 6 months ago. Maybe it's the potential danger of hanging around career day-traders who might be more heavily armed than they look. Maybe it's the realization that most people aren't making a killing on the stock market, even if some are. Maybe it's jitters over Microsoft's future extending into the rest of the technology stocks. Or maybe it's impatience with supporting a company when a good earnings report means losing only half a million dollars last quarter.

What does this have to do with the application service provider (ASP) market? Maybe a lot. Much ASP potential market share lies in business-to-business (B2B) services that companies want to get up and running quickly. After all, that's the advantage of outsourcing IT support: Rather than relying on yourself to get your Web server, customer database, and applications up and running, you can cede the responsibility for this infrastructure to another party so you can concentrate on the business or development end of the deal. Even if you're a small shop, this kind of support can give you a professional infrastructure at a predictable monthly cost.

Sound good? Now apply the same scenario to a B2B company or a new technology company that doesn't have as much money as it expected to. Perhaps it has delayed its initial public offering (IPO)—as AltaVista has—or didn't make as much on its IPO as it hoped to. B2B company stocks are losing some of their bloom among investors. Interest rates are rising as Alan Greenspan attempts to slow the economy by making borrowing less attractive, and higher borrowing costs affect the amount of money companies can spend on infrastructure enhancements. And although the reports from venture capitalists are mixed (some say that they're getting more cautious; some act as if it's business as usual), they are in the game to make money, not to be philanthropists. If they don't anticipate making money on a deal, they won't play. Notice that I haven't even addressed the issue of using profits to subsidize ASP services—many dot-coms and Internet companies don't have profits.

Obligatory Gold Rush reference: The people selling groceries to miners during the California Gold Rush generally made more money than the miners did. However, fewer miners or miners with less money means that you can't sell as many groceries. How does a shortage of liquidity affect the market for grocers—and ASPs? Frankly, I'm not sure. A long-term cash crunch could slow market expansion. Earnings still look good for many of the more established technology companies. But ASPs that counted on the startup market could find themselves looking for customers as the number of startups drops or startup companies go out of business if they can't raise capital. And ASPs that expect to make money from stock purchases could get hit—and lose money intended for infrastructure enhancements—if they make less than they anticipated. On the other hand, ASPs could sell themselves to potential customers who are worried about operating expenses and want a predictable outlay each month.

I don’t think that slithering B2B and Internet stocks will kill the ASP market. I do think the ASP model is viable in the long run, especially for applications that smaller companies need but can't afford to own or maintain (biotechnology engineering applications and large-scale enterprise resource planning—ERP—are two obvious examples). However, lower revenues in a big actual and potential market for ASPs have got to affect how widespread the ASP model becomes.

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