Boy, That Was Fast!

By Christopher Koch, CIO |  Software

Sardined into their seats and stacked three and four deep around the walls of a stuffy conference room in Boston, the sweating faithful gathered to hear Christopher McCleary, CEO of application service provider (ASP) startup USinter-networking (USi), tell them how ASPs were going to change everything.

It was 1999, and ASPs were the new new thing. Everyone hung on CEO McCleary's words. Until....

Maybe it was the lack of air in the room, but when McCleary announced that the Annapolis, Md.-based ASP wasn't going to charge a dime to implement its menu of complex rented software applications, the audience started to laugh. And it wasn't a scattered twitter here or there; it was a deep, rolling, communal belly laugh. Caught like Johnny Carson in the toils of a bad monologue, McCleary, who is now USi's chairman, did what Carson used to do; he turned on his material. "Look," he joked, "they tell me to say this stuff."

You couldn't blame McCleary. Last year, ASPs didn't have to admit that the costs for implementation (among other things) were hidden in their monthly software rental fees. They didn't have to prove much of anything, either -- that they were making money or even in some cases that they had live customers. Most could float along on the hype generated by the ASP concept itself and its solid underlying logic of low cost and convenience for companies that either couldn't afford or didn't want to manage complicated applications like customer relationship management (CRM) or enterprise resource planning (ERP).

But that was then. This year, no one's floating and no one's laughing. The venture capital faucets are being turned off, and investors are beginning to clamor for a payback from an industry that generated a pitiful $300 million in revenue last year, according to Framingham, Mass.-based research company IDC (a sister company to CIO's publisher, CXO Media) -- less than a single big ASP client makes in a year. McCleary's company, which is touted by analysts as one of the better run ASPs, is still standing, but last year it lost $103 million on revenues of $35 million. (And much of that revenue came from -- you guessed it -- implementation consulting services.) USi's main competitor, San Carlos, Calif.-based Corio, lost $45 million last year on revenues of just $5.8 million.

The losses can be explained in part because ASPs spent a lot of money on infrastructure and marketing to gain their first customers -- a building year, as they say in sports. But there's more to the struggles of the leading ASPs than that.

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