Are ASPs the next dot-coms?

While the application service provider industry has struggled through growing pains over the past year, most traditional telecom players have sat on the sidelines struggling with incorporating the ASP phenomenon into their service strategies. Few have jumped in wholeheartedly; most have begun tentative exploration, reluctant to take strong, decisive action in an emerging market that too closely resembles the dismal dot-com market.

Take a quick look at the ASP market and you'll see striking similarities with the dot-coms: huge swings in hype (currently negative), market projections too good to believe, and many start-ups with slim coffers and questionable business models. Few players in the ASP market are currently making a profit. Like many of the dot-coms, ASPs depend on end-user acceptance, which is usually slow to gain. Both the ASP and dot-com models are unproven, and the dot-com model is losing market favor every day.

No wonder there's mixed feelings. There's plenty of reason to wait and see, although with that approach, the likelihood of missing the boat increases exponentially. Players considering a move into the ASP space -- either through partnerships with independent software vendors or other ASPs -- must be cautious.

One way of segmenting ASP services are to place them into one of three categories: niche, me-too, or critical mass. While this is certainly not the only analysis you should undertake, it is a good place to start when looking at particular prospects.

Niche players are smaller ASPs that have found a highly specialized niche that's hard to duplicate and targeted at a small, well-defined market. The niche players can probably survive on their own by maintaining small profit margins, but they are great acquisition targets due to their specialized offering. It is possible for them to maintain their independence after an acquisition, as their specialization is hard to duplicate. This model is not usually attractive to telecom/ISP providers because it will only serve a small portion of their existing customer base and offers limited opportunity for significant growth. In fact, this model may be best suited to a pure-play ASP or ASP aggregator.

Me-too players are ASPs that do not differentiate their service from others. There are usually many me-too providers that offer similar applications seen as commodities in the market. However, from a service provider perspective, there might be ways to make this model work. Service providers can bundle their other products with application services to help round out their product portfolio. So even if the applications they offer are deemed commodities, through bundling it is possible to make an attractive offer -- but it may be difficult to sustain the advantage if other service providers duplicate the applications.

The category with the most promise is the critical-mass ASP. Critical-mass ASPs have an application service on which a large industry or a big portion of the entire market relies. Their focus can be horizontal or vertical in nature, and their business model must be able to scale to support the number of users needed to reach criitical mass. Their service is typically unique and addictive in nature. This category provides the service provider the best opportunity to sustain a differentiation strategy. It's also very difficult to recognize in the early stages, so it can be easy to miss the boat entirely.

Service providers looking at the ASP market have many things to consider. Deciding whether to enter the space at all is a huge question mark. But if that decision is made, looking at the category in which prospective ASP services fall will help determine whether or not the venture will be successful.

This story, "Are ASPs the next dot-coms?" was originally published by Network World.

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