Channel Changes | Article

woman changing  channelsFast moving and provocative with possibilities, the ASP market is in the midst of a revolution. World-renowned, best-of-breed vendors, as well as customers of all sizes are watching this rapidly growing industry even as they shape it. ASPs don’t look the way they did at the outset of 2000 and, at the end of 2000, they will have evolved and mutated a great deal more. Sometimes a channel — a route through which something progresses — is changed by widening, reinforcing it with concrete, or even making it bend in another direction. Today, the ASP “channel” and IT industry have begun redefining some of each other’s characteristics.

Impact on Software and Hardware Companies

Any time an ASP sells a solution where the software licensing is bundled into the ASP’s total operational cost and is not bought directly up-front from the software vendor, it has an impact on the software industry. Rita Terdiman, vice president and research director with the GartnerGroup, says that the impact thus far is a small dent because there have not yet been enough purchases of ASP services to make a large dent. When that does happen, she says the software vendors will need to do something to combat this impact. “They will need to change the whole way they look at their revenue. They will need to change the way they reimburse their sales people and, really, they will have to change a fair share of their business model,” she says.

The main thing Terdiman says she has seen in the past few months is that companies are developing their applications from scratch for the ASP model and for the Web. “They are scalable, Web-architected, thin client applications that sell for a very low price and have shared disks, which partly allows for the low price. They also have some form of business process embedded that takes it down to the Internet. Quite a few vendors are doing that.”

Conversely, ASPs are a plus for the hardware industry. “They are busy trying to sell hardware devices for the ASP model.” Terdiman adds that whether the vendors are now changing their products to ensure reliability and scalability for ASPs or whether those types of changes were already occurring is not certain. “What is certain is that you will hear a lot of noise from companies like Sun Microsystems and from suppliers like Cisco, Dell, Compaq and Hewlett-Packard saying that their products will accommodate the ASP model.

Differences in Value Chain

When it comes to players on the vendor side of the ASP market, the greatest activity now occurring is strategic alliances. ASP firms usually must align themselves with one or more vendors to provide the network (telecommunications and web hosting vendors), other hardware (server and data storage) vendors, and software and applications vendors (along with their infrastructure). Although strategic alliances are not new in the outsourcing world, they take on a different consequence for ASP customers.

“What’s different,” Terdiman explains, “is that in outsourcing the vendors will generally subcontract certain sub-functions. That is not really important nor part of the solution the customer is buying — in fact, the customer does not even know half the time if the outsourcing vendor is subcontracting or not. But when you go to an ASP (today at least), a customer must look at the whole value chain and realize that the ASP is not the direct provider of most of the services. So it is very important that you know all of the pieces of the value chain — where is the software coming from, who is doing the integration, who is doing the communications, who is doing the hosting. Customers need to know a lot more about all those vendors.”

She believes the lack of industry maturity (some of the companies have not existed before, and some services have not been done before) will cause some juggling around of alliance partners. “That’s where we will see a company like Corio shift from an Exodus to a Concensus alliance,” she says. †

A New Model

The ASP model is changing so quickly that it is just about impossible for people to predict what is going to happen in the near term, explains Terdiman. As for developments by 2001, she predicts an explosive growth in new vendors, along with more confusion as to how the market is going to shape out. “It’s really hard to say what is going to happen to this market, but let me just say that within one year it is not going to look the way it looks today.”

She believes the market’s picture for the year 2003, however, is already clear. “There will be a lot fewer vendors, and they will be separated into retail and wholesale vendors,” she explains. A lot of guys will do the back end infrastructure stuff, and they will add specialist ASPs catering to vertical industries and other specialized business needs. They will be joined with portals, so customers will actually go to a specialized portal and get ASP solution from there.”

Terdiman also predicts much more integrated solutions — as opposed to point solutions — by 2003. “Except for dotcom companies looking for a complete infrastructure, today’s ASP customers are just getting tantalized by what this model is. For the most part today when they go out and buy something, they want a point solution. They are not going out and looking for an integrated solution. But I think over time they will be looking for highly integrated solutions.”

While the industry endures its current experimental phase, she believes pricing models will continue to be experimental. Eventually the industry will come up with pricing models that customers like and which satisfy the ASPs’ needs to compensate their sales forces with incremental commissions (as opposed to an up-front commission, which the IT industry now uses) and compensate their alliance partners.

Finally, she says that “with the ASP model, there is not going to be one right or best way, just as there is no one right way in outsourcing today.”


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