Application Service Provider Market Far From Mature

Computergram International, March 8, 1999

Nothing underlines the immaturity of the application service provider (ASP) channel better than listening to rival enterprise-class ASPs Corio Inc of Redwood City, California, and Annapolis, Maryland-based Usinternetworking Inc (USi) pour scorn on each other's infrastructure models.

USi, based in Annapolis, Maryland, is the brainchild of CEO Chris McCleary, who founded and ran the leading ISP Digex Inc until its acquisition in 1997 by Intermedia Communications Co. McCleary's contacts helped the company raise $29.5m in its first equity financing round in May 1998 and it has already built an advanced international infrastructure with four state-of-the-art data centers, separate systems management control centers and broad dedicated bandwidth connections.

Corio, in contrast, has chosen to subcontract the running of its data centers to its Santa Clara, California-based neighbor, Exodus Communications Inc, a leading Web server host provider, which has an equity interest in the start-up venture. Founded by a team with diverse backgrounds in implementing and hosting enterprise applications for the midmarket, Corio's main backer is the prestigious Kleiner Perkins Caufield and Byers venture capital firm and its KPCB Java Fund.

Corio CEO Jonathan Lee disagrees with USi's strategy of owning its own data centers. "We don't want to have data center management as our core competence," he says, preferring instead to focus all his company's energies on implementing and supporting customer applications. Corio's staff manage applications on the servers hosted by Exodus using remote management consoles. By partnering wit Exodus, says Lee, "we have six world-class data centers from day one, and we didn't have to spend a dollar on them".

But USi president Steve McManus has just as much difficulty making sense of Corio's strategy. "I ask what's the customer view of that?" If there's a problem, he says, "in the Corio-Exodus model, there will be two trouble tickets". Lee maintains that Corio's target customer base will be more concerned with the quality of service than where it originates, emphasizing that having a data center at all will be a novelty for most middle market companies.

In reality, each ASP is courting a separate segment of the market and both approaches are likely to find favor in their respective quarters. Whereas Corio offers a specific, application-level service that targets young, fast-growing companies, USi has chosen a vertically integrated approach that appeals to the more settled and safety-conscious enterprise. McManus believes the worldwide ASP market will be worth between $3 billion and $4 billion by 2000. "We intend to get a large share of the market, but we don't have to get an overwhelming share to have a successful business," he says.