Application hosting: what's new here? - Industry Trend or Event

Communications News, August, 1999 by Bart Taylor, Dan Taylor

In recent months there has been a lot of noise made about "hosted applications." Major vendors of platforms, software, and integration and managed network services have joined in a chorus of announcements about new initiatives--enter the "application service provider." The ASP trend reminds us of a pond during mid-summer, when the din of the peeper frogs, all singing the same feverish message, is deafening.

What is the ASPtrend, and why should enterprise customers care? The basic idea is that applications, singly or in combination, can be remotely hosted on behalf of enterprises via service contracts. Beyond a new pricing model that can offer advantages--particularly to enterprises that are cash-strapped--ASPs can offer operational guarantees that include application availability and the highest assurances of security. Based on these promises, everything from basic office suites to high-end enterprise resource planning applications is being rolled into new commercial service offerings.

Many enterprise managers are nonplused. It's tough to absorb all of the nuances--and the not-so-subtle message: "You will be assimilated." While the labor crunch most organizations are currently experiencing may be a valid reason to outsource application hosting, a lack of resources alone isn't a good justification for the decision. Cost savings isn't enough to justify a decision to outsource, either.

Are these announcements just more "slideware," with no real substance? No, although a dose of skepticism is healthy, to inoculate oneself against market noise. In fact, the ASP trend is really nothing new, and it isn't likely to go away soon. We view it as a new spin on an old business. An old soap ad expressed the idea best: "In fact, you're soaking in it right now."

The ASP business finds its roots in a decades-old, successful business model that still exists today: time-sharing. If you're looking for an application to go with it, here's a classic: payroll. These kinds of services are doing quite well today, and many readers of this column are customers. Also, consider the pervasive nature of transaction-hosting applications: airline reservations, billing, and financial processing.

Today, advances in technology are pushing the service model further into the channel for most of the technologies sold to enterprises. For example, managed networks, VPNs, and help-desk offerings represent new hybrids that match enterprise management with third-party services. As another reference point, consider the role of services in the way hardware is sold--witness the storage business. It's easy to understand why the platform and storage product vendors are so keen to get into the ASP business: they are already in it. Most technology vendors, already selling more and more through services channels, are involved in the application-hosting business as a natural extension of their business models.

Given the new potential for service guarantees at even the smallest departmental levels--or for small to mid-sized enterprises that can't realistically go it alone--ASPs can offer the ability to maintain the very highest levels of quality assurance by bundling a set of once-separate components into a service. Providing this isn't going to be easy. The heart of the ASP delivery remains the hard work of application integration and systems management, with a laundry list of bundled services thrown in.

It seems as if nobody has escaped the tremendous surge in implementing new technology for electronic commerce. This has given rise to a booming ASP business in Web hosting, integration, and the management of back-end transactions. Enterprises have expressed these common needs by funding a new category of hosting/integration companies; these include the very largest VARs and Sis, as well as zooming new upstarts.

This pattern for success is being applied to other applications that incur needs for massive scalability, difficult integration, new skill sets, and a need for performance guarantees that include uptime, low latency, and security. What can be bundled? Everything: help-desk service, data access, quality-of-service network performance guarantees, and security. What applications? Enterprise planning, sales-force automation, specialized vertical applications.

There are ASPs today that are already making money using server-hosted applications. It's no wonder other ISVs (independent software vendors) are charging into this market, aided by their many channel partners.

Many questions remain. The ASP businesses that succeed will be those that match the most pressing needs of enterprises. Because customers vary by size and needs, addressing the market correctly will require some finesse and may take time to resolve itself. In the meantime, we' re watching the ASP market and betting that it will continue to develop into a new channel. This service channel will benefit enterprises by making high-value services more readily available. Opinions of Communications News readers will make all the difference in shaping this market, and we therefore invite you to tell us how the ASP market does (or doesn't) meet your enterprise needs. Write to us at asp@giotto.nu.