Mercer Viewpoint: Telecoms Search for New Life in the Emerging ASP Market

Business Wire, Oct 17, 2000

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 17, 2000

The rise of the Internet and network-centric computing is forcing telecom operators to rethink their futures.

Many see salvation -- i.e., a chance to decrease their dependence on providing commodity connectivity -- in the emerging Application Service Provision (ASP) marketplace, a sector expected to generate as much as $20 billion in revenues within the next two to three years.

Initial evidence of this hope for transformation is the telecoms' rush into the Web-hosting business, believing they need to own the higher-value hosting space, not just the commoditized transport network. WorldCom's recent acquisition of Intermedia Communications, which has a controlling interest in Web-hoster Digex, and NTT's buyout of Verio are good examples of the trend. Similarly, AT&T has said it will spend $250 million over the next few years to build hosting facilities, and both AT&T and Qwest have announced plans to partner with IBM Global Services to build-out dozens of global Web-hosting facilities.

The key question in the ASP commerce space is whether telecom providers should attempt to extend from this Web-hosting cornerstone to become Application Infrastructure Providers (AIPs), serving all ASPs as customers, or whether they themselves should become ASPs, directly marketing, selling, and managing applications. "We believe the first question telecom providers must ask themselves is whether ASPs are friends or foes, customers, or competitors," says Dave Sovie, a vice president of Mercer Management Consulting.

According to the just-published Mercer Commentary "Application Service Providers: Where are the real profit zones?" -- co-authored by Sovie and fellow Mercer VP John Hanson -- telecom providers should think twice before entering the ASP business. In the Commentary, Mercer argues that there is a "business-design break" between the people-based business design of applications management and ASPs and the infrastructure-intensive business design of a Web hoster or AIP. In Mercer's view, there are two reasons telecom providers should think carefully before becoming an Application Service Provider.

First, given the huge capital costs associated with building a world-class hosting or AIP business, "Most ASPs and software vendors moving to adopt an ASP model will bypass the capital-intensive infrastructure business and look to partner with an AIP," says Sovie. Mercer estimates a world-class provider must have, or plan to build-out, a minimum of 20 data centers globally, thereby creating tremendous potential for a "wholesale" AIP business for telecom providers.

Second, says Sovie, ASP business designs require an intensive knowledge of applications and business processes, which telecom providers simply do not possess today. Indeed, top executives at Exodus have been widely quoted as saying, "Our company is not in the business of knowing applications; we just support ASPs."

Regardless of which model(s) a telecom provider follows, Sovie emphasizes that a customer-driven business design with a compelling value proposition will be critical to their success. "Telecommunications incumbents who opt to migrate to the AIP's side of the business must carefully consider the features and functionality, as well as the other value-proposition elements they must build into their networks to become the infrastructure provider of choice for ASPs," he says.

Editors: Please contact Howard Bailen at howard.bailen@mercermc.com if you would like to receive a copy of the new Mercer Commentary, Application Service Providers: Where are the real profit zones?