Aspiring to be the perfect host - applications service providers - Industry Trend or Event

CommunicationsWeek International, Nov 15, 1999 by Joanne Taaffe

Software vendors are having to change their business models to go after smaller companies and to grab a share of the emerging application hosting market.

A year ago application hosting was a little-known term referring to a niche market in the United States. Today it is still just a niche market in terms of revenues, but one pursued hotly worldwide by traditional carriers, service providers, Internet service providers and hardware manufacturers alike.

Even Microsoft Corp., Redmond, Washington, last week said it is trialing a shift from charging a one-off license fee for its BackOffice and Exchange applications to selling them on a monthly basis through applications service providers (ASPs) and operators such as BT.

Different definitions

But while there is general agreement that there is money to be made from application hosting, there is less consensus as to what it actually is.

At one end of the scale it can refer to a consumer renting an application and paying for it monthly or quarterly. At the other end of the scale it could encompass an entire corporation out-sourcing its applications.

And application hosting could come from facilities-based service providers dedicated to taking charge of hosting, managing, integrating, delivering and servicing out-sourced applications; or it could come from a software company and service provider working jointly to host and deliver applications.

As an idea, application hosting is compelling: users get pay-per-use software, while software companies get a new channel to users and carriers benefit from value-added business. The trouble is, at the moment the application hosting market offers little more than promise.

Operators, software companies and hardware manufacturers all acknowledge that sales are small. Some pieces still have to be put firmly into place before application hosting can hope to lift off and reach the market value of $4.5 billion forecast by International Data Corp. for 2003.

As a result, customer, carrier and even software vendors are still not quite ready to dive wholeheartedly into applications-hosting business.

One stumbling block is the difficulty currently of persuading the target customers-medium-sized companies-to outsource their business applications.

"[Our] biggest competitor is the internal IS manager," said Jim Stalder, executive vice president of strategy at USinternetworking Inc. (USi), an ASP based in Annapolis, Maryland. He believes information systems managers are concerned about job cuts as a result of out-sourcing deals.

But even if medium-sized companies were clamoring to hand over the hosting, management and delivery of their business software applications to an ASP or a carrier, there would still be the problem of software applications developers that will need both to adapt their products, and stomach changes to their revenue model, according to Roger Baskerville, High Wycombe, England-based U.K director of i-business development at Citrix Systems Inc., of Fort Lauderdale, Florida. For a company used to selling a shrink-wrapped software package for several hundred dollars, the possibilities of selling on a monthly basis instead, can be daunting.

"[Application hosting] is not commonly used and it's not something that ISVs [independent software vendors] have learned to co-exist with," said Keith Roberts, campaigns manager for e-commerce and service providers at Sun Microsystems Inc., Mountain View, California.

Baskerville goes further, arguing that the application hosting business will spark a fundamental shift in the way that programmers construct applications. "Applications will be of a new type, in terms of architecture. What's being worked on right now is [scalable, one-to-many systems]. The back end will need different operating systems," he said.

Most of today's desktop applications are designed to run on a single local device, not over a network, and will be difficult to adapt. Partly because of this, business client-server applications-familiar products such as Siebel, SAP and Peoplesoft-made up the first wave of ASP offerings.

But the other reason enterprise resource planning companies such as Walldorf, Germany-based SAP AG rushed into the application hosting space was because their traditional target market of large enterprises had become saturated, said Graham Clark, who recently left his role as head of Microsoft's e-commerce division to found BA Port, a software company that designs applications for the application hosting market.

He said by adapting their wares for application hosting, the software companies that have traditionally served enterprises will be able to attract smaller customers. But now it appears that the second wave of application hosting is coming.

Companies that specialize in office applications-notably Microsoft-are looking at how to use ASPs as a channel. The Redmond company is trialing the distribution of its BackOffice suite of applications via ASPs and operators in the United States and Europe. It is still evaluating how to license the software to companies such as BT and USi, and will not make BackOffice commercially available via ASPs for around another six months, said Richard Tooth, manager of Microsoft's U.K. Internet customer unit, based in Reading, England.