The Evolution Of Managed ASPs

When opportunity knocked, I told it to take a hike. Several years ago, my company tried hosting applications for a client on Citrix WinFrame servers running in our office. We called our service a RON (Remote Outsourced Network). After experiencing some infrastructure and administrative difficulties, though, we realized that application hosting would require a serious investment in both money and resources in order to be successful. We pulled the plug and transferred the RON application to our client.

Little did I suspect that within a couple of years the newly labeled ASPs (application service providers) would be Wall Street stars. By early March of 2000, the combined market capitalizations of the five leading, publicly traded, general-purpose ASPs at the time - Breakway, Futurelink, Interliant, NaviSite, and USinternetworking - was an incredible $24 billion, a multiple of over 50 times their combined hosting revenue. And unlike our RON, not one of those ASP pioneers was even remotely close to profitable.

Wall Street thought that by leveraging data centers, hardware, and IT talent across a large number of customers, ASPs would generate huge earnings. Investors believed cookie cutter service offerings would bind customers to them in endless streams of recurring revenue.

Hosting all applications for multiple organizations, however, is extremely difficult. The expected ASP economies are negated by other requirements. Separate hardware platforms, for instance, are often required for each customer as the only practical way to support legacy Windows applications, deal with DLL (dynamic link library) conflicts, resolve printer driver problems, and provide expected security. The process of understanding and fulfilling vastly different IT and user needs entails enormous transaction costs.

Even ASPs focused on a narrow vertical niche are plagued with continuous requests for "one-off" work such as user configurations, report writing, programming, data warehousing, and integration with other applications. In addition, they often have trouble making money from this ancillary consulting.

Predictably, the ASP bubble burst in a spectacular fashion. By early March of this year, the combined market caps of the five ASP pioneers had plunged a remarkable 98% to only $546 million. Sadly, they may still be overpriced. According to Downside's Deathwatch, four of them are projected to run out of cash by early July of this year. And earnings problems are not limited to the industry leaders. Out of 14 privately held ASPs listed in the September 2000 issue of Red Herring, only one was in the black.

ASP Models That Work
One recent morphing of the ASP model, however, not only makes money, but is also reminiscent of our RON. Solution providers are responding to customer requests to take over management of their internal ASPs. But today, solution providers can minimize their investment by hosting the servers at a co-location facility. New generations of software from Microsoft and Citrix provide a much more robust and reliable hosted environment. Performance is further enhanced with a vast array of new management, storage, security, and bandwidth products geared toward ASPs.

Hosting all of a client's applications is really just a more efficient version of IT outsourcing. Hosting agreements are typically customized based upon an established relationship and mutual trust. The resulting SLAs (service level agreements) reflect the solution provider's understanding of the customer's specific business and IT infrastructure requirements.

My company is going to repeat history and jump back into the "managed ASP" business, which we think is a hipper moniker than RON, yet dilutes the negative connotations surrounding the term ASP. It also indicates a willingness to accommodate a client's specific desires such as owning the hosting equipment.

Solution providers who offer managed ASP services can continue to concentrate on their core competency of building IT infrastructures while learning how to be successful hosting applications. A managed ASP will never come close to generating the market valuations of the gilded ASP days of last year, but it can certainly provide reasonable profits. It can also generate substantial recurring revenue to help even out the cash flow disparities of project work.