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From hosted apps to Web services

Venture capitalist Jennifer Fonstad explains why the move toward delivering software as a service may be just the tonic struggling ASPs need to turn the corner.

Although Steve Ballmer claims that within 10 years all software will be delivered as a service, current application service providers struggle to make their businesses work.

Heavy maintenance and integration costs have undercut much of the early promise of hosted applications. Today, however, new Web services technology may finally allow hosted services to be pervasive, overcoming many of the shortfalls inherent in the ASP model, while enabling an even broader set of services to emerge.

According to research firm Gartner, developers spend 68 percent of their time "gluing" applications together at an estimated cost of over $120 billion. Most application service providers struggle to make delivery of their services cost-effective as they bear many of these costs.

Outsourced commerce service providers, like Digital River, suffer from significant costs in constantly updating content like pricing and product information. Others incur huge expense in managing data migration or integration of disparate data streams. These costs have overwhelmed the small, transaction-based or usage-based revenue models that many of these ASPs follow.

The emerging Web services technology helps overcome these huge costs by blending traditional application and middleware layer functionality onto one seamless platform. By using small, component-based applications that plug easily into this technology, data integration, data queries and management, as well as content updating, can occur without expensive integration teams or manual processes to make it work.

The Microsoft gambit
Microsoft, with its .Net strategy, wants to create a portfolio of those building-block components to enable pooled services to work together. Microsoft is even promising to be "open"; emerging industry standards such as SOAP and UDDI are defining the interoperability language for these services.

If Microsoft succeeds--through Passport, HailStorm security initiatives, and other early services like authentication and usage metering--it will dwarf the days of DOS and Windows.

But much of this infrastructure will be key to interoperating the Web services seamlessly and successfully.

There are also many exciting start-ups building integral pieces of this new services platform. Companies like WebMethods are at the forefront of the Web services market by transforming disparate data streams and enterprise applications into a seamless business process. Working with Juniper Networks, the WebMethods B2Bi solution rebuilt a key business process for Juniper, delivering product availability and price quotes in less than a minute from upward of a week previously. Costs were reduced by 2 percent of revenue, which drops right to the bottom line.

Other companies include Appstream, Groove Networks and Ipedo. Appstream eliminates costly software updating and maintenance through its component-based software-delivery technology. Saint Gobain Norton uses Appstream to improve network performance--over 10 times faster--for its application delivery while enabling seamless, virtually real-time upgrades.

Groove uses a peer-to-peer framework for metadata management, and Ipedo's XML database and caching products solve critical data access, integration and performance problems. Each of these pieces is fundamental to building Web services technology for seamless delivery of software as a service.

And delivering software as a service can offer significant advantages to a business. A subscription-based service makes cost of entry low and can price features and functions to usage. It eliminates expensive maintenance costs like supporting multiple versions of a software application sitting on hundreds or even thousands of desktops. Pooled services provide even greater second-order advantages, like real-time, data-driven collaboration and new types of data aggregation that can provide huge value back to the hosted businesses.

Athenahealth, with its hosted billing services technology for physicians, is a good example of a company using first- and second-order benefits through its model. While its service slices the cost of claims processing in half, its second- and third-order advantages may be even more significant.

By aggregating data across hundreds of medical codes and thousands of doctors, payers and physicians gain new insights into everything from disease management and epidemiological outcomes to expense control and opportunities for revenue enhancement. Many other companies, as well, are using early XML-based applications in everything from supply chain to online commerce to take advantage of both cost advantages and collaboration advantages fostered by Web services technology.

With the emergence of this platform and widespread adoption of XML, Ballmer may be right; all software and applications as we know them today will be delivered in a service-based model. Seamless integration, metadata management and routing aggregation are all critical pieces of this new infrastructure and may be just what anemic ASPs and current application service providers need to make their businesses work. It also offers the broader promise of making the Internet into a seamless thread in the fabric of business processes tomorrow, offering huge opportunities to start-ups today to help make that happen.

Draper Fisher Jurvetson is an investor in Appstream and Ipedo.