Commentary: Acquisition eases Nortel into crowded ASP market

By Rita Terdiman, Gartner Analyst

Nortel Networks' planned acquisition of remote management provider Epicon is the second major deal in the application service provider (ASP) market in as many days.

Yesterday, Cereus Technology Partners and ASP Eltrax Systems announced a merger to form a full-service provider, offering a full range of information technology services, including consulting and application hosting.

These deals illustrate key trends in the ASP market.

	See news story: Nortel dives into application services with buy

First, newcomers are entering this increasingly crowded market daily--including portals, system integrators, value-added resellers, network service providers, external service providers, independent software vendors and Internet service providers.

Networking providers such as Nortel look for ways to increase revenue and profit margins through value-added services. These sellers directly offer ASP capabilities such as application hosting or provide ASP capabilities and tools to other service providers that want to offer e-business services.

Although the ASP model should simplify application deployment for enterprises, systems management problems surrounding desktop environments remain. Epicon gives Nortel the infrastructure software needed to remotely manage the desktop side of ASP offerings. Nortel will likely add this technology to its Preside Managed Application Services Platform (also announced today) and offer it to various service providers.

With so many players entering the ASP market, a severe shakeout will inevitably occur. We expect the number of new entrants to grow through the first half of 2001; the industry will then consolidate significantly. As the Nortel-Epicon and Cereus-Eltrax deals show, the number of mergers and acquisitions has already begun to increase. Yet by the end of 2001, many of today's ASPs will likely cease to exist in their current form--not only due to consolidation in the ASP market, but also due to poorly thought-out business models, bad choices of partners and the inability to execute.

Nevertheless, demand for ASP offerings--still relatively small--will continue to grow. Although some in the industry expected that ASPs would appeal primarily to small and mid-size enterprises, we already see interest among large businesses for certain types of ASP offerings. Businesses' desire for rapid implementation, more standardized solutions, and the desire to lower total cost of ownership through centralization will make the ASP model an alluring alternative to enterprises of all sizes--in the appropriate situations.

(For related commentary on how ASPs will affect large companies, see TechRepublic.com--free registration required.)

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