ISPs amid service evolution

SAN FRANCISCO--The term "ISP" is already becoming passe.

Sun Microsystems, Netscape Communications, Oracle, and Microsoft are talking up "applications hosting" for corporate customers as the next frontier for Internet service providers dissatisfied with the slim profit margins of the online access business.

"A transition is happening from ISPs to commerce service providers to application service providers," Sun CEO Scott McNealy said this week here during Sun's conference for ISPs, dubbing the final stage "full service provider."

Application hosting means that big companies would move their internal applications, such as human resources systems and intranet applications, off of their own computer systems and onto systems housed at an ISP's location. To a company's users, the transition to a hosted application would be nearly imperceptible, since they would still access the applications through a Web browser as if they were intranet systems hosted locally.

Also, the cost savings for big companies could be huge, since they no longer need to maintain systems locally.

While many ISPs host Web sites and some host virtual storefronts, few are yet embracing an emerging trend of hosting other applications.

"ISPs are confused and scared about outsourcing applications," said Tim Sloane, an analyst at Aberdeen Group. "It means an entire change in the way they do business. They are rightly hesitating to ask if the business model has to change that dramatically."

Adds editor Jack Rickard of ISP trade magazine Boardwatch: "They don't think it will sell," Rickard said.

But demand from corporate customers is beginning to appear.

"More and more customers want to push things out to the Internet, but within their organizations, they don't have the infrastructure" said Warren Recicar, a vice president at GTE Internetworking, which hosts Lotus Notes and its own proprietary groupware applications, among others. "People still have a big fear about security."

Many ISPs are already into something called "co-location," running "server farms" where companies house their Internet servers at an ISP's secure site where a staff oversees whether the hardware is running properly. Exodus, Digex, and GlobalCenter Frontier run major co-location facilities.

Applications hosting moves beyond watching the hardware to managing the applications that run on the hardware. Hosting Web pages is a simple form, and commercial service providers running Web storefronts is another variant. Such providers, already dubbed "CSPs," often host e-commerce software from Open Market, iCat, and Intershop.

IBM subsidiary Lotus has created a hosting program for its resellers and ISPs like Netcom, GTE Internetworking, and Digex to host that complex collaboration software on servers for customers. With ISP US West Interprise, customers can even rent a hosted version of Lotus Notes for a specific period of time.

Start-up U.S. Internetworking was formed specifically to become an applications service provider, specializing in hosting enterprise software from Siebel Systems and PeopleSoft.

International Data Corporation analyst Meredith McCarty notes that application service providers face a host of issues: What is their relationship with the software companies whose applications they host or sell? How do they charge customers for their service?

At one time, ISPs served as a distribution channel for network hardware vendors, Livingstone Enterprises, for example, before it was acquired by Lucent Technologies. The applications service providers may play a similar role for software, McCarty believes, actually selling the software they host.

Remy Malan, director of marketing for Sun's Network Software Group, thinks new kinds of applications will emerge for the hosting market. He mentions service bureaus that offer software for targeted email based on addresses from messages, not a database. Or a software developer might offer a service to show Web developers what their site looks like to different browsers.

Despite hesitations by ISPs to host applications, analyst Susan Almeida said it provides them a way to move out from the commodity business of providing Internet access and Web hosting.

Greg Howard, senior analyst at Infonetics, thinks customer demand will push ISPs into the applications hosting business. "We interviewed 13 national ISPs, and less than half were planning to host applications for the customers," Howard said. Applications they would host are based almost entirely on what customers demand.

"Service providers don't have a lot of capital to throw into services that are risky," Howard said. "To deploy new services that are extremely costly, shelling out $50,000 to $150,000 for a service they don't know if it will fly--the money may be best suited in upgrading parts of their network."

Indeed, in a Tuesday session on outsourcing e-commerce applications, virtually all questions from ISPs in the audience centered on how much software vendors on a panel would charge to offer their software to ISPs for hosting.

"We want to share in your success," said Kent Godfrey, CEO of Andromedia, which created a version of its Web tracking software specifically for ISPs to host. "We have eight ISPs as current customers and on average they pay $20,000 to get started. Then it's pure revenue-sharing."