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Phone giants may gain most from ASP market

A market meant to make computing for businesses easier may end up causing a confusing race pitting start-ups against the veterans of the communications industry.

A market meant to simplify computing for businesses may end up a confusing race pitting start-ups against the veterans of the communications industry.

As the trend to outsource corporate computing tasks gains steam, start-up businesses that offer a selection of application service provider (ASP) services are finding that giant telephone companies also have been drawn to the market. The influx may confuse the broader ASP market, just as it seems poised to take off.

ASPs typically allow businesses to offload their technology needs, including staff and equipment, for a monthly fee that covers a rental of expensive software applications that small businesses couldn't otherwise afford. Some analysts estimate there will be more than 200 ASPs vying for customers by the end of the year, creating the need for "aggregators" that offer a kind of one-stop shopping.

In this environment, start-ups Jamcracker and ePanacea may be at a disadvantage.

"The customer is going to say, 'Wait a minute, I don't know you, and I don't know your ASP partners, so why should I give you my money?'" Kneko Burney, director of markets and computing for Cahners In-Stat Group, said.

ASPs' ascension
The worldwide spending on application services is expected to explode over the next five years.
Year Revenue
1999 $296 million
2004 $7.8 billion*
Source: International Data Corp.
Established companies like AT&T, Sprint or Bell Atlantic boast sprawling networks and time-tested relationships with customers, and these companies are actively searching for talent, with agents around the world looking for small applications companies that the giants can sign up and offer over their networks. In some cases this is leading to competition for the start-ups' business, as firms such as AT&T and Qwest compete for exclusive relationships with promising partners, according to some.

The campaigns are a huge boon to the small businesses, which can play the giants off each other for a better deal. But ultimately, they need the credibility and blue-chip corporate relationships the large companies offer.

"At the (corporate) level, they're looking for industrial-strength (networking) services," Dave Dorman, chief executive of AT&T and British Telecommunications' Concert joint venture, said. "An eight- or 10-person company has a hard time convincing American Express that it can do this."

IDC predicts that worldwide spending on ASP services will grow to $7.8 billion by 2004, up from $296 million last year. Meanwhile, Cahners projects more than 3 million companies will spend $7 billion on application services by 2004.

Analysts believe established ASPs serving larger corporations will continue to have success selling directly, but that these smaller, unknown ASPs targeting small businesses would be wise to align themselves with communications companies, such as high-speed, or "broadband," service providers.

"Small businesses are really going to trust companies like Bell Atlantic, so it makes a lot of sense for a small-business ASP to partner with companies that already have an in with small businesses," Amy Mizoras, an ASP industry analyst with International Data Corp., said.

For example, AT&T already has signed several ASP partners, including USinternetworking, to deliver services over its "Ecosystem for ASPs." Many of the high-speed digital subscriber line providers have also considered offering ASP services, according to executives.

According to analysts, Jamcracker and ePanacea, among several others that are popping up, plan to aggregrate hundreds of ASP offerings together in one place, in some cases repackaging them for communications carriers to resell.

Start-up ePanacea, for example, is positioning itself as a "cure all" for the ASP industry, which it believes will have trouble expanding quickly and gaining distribution on communications carriers' networks, according to executives.

"The aggregator has to emerge ... (But) we're the next level beyond aggregator," according to ePanacea chief executive Matthew Rosenhaft.

Backed by Exodus Communications founder K.B. Chandrasekhar, Jamcracker is developing a Web portal-like clearinghouse for dozens of Web-based ASP services.

Based in Atlanta, ePanacea was launched last September and has about $3 million in funding to date. The company has about 30 employees thus far and expects to name several ASP and communications carrier partners in the coming weeks.

Jamcracker, meanwhile, announced $42 million in equity and debt funding last month after being formed in July.

ePanacea will share revenue with both the ASPs and communications companies, and plans to launch its service June 1, according to executives.