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ASPs growing by leaps and bounds, analysts say

The application service provider market is poised for explosive growth, but companies will soon find themselves in a consolidation period, according to a new study.

3 min read
The application service provider market is poised for explosive growth, but companies will soon find themselves in a consolidation period, according to a new study.

Market research group Gartner today said it predicts the worldwide application service provider (ASP) market will reach more than $25.3 billion by 2004. In 1999, Gartner analysts said the ASP market was worth $1 billion and would reach $3.6 billion by the end of 2000.

While the worldwide ASP market has been led by North America, Gartner projects it will become much more global during the next few years. North America accounted for 65 percent of ASP revenues last year and is expected to represent 45 percent of revenues in 2004. Europe accounted for 20 percent of the ASP market last year and is expected to grab 32 percent of the market by 2004.

ASPs host software so customers do not have to install and manage it themselves. The software is accessed from desktops and is remotely monitored from a data center. Customers pay outside providers to run everything from complicated enterprise software installations to more common desktop applications, which are often difficult to maintain.

A growing number of software makers, communications providers and hardware giants have all jumped into the nascent market, hoping to nab a piece of the lucrative pie. Companies such as Microsoft, Oracle, SAP, Dell Computer, IBM, AT&T, Qwest Communications International and others have been busy trumpeting their own ASP offerings in the crowded market alongside early players like Corio and USinternetworking.

However, Gartner analysts say they believe a consolidation phase will be in full swing in the coming months, prompting companies to fine-tune their business models, acquire other ASPs, or strike more exclusive partnerships.

"Everyone is chasing the $25 billion number, but they're not taking the time to fully bake their business models," said Gartner analyst Audrey Apfel.

Gartner analyst Benjamin Pring said communications providers will probably do most of the acquiring as they continue to see smaller application hosting partners as a way to quickly bolster their offerings in the growing market.

AT&T, for one, has been aggressive with its hosting strategy by linking with several ASPs, such as USinternetworking, in hopes of capturing the lion's share of network traffic and boosting the use of its own network services.

"The next 12 months may very well determine the future prospects of the ASP model as ASPs scramble to position themselves in the market, chase down an ever-receding customer base, and replace grandiose marketing claims with concise, sober-minded business propositions," Pring said.

Apfel said the market will see a number of larger companies buying the smaller players, especially those that are aiming to become a full-service providers.

"As a struggling dot-com could represent an easier way for a brick-and-mortar company to transform (to the Internet), a struggling ASP could represent a good bolt onto a large software company" to better compete in the market, Apfel said.

The successful ASPs that will achieve longevity in the market will be those that have stellar service level agreements as well as strong customer relationship management skills to sustain long-term clients, Apfel added.

"We predict an overall sustainable trend here but don't want to be glib enough to say that it's an easy road for all," she said.