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© 2003 UMFK.

Application Service Providers

internet business models

text and cases

Tony Gauvin

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© 2003 UMFK.

Overview

• Definition

• Taxonomy

• How do ASP’s create value?

• Barriers to Adoption

• ASP economics

• GBF??

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© 2003 UMFK.

The Future of Computing

Five years from now, if you’re a CIO with a head for business, you won’t be buying computers anymore. You won’t buy software either. You’ll rent all your resources from a resource provider.

– Scott McNealy, CEO, Sun Microsystems

– May 2000

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ASP

• An ASP is a organization that manages and delivers application capabilities to multiple entities from a data center across a Wide Area Network– Software is “rented” for a recurring fee– Can add multiple service offerings

• Application Software• System Integration Services• Data Center and Connectivity Services• Application Monitoring, Metering/billing, and End-user support

• Defining characteristic was that an ASP is the sole owner of the customer relationship

• Expected 6-fold increase from 2000 to 2003 – $1,964,000 to $11,311,000

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© 2003 UMFK.

Taxonomy

• Four dimensions– Solution Focus

• Internal <> external

• Horizontal <> vertical <> enterprise

– Customer focus• Age, size, growth rate, complexity

– Breath of application solutions• Single application <> portfolio

– Applications sourcing strategy• Internet enabled vs. Web-native

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Solution Focus

• Application classified along two vectors– Externally versus internally focused

• External connects a company with outside partners– CRM, Supply Chain,

• Internal used by company employees– HRM, Financials

– Horizontally, vertically or enterprise focused• Horizontal is across a wide range of industries

– E-mail

• Vertical is for a specific industry– CollegeNET

• Enterprise is for large complex organizations

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Customer Focus

• Characteristics of Customers– Size

• Small <100 employees

• Medium >100 < 999 employees

• Large >1000 < 4999 employees

• Very Large > 5000 employees

– Pace of Growth– Business Complexity

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Breath of Application Solutions

• Single applications– SAP R/3

• Portfolio of products– May not be their products but that of another

vender (Microsoft)

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Application Sourcing Strategy

• Internet-enabled applications– Originally built for client/server and then

retooled for the Internet– Often only had a web based front end

• Web-native applications– Designed from inception to operate only over

the Internet

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How ASPs Create Value

• Create “Frictionless commerce”– Reduce high-cost of shrink wrap software

– Reduce difficulty of recruiting and retraining IT staff

– Reduce the need to build and maintain IT infrastructure

• Compensate for lack of in-house expertise• Low up front investment and predictable cost• Speed of deployment

– For ERP – 90 days versus 3 years

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Barriers to Adoption

• Security– Internet– Outsider Data Center

• Lack of personalization and customization– Generic (one size fits all) solutions

• Untested business model

• What happens if the ASP goes under?

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ASP Economics

• Tough to collect data– Diversity of ASPs activity– Only a few ASPs were publicly traded

• Sources of Revenue– Rental fees for software

• Long term

– Fees for Professional Services• Short term

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ASP Cost Factors

• Cost of Services (mostly personnel)– Network operations– Data Center operations– Customer support– ? Licensing fees if using other vendors

• Sales and marketing– Direct sales reps

• Product Development– Depends on whether the ASP developed or bought

Applications • G&A

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GBF or GIRF?

• Network Effects– Varies based on application sourcing strategy– Higher for Web native then Internet enabled

• Scale economies– Good if ASP developed their own applications– Operations costs vary with transaction volumes

• Incremental gains

• Customer retention– Very HIGH– First mover advantage– Lower for Web native then Internet enabled