Analysts Debate ASP Market's Future

Recently, research firms International Data Corporation (IDC) and Forrester Research examined the application service provider (ASP) market and released reports that offer predictions about the industry's future. IDC believes that ASPs will change the face of business; Forrester is less enthusiastic. But the companies put forth similar predictions about what the IT world will look like if the ASP strategy wins out: ASPs will become the new "face to the customer," offering full vertical packages of services.In its report, "The ASPs' Impact on the IT Industry: An IDC-wide Opinion," IDC predicts that ASP revenue for enterprise applications will reach $2 billion by 2003, and that the potential for the ASP market will reach $4.5 billion by that same year. "The ASP [market] has the potential to topple some industry leaders if they are not cognizant of its effect," IDC writes. However, success for the industry depends on several variables, which IDC is monitoring closely.IDC also predicts sweeping changes for the software industry, especially in the relationship between software vendor and customer. IDC believes that the ASP revolution will grant success to companies that can form working vertical partnerships and that can deliver cost-effective whole-product solutions.For Forrester's report, Sizing App Hosting," analysts interviewed 77 software vendors and 36 application hosting organizations and found that users are "lukewarm" about application hosting. In fact, the report concludes that virtually no larger or very large companies will use the model. "These firms resist outsourcing because they have already invested in the apps they need, don't believe it's cost-effective, or possess sufficient skills inhouse." Nevertheless, the Forrester study reports that most of the small to midsized companies interviewed indicated an interest in purchasing ASP services.Despite the lukewarm reception to the ASP model, the Forrester report says that the "concept is compelling," citing the ability for smaller firms to upgrade regularly without great cost and to gain access to software such as PeopleSoft, which is otherwise very expensive and requires extensive customization. However, in its assessment of the ASP market today, Forrester points to insufficient technologies, old world pricing strategies, and poor market response. According to the report, "App offerings don't meet early market needs. Vendors like AppNet and IBM entered the market with products like SAP financials or PeopleSoft HR that are accessed by less than 5 percent of internal users."Forrester's predictions for the ASP industry's future are more optimistic than IDC's. Forrester predicts that by 2003, the ASP market will reach $11.3 billion—nearly three times IDC's estimate for the same period. In fact, the Forrester report says that the ASP business will grow large enough to significantly affect client/server software sales. Forrester believes that e-commerce applications, not internal applications, will drive most of this growth. The future will favor thin clients and Internet-enabled computing—a future in which Microsoft loses out and "big-box" companies such as Sun Microsystems win.Like IDC, Forrester predicts a wild shift in vendor-customer relations. And, like IDC, Forrester predicts that vast integrated product bundles, not single-application services, will lead ASP industry growth.