Bus. Std: ASPs Failed – but are now making a Comeback

My latest column in Business Standard:

About 5-6 years ago, Application Service Providers (ASPs) were one of the hottest categories in software. They would transform the way software would be delivered, and create a win-win situation for customers and software vendors. That dream did not pan out. ASPs were lumped in the basket of Internet failures along with online pet food stores and b2b exchanges.

Unlike the others, though, ASPs are now making a comeback and for good reasons. I believe that the ASP business is where Search was in 1999 when Google strode on the scene ripe for new entrants to come in and change the rules of the game. But first, let us take a walk down memory lane to understand the promise of ASPs and then analyse what went wrong in the first wave.

ASPs offer applications over the Internet using their own servers to customers, who pay a regular fee for the use. For companies, there is no need to own either the application or the underlying infrastructure. For service providers, it helps them aggregate a large number of customers providing economies of scale. Using the Internet as the distribution medium, ASPs can reach out to customer globally.

Wikipedia outlines the advantages: software integration issues are eliminated from the client site; software costs for the application are spread over a number of clients; and, vendors can build more application experience than the in-house staff. It also mentions the disadvantages: the client must generally accept the application as provided since ASPs can only afford a customised solution for the largest clients; the client may rely on the provider to provide a critical business function, thus limiting their ability to handle that function to that of the provider; continuing consolidation of ASP providers may cause changes in the type or level of service available.

ASPs promised a world where software would be delivered over the Internet, customers would have to pay a monthly service charge rather than a large upfront payment, and vendors would have great scale in offering the services to business globally much like Yahoo, Google and MSN have done for consumers in every country of the world.

On paper, the ASP idea looked like a great win-win for everyone. So, what went wrong?

An October 2002 article in Baseline summarised what went wrong with the business model of Application Service Providers (ASPs): The idea was that the customers, then primarily dot-coms, would be freed of purchasing and maintaining software and could use their dollars elsewhere, perhaps to bolster their marketing budgets and build their brands. And the rent would provide ASPs with a steady source of incomeBut two things went wrong. First, there were few companies that thought renting was a good idea. Most wanted to own an asset as important as software, and they were not about to turn over anything that controls their critical business processes to an outsider. Second, the Internet stock-market crash wiped out most of the customers.

John Hagels book Out of the Box (published in 2002) has an extensive discussion on ASPs, what the early companies did wrong, and how it can be done right. He writes: ASPs in many respects presented a false start in the efforts to break out of the enterprise straitjacket. In particular, few of them adopted Web services architectures as their technology platform. Instead, they attempted to build businesses on the Internet using traditional technology architectures. This proved a significant flaw in the early ASP model.

Hagel then discusses the reality of the first wave of ASPs:

  • Product Complexity and Lack of Flexibility: Traditional enterprise applications were designed to meet the complex needs of a large enterprise. Small- and medium-sized enterprises rarely needed the full complex functionality embedded in these applications. As a result, the applications proved unwieldy in smaller enterprises they were slower and more complicated than necessary. [Also,] applications designed using conventional technology architectures presented major challenges when businesses tried to customize them or connect them with their existing applications.

  • Product Performance Concerns: Within the firewall, CIOs had much better control over performance. Outside the firewall, they worried about both technical and corporate performance.

  • Vendor Performance Concerns: ASPs were new start-ups, with a very limited track record. CIOs found that ASPs had very limited operating history to provide reassurance that their management processes had been tested successfully in high-volume, mission-critical environments.

  • Challenging Vendor Economics: Customer concerns about ASP performance and the lack of compelling product benefits contributed to much higher customer acquisition costs than anticipated. Sales cycles were also longer than anticipated. [As a result,] ASPs found themselves caught in a potentially life-threatening economic bind.

    Hagels key point: The Internet is not simply a new distribution channel. It often requires a fundamentally new set of products and technologies if a business is to exploit its full potentialWeb services architectures are the key to unlocking the full business potential of the Internet.

    That is the starting point for rethinking ASPs. But theres a lot more to ASPs than web services. We also need to rethink the markets they address. As I will explain in the next column, the big opportunity for ASPs is the long tail of enterprises in the worlds developing countries what I call the SMEEMs (small- and medium-sized enterprises in emerging markets). They have been largely unaffected by the Internet other than email usage and in some cases, a minor web presence. The software they use for their business remains almost identical to what they used five or more years ago. [In India, this is limited to mostly pirated copies of Microsofts Windows and Office, and Tally for accounting.] They are the weak links in the information value chain and the next big opportunity for software vendors.

  • Broadband for Development

    Tom Friedman writes:

    Thomas Bleha, a former U.S. Foreign Service officer in Japan, has a fascinating piece in the May-June issue of Foreign Affairs that begins like this: “In the first three years of the Bush administration, the United States dropped from 4th to 13th place in global rankings of broadband Internet usage. Today, most U.S. homes can access only ‘basic’ broadband, among the slowest, most expensive and least reliable in the developed world, and the United States has fallen even further behind in mobile-phone-based Internet access. The lag is arguably the result of the Bush administration’s failure to make a priority of developing these networks. In fact, the United States is the only industrialized state without an explicit national policy for promoting broadband.”

    Mr. Bleha notes [that] when America “dropped the Internet leadership baton, Japan picked it up. In 2001, Japan was well behind the United States in the broadband race. But thanks to top-level political leadership and ambitious goals, it soon began to move ahead.

    “By May 2003, a higher percentage of homes in Japan than the United States had broadband. …

    “Today, nearly all Japanese have access to ‘high-speed’ broadband, with an average connection time 16 times faster than in the United States – for only about $22 a month. … And that is to say nothing of Internet access through mobile phones, an area in which Japan is even further ahead of the United States. It is now clear that Japan and its neighbors will lead the charge in high-speed broadband over the next several years.”

    South Korea, which has the world’s greatest percentage of broadband users, and urban China, which last year surpassed the U.S. in the number of broadband users, are keeping pace with Japan – not us. By investing heavily in these new technologies, Mr. Bleha notes, these nations will be the first to reap their benefits – from increased productivity to stronger platforms for technological innovation; new kinds of jobs, services and content; and rising standards of living.

    Also read Thomas Bleha’s article in Foreign Affairs.

    IBM’s Challenges

    The New York Times assesses the future after IBM’s disappointing results:

    I.B.M. is making an ambitious shift in its services business to move beyond helping corporate customers run their data centers to using information technology to make their business operations more efficient. It means putting I.B.M. researchers and software programmers to work for customers to redesign and automate business tasks like procurement, human resources management, accounting and customer service. Customers often hand these tasks over to I.B.M.

    The logic is to move up the economic ladder to more complex and more profitable tiers of the services industry, thus staying ahead of rivals offering less expensive services – Indian outsourcing companies like Infosys, for example, and Dell, which is expanding rapidly in technology services.

    The risk, however, is that competition in its traditional technology services will erode I.B.M.’s business faster than the company can replace it with more lucrative work.

    I.B.M., analysts note, is trying to navigate a strategic shift in its services business at a time when the technology industry is growing slowly and erratically, making its task more difficult. Besides lower-cost rivals like the Indian outsourcing companies, it faces competition from companies like Accenture, which had a strong first quarter. Still, even though the ride may be bumpier than expected, the strategic path I.B.M. has chosen seems to be the right one, most analysts say.

    Aggregation as the New Scale

    Jeff Jarvis writes:

    Scale doesn’t scale anymore.

    The old days of big players in the economy collecting consumers, audience, distribution, manufacturing efficiency, buying power, or capital in the grip of centralized control are waning. That used to be the way to find efficiency and size. That used to be the way to scale.

    But they are being foiled by our new distributed world. And they are being replaced by a more efficient means of finding size and efficiency.

    Aggregation is the new scale.

    consider how [the]…model of decentralization — of control at the fringes — can, should, and will hit other industries:

    News: As a producer, why depend on the 300 (expensive, snarky, recalcitrant) reporters you pay for when you could have 3,000 aggregated reporters to get more news less expensively than ever before.

    As a consumer, why depend on one or two sources of news a day when you can aggregate the best of 200?

    Media: As a distributor, when you can no longer use your stranglehold on channels to guarantee you an audience, you will have to aggregate audiences to reach scale.

    As a creator, you’re going to have to establish your own direct relationship with your audience: You have to do your own aggregating.

    As a member of the audience, why adjust your schedule and taste to the distributor when you can aggregate your own entertainment from anywhere, anytime?

    Fred Wilson adds: “You cannot collect all the pieces of a marketplace in a centralized way and control all of it. The technology won’t allow that to happen. You can’t ‘get to scale’ that way. You must be open to others owning pieces of the equation. You must let the users get the value of scale however the choose to create that scale. You must facilitate the creation of virtual scale.”

    Adobe’s Plans

    The Economist profiles Bruce Chizen, the boss of Adobe Systems. Some of these ideas become even more important in the context of Adobe’s decision to acquire Macromedia.

    Last week, he was in Brussels to demonstrate how. Belgium will be the first country in the European Union to give its citizens electronic ID cards. And by plugging these cards into the USB ports of computers that have Reader, Belgians will soon be able to signie, digitally authenticate and sealPDF documents such as tax forms, mortgage applications, patent approvals and anything else that today requires a signature in ink.

    The news is not that these forms can then be submitted electronically for instantaneous processing. Rather, it is what happens to those forms that are submitted on paper (because the owner is offline, say). Today, such loose-leaf is the atavism that disrupts all those bureaucratic workflows that are allegedly already electronic. For instance, billions of PDF forms have been downloaded from the website of the IRS, America’s tax agency, in the run-up to this week’s filing deadline. But most of these were then printed out and sent by mail, for poor drudges in some back office to type again into a computer. What a bore.

    Adobe’s trickin effect, a sort of alchemy that turns paper into computer codeis a clever bar code at the bottom of its latest PDF documents. As a PDF form gets filled in on a computer, this bar code constantly changes so that all the information is captured. This includes not only the obvious (name and address, say) but also higher forms of intelligence, such as audit trails (who has read this form?), access privileges (who may view or e-mail it?), and business logic (who needs to see this form next?). When the form is then printed and sent as paper, it only needs to be scanned at the other end for all the data to enter their destination computers as if the form had stayed electronic all along.

    TECH TALK: When Things Go Wrong: The Present Situation

    The second failure that I had discussed last week was the one that I am presently going through. I thought quite a bit before writing about it. It is never easy to discuss unpleasant realities in public! As Sachin put it: After reading this article from you, what came to my mind was that it takes a lot of courage to write about ones own failure. Indeed, it does! But then I have been quite open on the blog and in my writings, so I decided to go ahead.

    It is never easy talking about the present. Analysing a decade-old experience can be easy because the ending is now known. But thinking through the immediate past and the coming future is not easy. But if as entrepreneurs we can be more open, I think it will definitely help all of us do things better. No book on entrepreneurship can lay out the roadmap to success, but learning from experiences of others can definitely lay out the path to avoid failure!

    As I look at our business in Netcore, there are two parts to it. One is the Linux-based messaging and security business, which has a customer base of over 350 small- and medium-sized enterprises garnered over the past 7-odd years. This business is growing, but not fast enough to support the rising costs of doing this business and fund our other activities. Which brings me to second part of our business. The vision here has been to provide computing as a service and create a platform for the next billion people. (Talk of ambition!) Here, we have tried a few ideas around server-centric computing and thin clients, but somehow the solutions have just not been good enough.

    So, there are twin challenges that I face: how can we grow the messaging and security business and take steps towards realising our vision of computing as a service. While I did wonder whether we should drop one in favour of the other and focus, I think that the two businesses are complementary. Doing the first helps us build a customer base which allows us to bootstrap the second business. By narrowing what we do in each of the two areas will help us achieve the twin objectives of building a near-term profits engine and a longer-term growth platform.

    So, in the messaging and security business, we need to (a) focus on a few standardised offerings that we sell without getting into too much of customisation (b) build a distribution channel so we can amplify our market reach (c) invest in building a brand that separates us from other players. Here, the products are ready. What we need to do better is on the marketing and sales side. Our current customer base gives us the foundation to build further on this business and I am confident that in the next few months, we can not only turn the corner here but also build an engine for growth going ahead.

    The second business is harder because we are now going into unchartered territory. I understand now that the mistake we made was that we started from the devices (thin clients) side instead of focusing first on the services (applications and content). It is the services which will make computing desirable and compelling for the small- and medium-sized enterprises (SMEs) to get more computers which is where the thin clients will come in. So, in the business, the first focus is on creating a suite of useful services which address customer key points and deliver them via the Internet. This is the ASP (application service provider) model starting with SaaS (software-as-a-service) and then going on to CaaS (computing-as-a-service).

    When I look back, one of the missing elements was focus. Sunil Goyal put it very nicely: I think for any business dreaming to be big there’s always a stark difference between short term reality and vision of tomorrow. The strong mental models might make one believe this is achievable but reality still plays its part. Even though I don’t have much experience, but I am experiencing this phase myself. My own realization of the current startup time phase is, to have the right FOCUS. This is what we will need to bring to the tasks ahead.

    Tomorrow: The New Business

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