An October 2002 article in Baseline summarised about 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 income.
But 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.
An earlier October 2001 article in Network World Fusion explored the issues in greater depth:
The ASP industry is experiencing growing pains common to any emerging technology as IT executives slowly warm to the idea of changing the way they do business. The difference is that instead of providing a tangible product, ASPs are delivering a service that is somewhat difficult to define. Add to that the inherent complexities of remotely delivering applications designed for a client-server environment, and the troubles quickly mount. Nevertheless, the notion of software as a service is here to stay. The question is which vendors will figure out the winning way to deliver that service.
In addition to some shaky business models, ASPs were facing difficult technical hurdles. “There were last-mile concerns, concerns about security over the Internet, transaction volumes over the Internet, things like middleware to write and maintain interfaces,” says Rob Unger, CEO of Agilera.
So while early ASPs targeted dot-coms and small businesses that required little integration and customization, and accessed their applications largely via the Internet, maturing vendors struggled with how to provide the same service to more demanding large corporations.
Corporations were worried about security, connectivity and integration, observers say.
What’s more, big companies didn’t want the “vanilla” applications ASPs were set to offer, preferring customized software that could be integrated with their internal systems.
Assembling the infrastructure necessary to deliver hosted applications isn’t inexpensive. Most ASPs have found it difficult to establish the customer base and recurring revenue they need to offset debt.
There is no question the ASP market will thrive, observers say. But you probably won’t know the players as ASPs. Software as a service, it seems, is what we’ll call the next big thing.
Tomorrow: Hagels Analysis