Subscribe to Inc. magazine
E-COMMERCE

Upstarts: ASPs

Say good-bye to software as we know it and hello to ASP start-ups.
Advertisement

Software on the Web

ASPs are coming ASAP

The entire software industry is about to be turned upside down. Say good-bye to software as we know it

You know the computer industry is innovating too fast when it has to start recycling its acronyms.

The term ASP was once known in Webspeak as an "active server page," referring to a Web page that's generated at the time it's downloaded. But the term has recently taken on another meaning, and a host of start-ups are using the idea behind it to turn the traditional, shrink-wrapped software industry on its head.

The "new" ASP refers to a type of computer business called an application service provider, which offers outsourcing with an Internet twist. An ASP hosts software applications, which its customers access over the Web instead of running them on their own computers. ASPs aim to save their customers the costs and hassle of owning and managing technology, by "renting" to them whatever software they need. Rather than wrestling with a new upgrade, say, an ASP's customers are free to focus on better things. "We tell our customers to mind their own businesses," explains Jostein Eikeland, a 32-year-old Norwegian former rock-video and movie producer, who launched one of the first ASPs and is credited with having coined the term ASP in 1996.

The exciting -- and befuddling -- thing about ASPs is that the software they offer can be anything under the sun, ranging from a consumer application like Microsoft's Hotmail (a free Web-based E-mail service that the Redmond giant hosts -- which made the company an ASP before the term came into vogue), to bundled office suites (spreadsheets, word processing, and so on), to complicated enterprise applications like customer-relationship management or sales-force automation. But as with any big market change, this upheaval has created a window of opportunity.

Right now that window is incredibly wide. Many different kinds of companies are jumping into the ASP industry, including computer hardware and software makers (such as Sun and Microsoft), network service providers (AT&T and Qwest), Internet service providers (UUNet), and newly minted start-ups. As Forrester Research senior analyst Stacie McCullough wrote in a recent report on the ASP industry: "More than 300 vendors claim to be an ASP -- each offering a different story and solution. ... It's no wonder users are confused and skeptical."

Lost amid the hype is the fact that the ASP sector, with $933 million in revenues last year, is still minuscule compared with the $74-billion software-application market. McCullough estimates that less than 1% of companies are renting their software through ASPs, though that number is projected to grow exponentially as the market swells to $11.3 billion by 2003. What follows is a selection of the variety of ways start-ups are joining the ASP gold rush.

The ASP department store
Jostein Eikeland happened on the idea of a one-stop, soup-to-nuts ASP in 1995 -- the equivalent of ASP ancient history. Back then he was a 27-year-old working in sales for a systems integrator, which was having a bear of a time completing a massive software installation for a Norwegian bank. Eikeland's hunt for a solution led him to Citrix, whose technology allowed the bank's desktop applications to run from a centralized server managed remotely. It struck Eikeland that "this would be the new wave of outsourcing."

Five years, some 200 employees, and some $50 million in funding later, Eikeland's company, TeleComputing Inc., based in Fort Lauderdale, Fla., is one of the leaders in the ASP field. TeleComputing has more than 100 customers and hosts hundreds of applications, including industry-specific systems, such as those for car dealerships and law firms, as well as business-function-specific software, for operations like accounting or human-resources management. Customers pay an average of $350 per month per user for a three- to five-year contract. Given that so many companies are reinventing themselves to jump onto the ASP bandwagon, Eikeland is particularly proud to be the bandwagon. "Every revenue dollar that we have has come solely from ASP services," he says.

Enabling other ASPs
One of the trickier aspects of launching an ASP is figuring out how to charge for your services. Pricing models in the industry are almost as numerous as the applications themselves. Many companies even offer customers a choice of how they would like to pay -- by subscriber, by transaction, or by number of ports or concurrent users. So billing can quickly become an ASP entrepreneur's biggest nightmare. And as Scott Swartz, CEO of MetraTech, likes to say, "without billing, it's just a hobby." Swartz, who in a former life helped Fortune 500 companies develop their accounts-receivable systems, entered the ASP market almost serendipitously, in late 1997, when he started MetraTech to sell a "next-generation Web-based billing system." His plan was to build, host, and sell his system piece by piece to customers -- largely telecommunications companies -- on an as-needed basis. "I can't tell you I started off going after the ASP market," he readily concedes.

Swartz quickly realized that MetraTech's flexible billing software could help ASPs of all sizes -- from "one person in a shoe box to a tier-one telecom company" -- price their services. "We ASP to the ASPs, allowing them to do their ASPing," he says with a straight face. The privately funded Waltham, Mass., company began selling its products (ranging in price from $20,000 to $1.5 million) in mid-December and expects to achieve revenues of $6 million this year.

Zeroing in on one industry
AristaSoft's story sounds like the quintessential Silicon Valley soap-opera plot. Venture capitalist named Rich issues $10-million challenge in Upside magazine to find the person who can deliver enterprise resource planning (ERP) software -- which manufacturers use to integrate all their internal applications -- over high-speed phone lines. Indian technologist -- call him Lucky -- who has written a white paper on software as a shared rental service, reads Upside article and sends Rich E-mail. Rich (last name Shapero), managing partner of Crosspoint Venture Partners, meets with Lucky (a.k.a. Amar "Lucky" Lakhtakia). Three months later, in January 1999, Lucky is in business in an ASP start-up positioning itself as the IT department for high-tech manufacturers, with an enviable $5 million in the bank and a top-notch CEO. Ten months later Lucky's company, AristaSoft, in Mountain View, Calif., has $30 million more in the bank, 60 employees, and its first live customer, a Silicon Valley high-tech manufacturing start-up.

In a dramatic illustration of the economies wrought by ASPs, AristaSoft implemented in 60 days what could have taken its customer up to a year to do on its own: namely, install a complete finance, distribution-and-logistics, and manufacturing software system, which AristaSoft now hosts, services, and maintains. AristaSoft CEO Drew Hoffman says that the company will eventually host 30 applications ("light, heavy, and medium"), for which it will charge customers from $5,000 to $30,000 a month, depending on the application and the number of users.

Software for the masses
Most players in the ASP space are going after the business-to-business sector of the marketplace, but not Cameron Chell, founder of C Me Run, a new consumer-oriented ASP service company that incorporated last November. At the age of 31, Chell is an industry veteran and the founding president of the ASP Industry Consortium. In 1996 he launched a business-to-business ASP. Today that company, the publicly traded FutureLink Distribution Corp., in San Francisco, has a market capitalization in excess of $1 billion.

Now Chell has teamed up with four FutureLink colleagues -- as well as Warren Talbot, who started up Microsoft's ASP licensing program -- to tackle what the founders think is an overlooked sector of the ASP boom: brand-name software for consumers. C Me Run will strike licensing deals with well-known software developers (Microsoft comes to mind, but the company is also in discussions with Corel, Lotus, and several game and educational developers, among others) and then host their applications for Internet service providers, portals, and telecom companies. In turn, these businesses will offer those bundled programs to their subscribers for monthly fees (ranging in price from free to $15, depending on the number and type of programs).

By serving the AOLs, MSNs, Qwests, and Yahoos of the world (the company is also in discussions with the second-largest ISP in Europe), C Me Run aims to alleviate what Talbot zealously describes as "the biggest civil-rights problem of the 21st century": access to information for general consumers.


Q&A

Mining for ASP Gold

Phil Wainewright, founder and managing editor of ASPnews.com, likens himself to "the guy who was already there selling the maps when the prospectors started turning up at the gold fields." Wainewright has tracked the emerging ASP sector full-time since October 1998, when he established his Web site to be "the source for ASP news and analysis." He recently spoke with contributing writer Alessandra Bianchi about the ASP gold rush.

Inc.: It seems as though everyone and his brother are calling themselves an ASP these days. How would you define an ASP?

Wainewright: People use the term ASP to mean many things, but from an end user's point of view, the concept is very straightforward -- an ASP is someone that operates software so that you don't have to. ASPs take care of all the complexity of getting it working in the first place and all the worry of keeping it working from then on. An ASP does all of that on its own premises and lets users access the applications across a data link, usually the Internet.

Inc.: Outsourcing is not a new idea. What makes ASPs different, and why have they suddenly become a hot opportunity?

Wainewright: ASPs spread the cost of designing their solution across several customers who all take pretty much the same recipe. As time goes on, that cost-sharing element is going to really drive prices way down, much more than most people currently expect.

Inc.: What about the broader business implications? Is the traditional software industry dead, as many headlines have announced?

Wainewright: People will continue to buy software but will get an increasing proportion of it via subscription or on a pay-as-you-go basis. The software industry believes the ASP model will make software more popular because it makes it easier to use, and with a subscription-based payment method, it costs less to start using it. But the established players are also worried it could mean a short-term loss of revenues while they change from the purchase model, where they get all their money up front, to a subscription model that spreads the revenue stream out over time. The more serious threat to traditional software players is over the longer term because new generations of software are much better suited to the ASP model than today's leading packages are.

Inc.: What are some of the smarter new ASP players doing to compete against the established giants who are also entering the ASP arena?

Wainewright: Start-ups are much better positioned than the established giants, who don't yet realize how much they're going to have to change to adapt to the ASP model. One of the biggest differences is that ASPs sell a service, whereas the computer industry has always focused on product sales. Building a sustained relationship with a customer takes a completely different mind-set. For instance, ASPs can monitor how customers use the software, and if they spot something that needs changing, they can do it right away.

Please e-mail your comments to editors@inc.com.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: