ASP Paradox Even accounting for the blue-sky quotient of many software industry claims, its tough to reconcile the grand proclamations by leaders such as Oracle Chairman and CEO Larry Ellison, Microsoft Chairman Bill Gates and Sun Chairman and CEO Scott McNealy with the performance to date of the most visible early entrants in the software services market, the application service providers (ASPs).The key to the paradox is that growth will be driven not by the start-up ASPs which have gained mind share but not market share but by the folks that already sell software by the ton. "Look at sales of records by the Sex Pistols as opposed to Nirvana yet without one you wouldnt have the other," Pring says. "Its going to be the big guys who commercialize it." In fact, IBM is expected to announce this week that it is formally getting into the ASP business with a hosted and managed offering from Ariba. Until now, IBM has operated a substantial hosting business and has managed applications for clients on a one-off basis. However, with its AribaBuyer application service, IBM will be getting into the business on a large scale. "We think this could develop into a really big opportunity for us," said Paul Boulay, program director for application hosting service at IBM. "There is a big market of small and midsize companies out there that would like to be able to take advantage of e-procurement, but arent prepared to make a multimillion-dollar investment." The potential benefits to customers and the software companies themselves are too big for the vendors to leave services to anyone else. Software as a service promises businesses a new level of interconnectedness and access to a broad spectrum of applications. "The integration possible via services will provide flexibility and speed that will make the CIOs [chief information officers] life easier," Parthasarathy said. Universal interoperability is an oft-broken promise, though, and not everyone relishes the possibility of another generation of market leadership by Oracle or Microsoft. Vendors, meanwhile, see a chance to enter new markets, smooth out earnings flow and establish their services as the standards of a new era. ASPs or companies such as Electronic Data Systems and IBM that are muscling onto their turf may prove a viable channel for the delivery of some software services, but hosted application software is only part of the change in how businesses will use software and the Internet. Microsoft, for example, doesnt mean for all software to be delivered as a hosted service though it plans to sell plenty that way. Its goal is for all software to be able to instantly access that interconnected service environment on demand. "Its a misconception that people will get [Microsoft] Office off a Web site," said Dwight Krossa, director of emerging business product management at Microsoft. "What is Office in a software-as-a-service world? A client, a way for people to access some services. The same with Windows. Its an experience you go into." Said Ian Rogoff, vice president at Microsofts worldwide partner group: "It doesnt matter if the next-generation business application is hosted or on-premises software as a service is less an objective than an enabling factor." Southwest Airlines, for example, can use Dollar Rent A Car Systems reservation software to assemble travel packages on its own Web page, with the disparate back-end systems tied together on a Microsoft platform. Thats what the whole .Net strategy is about: making the functionality of software accessible on demand, and in the process establishing Microsoft as the platform on which it runs best. ".Net is our strategy for embracing an XML [eXtensible Markup Language] Web services architecture for everything we do," said Barry Goffe, group manager for .Net enterprise solutions at Microsoft. "SQL [Structured Query Language] itself isnt going to be shoved out onto the Internet as a Web service, but people who want to build an XML service with a persistent data source on the back will use it as the foundation on which the services are built." .Net also undergirds Microsofts bCentral small-business applications and its ASP strategy. Oracle has its own vision for the world of integrated applications. "We are headed toward a standard e-business platform and infrastructure," Chou said. But even the enthusiasts admit the ultimate goal of seamless Web services is still years away. "Major technology work needs to be done to get it all tied together," said Chou, who noted that customer awareness, network reliability and bandwidth are near-term challenges. How long the transition will take is unclear. "I think that a three- to five-year time frame for a financial impact is reasonable, but everything depends on the market uptake," Parthasarathy said. "This has to go through three phases: access, integration and personal relevance. Today, were in the access phase of hosting software. The next step is a loose federation of Web services, coupled by XML. The key then is relevance to the user. If you are a CIO, you have to think about different audiences, such as employees, partners and customers. HailStorm may be more relevant for end users, Active Directory for employees, and some federation of HailStorm and Active Directory for partners." Theres no guarantee that the specific business plans envisioned by Big Software will pan out. Oracles strategy depends on customers buying a suite of software instead of best-of-breed applications, while Microsofts .Net faces competition from other would-be service platforms, including offerings from IBM and Sun. In addition, a new wave of vertical service providers could take market share away from established companies for some applications. Still, theres no question the software industry is changing for good.
"Its the ASP paradox," said Ben Pring, principal analyst at Gartner. "The first-wave companies are struggling, yet everyone seems to buy the idea that this will be a no-brainer." Gartner estimates a $11.6 billion global ASP market in 2004 less than its previous projection of $25 billion, but up sharply from about $2.1 billion last year.