Fighting From Strength

By Edward Cone  |  Posted 2001-01-08

With 2001 expected to be a year of consolidation in the application services business, Agilera Chief Executive Paul Rudolph put his company ahead of the curve in December 2000 by acquiring another privately held application service provider, Applicast.

Unlike many of the deals to come, this one involved two healthy companies. "We have a clear path to profitability, and this combination will help us get there," Rudolph says.

Agilera may be a trendsetter in other ways as well. Its focus on vertical markets, including the manufacturing sector targeted by Applicast, is winning mind share as a strategy for enterprise-class ASPs. And with the stock market chewing up publicly traded ASPs such as Kibble, there is a certain cachet to well-funded private companies such as Agilera, eOnline, Jamcracker and Qwest Cyber.Solutions.

"I feel bad for some ASPs," Rudolph says. "When they entered the market, revenue was the metric that people were looking for. Then it switched."

For Rudolph, who says Agilera is growing ahead of expectations, the core value of ASPs to business customers bodes well for the industrys future. "We believe that the ASP model is really required to allow businesses to focus on their core competencies," Rudolph says.

Despite the expected shakeout, analysts, including Bill Dering at C.E. Unterberg Towbin and Lehman Brothers Holdings Geoffrey Stricker, agree with him. "Its a good business model — thats why there are so many players," Stricker says. "There has been lots of noise and hype and confusion that make it difficult to move ahead."

Kate Murphy, a research director at AMR Research, says the recent climate has been chilling. "Theres a lot of negativity and the image of a market in shambles," she says.

With USinternetworking garnering $300 million in funding — including a $50 million equity stake from Microsoft — during the last quarter of 2000, the ASP business closed its uncertain year with a significant vote of confidence. "That was great news, to see Microsoft demonstrate its belief with cash," Rudolph says. In the year ahead, he predicts, the strong will survive. "Strength will emerge. For a small set of private companies and a very small set of currently public companies, this will happen. I see momentum picking up as service providers are beginning to provide measurable value to customers."

That value will have to drive the industry now that the glamour is gone. "At the end of the day this is grunt work," says eOnline customer Ben Gilbert, chief information officer at Solvay Information Technologies, the information technology services arm of Solvay America. "Its a service, and thats what they have to deliver."

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