ASPs are in Search of Better Footing

USI reorganizes with $81.25 million investment from bain, will merge with ASP interpath.

Financially troubled USInternetworking Inc. last week announced that it had emerged from its Chapter 11 restructuring with a cash infusion and a merger partner.

The upturn in USis fortunes may signal the end of the downturn for the battered ASP (application service provider) market, as service providers hone offerings and users begin to warm to the concept of ASPs, analysts say.

USi, in Annapolis, Md., restructured itself in four months and received an $81.25 million investment from an affiliate of Bain Capital LLC, erasing all but $70 million in debt from its books. At the same time, USi will merge with ASP Interpath Communications Inc., of Research Triangle Park, N.C., in which Bain Capital owns a controlling interest.

The combination is expected to yield the largest PeopleSoft ASP in the world, with 130 customers across a range of applications and combined revenue of $150 million for 2001, according to Andy Stern, who will become chairman and CEO of the combined companies. Stern said he believes the companies complement each other well.

"They have a strong e-commerce business built around Vignette [Corp.]. Were built around Microsoft [Corp.] and BroadVision [Inc.]," Stern said. We have a strong CRM [customer relationship management] offering with Siebel [Systems Inc.]; theyve been smaller in scale with CRM. Interpath spent a fair amount of effort developing a shared infrastructure solution—we have not. This lets us address a broader market segment."

During its restructuring process, USi retained most of its clients by improving service levels, Stern said. "The availability level across our entire client base was 99.98 percent," he said.

USi did a good job of keeping clients informed about its Chapter 11 process, reassuring them that its plan to keep the company in business was solid, according to Eddie Rivera, vice president of IT at Mars Music Inc., in Fort Lauderdale, Fla. "They went out of the way to make me feel comfortable and know they were going to be around, and they did that for all their customers. They managed it very well."

Stern said he believes that Bains commitment to provide up to $100 million in funding is a strong signal to the market that the ASP business model is here to stay.

As consolidation continues in the struggling ASP market, the remaining players are creating stronger businesses that are beginning to attract more interest from enterprises that had previously shunned the ASP space, according to Amy Levy, an analyst at Summit Strategies Inc., in Boston.

"There wasnt a meshing before of business pain points with ASP value propositions to make the market take off. As the ASP pool shrinks dramatically, the ones with real value propositions are left standing. And it seems the message is finally getting through that these companies have some advantages," Levy said.

"Nobody was buying in [the third quarter] or [the fourth quarter] of last year," said Kneko Burney, an analyst at In-Stat/MDR, in Scottsdale, Ariz. "This year, our research is suggesting that large and midsize companies are showing more demand for managed services, whether its Centrex hosted applications or what have you. Service providers either have proven themselves or have perfected their solutions to the point where they are addressing demand in the market."