Round 1 Survivors Face An Uphill Battle

Corio, Mi8, others must fend off native Web applications, larger players.

Historians of IT will someday remember first-generation ASPs as a niche annihilated by the meteor of reality, but now the survivors face greater terrestrial hazards such as Microsoft Corp., money, time and telecommunications companies.

Companies such as Corio Inc. and Mi8 Corp. survived Round 1 of the general-purpose application service provider game, subsisting on modest growth and extreme belt-tightening. Many rivals, however, succumbed to data center costs, more focus on automation than service and integration, having too few credible partners, and an inability to see past the time-sharing metaphor.

Bankruptcies, shutdowns and direction changes engulfed high- profile vendors such as Breakaway Solutions Inc., Cable and Wireless plc.s a-Services division, FutureLink Corp., Interliant Inc. and USinternetworking Inc. Even the ASP Industry Consortium essentially became defunct recently, and co-founder Citrix Systems Inc. has de-emphasized the ASP focus.

The problem now, said officials at Corio, Mi8 and other ASPs, is to figure out how to stay alive in Round 2, with the imminent threats of being made unnecessary by native Web applications, such as Microsofts forthcoming .Net plan, or simply being squashed by companies such as IBM or AT&T Corp.

"Basically, its the business model. Over the last three years or so, theres the whole discussion about whats the most optimum business model in the ASP space," said Corio CEO George Kadifa, in San Carlos, Calif.

Renting data center space instead of building it, not using debt for capital funding and augmenting instead of replacing customers infrastructures remain the keys to Corios strategy, Kadifa said.

"Our returns are based on how efficient we process the business model," Kadifa said.

Corio has seen that the learning curve is steep for any ASP newcomer, as a-Services and Intel Corp.s failed Pandesic operation showed. "Were going to stick with what were doing right now for a while," Kadifa said.

Dave Castellani, CEO of Mi8, followed a similar formula. Mi8 rents data center space instead of owning it, and the company put whatever it could into the bank instead of trying to grow too soon. Mi8s New York office is a simple space, all employees took a 30 percent pay cut and sales kept doing one thing well—hosting Microsoft Exchange for medium-size enterprises. But now, with about 350 customers, the private company can get more aggressive: Mi8 inked a sales partnership with outsourcing company Electronic Data Systems Corp. last month.

"If we can make [the EDS deal] work and do it in less than three years, weve got a pretty good chance," Castellani said.

Looking back, "luck enters into it," Castellani said. "It was absolutely rigorous ... financial management. When we saw the market turning, we put the breaks on hard and fast. We didnt cut 20 percent right away, we cut 60 percent, and we didnt have to cut again."

For David Schorlemer, chief financial officer at oil field services company Q Services Inc., Mi8s specificity is ideal.

Q Services runs about 250 Exchange users across 60 locations, hosted and managed by Mi8. "For a company that has a small IT group and lofty IT goals," running Exchange internally was "quite a bit" of effort, said Schorlemer, in Houston.

"I went from worrying when the next virus was going to hit our Exchange server or when the next hard drive was going to fail ... to not even thinking about e-mail," Schorlemer said. "It provides no benefit—and a loss of focus—to attempt to maintain that technology internally."

Along with providers such as Agilera Inc., Surebridge Inc. and Qwest Cyber Solutions LLC, Corio and Mi8 "still have some room to breathe, at least for the next couple of years," said Cahners In-Stat Group analyst Kneko Burney, who said he expects telecom carriers—having already taken over the Web hosting arena—to eventually figure out and become major players in the ASP market. Its significant that vendors such as Corio are acknowledging the need to keep innovating, not just lay low, Burney said.

The ASPs still in business deserve "credit from a strategy perspective because they were able to show pragmatism to some degree in conserving their burn. ... What were finding is that theres a ton of hosting going on; its just not through an ASP, its band-aids. IT managers are really leery of changing things that work," whether by an ASP, an outsourcer, a carrier or through a software maker directly, said Burney, in Scottsdale, Ariz.

"Their value is sort of their ability to really know the customer," but "theyre still in tweak mode, which isnt necessarily good," Burney said.

Gartner Inc. analyst Ted Chamberlin, in Stamford, Conn., put it bluntly: "The reason these guys are surviving, I think, is 70 percent luck and 30 percent strategy." Their vision of general-purpose software delivered over the Internet for recurring revenues "has a place but not a time," Chamberlin said.