ASP Winners and Losers

Computerworld - It hasn't been an easy year for many application service providers. Despite a strong forecast for hosted services, a glut of vendors and the dot-com crash are likely to cause further consolidation, say analysts. "We will see a greater concentration of the market in a smaller number of players," predicts analyst Jessica Goepfert at IDC in Framingham, Mass., who notes that the top 10 companies already own 45% of the market today.

So who are the winners—and losers—so far? To find out, Computerworld's research department created two lists: "The Top ASPs" are ranked based on fiscal 2000 revenue estimates from IDC and Stamford, Conn.-based Gartner Inc., while the "Failed xSPs" list covers a wide range of hosted service providers that have gone out of business during the past year.

Gartner analyst Rita Terdiman warns that some companies that are on top today could end up on the casualty list before the shakeout is over. "We see a huge consolidation. Right now you've got a billion players with zero revenue and zero profitability," Terdiman says.

The total market for application services last year came to just $770.5 million worldwide, according to IDC. But the total market is expected to more than double this year and jump to $15 billion by 2005, the market research firm says. Goepfert says she believes the current economic slump will actually increase that demand. "Larger companies view ASPs as a means to reduce their own costs," she explains.

Just who will stay on top? Goepfert says companies such as Electronic Data Systems Corp. and IBM have the deep pockets necessary to succeed. But she also likes niche market providers Surebridge Inc., a Lexington, Mass.-based company that focuses on health care, and Portera Systems, a Campbell, Calif.-based firm that targets professional services organizations.

The current problems at many xSPs have more to do with poor business plans and too many vendors than with a drop in demand, according to analysts. One of the most notable failures was Pandesic LLC, which depended on a revenue sharing model with its dot-com retail customers that "seemed like a good idea at the time but didn't hold water," Goepfert says. By contrast, Red Gorilla gave away services and for revenue relied on advertising that never materialized. Still others overspent on sales and marketing without regard to profitability and simply ran out of money when the venture-capital well ran dry.

When an xSP does fold, users don't always receive advance notice or the assistance they need to move to a new provider. Mike Perini, vice president at the Petroleum Equipment Suppliers Association in Houston, says he received no advanced notification when eBaseOne Corp. failed last year. His Web site continued to run unattended for about a month, he says. And although he had copies of all applications and data, moving the domain name was problematic. "Without someone to OK the domain change, we couldn't move it," he says.