Application service providers "rent" enterprise software packages for a fixed monthly rate, delivering access to the software through a WAN, virtual private network, or the Internet. ASPs procure software licenses for customers and provide services such as support, applications monitoring, and upgrades. Using ASPs, companies pay periodic subscription fees rather than make huge up-front capital investments for applications. Gartner Group's Dataquest estimates that the worldwide revenue for ASP services will grow 91% from nearly $900 million in 1998 to $22.7 billion in 2003.

ASPs are especially attractive to smaller companies that don't have the IT budget or staff to invest in their own large-scale implementations. PointClick.com Inc., an Internet marketing company in American Fork, Utah, pays Oracle Business OnLine $5,000 a month to host financial applications, including accounts receivable, accounts payable, and general ledger. Business OnLine also provides full-time support and maintenance services.

Craig Brown, CIO at PointClick. com, says the company is saving at least 30% by using an ASP instead of buying the applications and the servers needed to run them. "We're saving in terms of up-front [installation and administration] costs and in not having to buy the hardware that we'd need to support the applications," Brown says.

Analysts expect ASPs to become increasingly attractive to larger companies as well. "They'll get top-rate applications at prices that are more affordable," says Greg Runyan, a Yankee Group analyst. Runyan says there's no typical pricing arrangement for an ASP deal, partly because it's a relatively new concept to both providers and customers.

Many of the big software companies will launch ASP offerings over the next few years, Runyan says, but it will be a difficult transition. "A lot of them are tied to a licensing structure, and going to a subscription model will be tough," he says. "These companies are forgoing a lot of up-front revenue, but this is something customers are requiring."

Microsoft is experimenting with subscription-based licenses for the ASP market. Under pilots for Office and BackOffice products, ASPs pay monthly fees for use of Microsoft's server and application software-$20 to $25 per user per month for Office Online, for example. The ASPs then charge their customers slight markups to rent the applications and for application administration. Microsoft officials say they're testing the option of charging ASPs per-transaction fees, which would be based on usage, network bandwidth, or other metrics, as the company discerns how to offer subscription licenses without jeopardizing the revenue it derives from traditional license sales.

IT managers applaud the software industry's move to more flexible pricing. Construction and engineering company Fluor Corp. in Aliso Viejo, Calif., has an arrangement with one of its biggest software suppliers to buy software on a per-seat basis with the option to rent additional seats at a predetermined rate as the need arises.

"We're in a cyclical business, and as our business fluctuates we can add more seats to see us through the peaks, then drop seats when things slow down," says Dennis Benner, VP and CIO at Fluor. Benner didn't identify the software supplier but says Fluor is discussing similar deals with all its major software vendors.

In a growing number of cases, software that used to be available only through licensing is now offered at no charge over the Internet. Linux, for example, is garnering attention from IT managers, and more companies are using lower-cost Linux Web servers for Internet infrastructure and E-business applications. The operating system is gaining support from IT vendors, including Hewlett-Packard, Oracle, SAP, and SGI. IBM has revealed a reorganization that places its Linux efforts under the guidance of top enterprise systems executives to ensure that Linux runs well on IBM hardware.

"Linux holds a lot of promise, and it will bring prices down," says Biland of Snap-on, which is using Linux systems for E-business applications. One of the price benefits of Linux, Biland says, is that companies can run the operating system on a $3,000 desktop machine instead of a Unix server costing $20,000. Snap-on built a Linux server for its auto-dealer portal using Red Hat Software's Linux Secured Server for $118, he says. "We would've had to pay $2,000 for a Unix license."

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Illustration by Catherine Parr