InformationWeek

Midsize companies eager to implement E-business will likely see the ASP as a solution that, finally, fits their needs and pocketbooks. The larger question is whether they'll see the ASP as a stable-enough business entity to entrust with their data for safekeeping. In the short run, many ASPs will find it hard to make the case for their staying power. Acquisitions and mergers are inevitable, and, in some cases, service will suffer.

Midtier, old-economy companies may find themselves with an unexpectedly attractive ASP option: IBM is getting into the game and serves up a very compelling combination of experience in offering services, technical acumen, and company stability.

How Microsoft plays the ASP market will most certainly affect offerings here. Microsoft will strive to furnish ASPs with software and the services that go with it. But other middle-market vendors, such as Novell, also are aiming to provide ASPs with infrastructure software. Indeed, Novell's directory-services offering may have found market demand. Using eDirectory as a single-sign-on system for ASP applications makes tremendous sense, and Novell has a good background here, with years of practical experience beyond Microsoft's.

Small businesses-particularly new dot-coms-see ASPs as the means to get up and running quickly and therefore are embracing the service model. Wisely or not, these startups are less risk-shy than established midtier companies and are willing to look beyond the likely tumultuous mergers-and-acquisitions environment. These companies make ideal ASP customers, because their business practices are not yet ingrained. An ASP's application templates for a dot-com's intended industry are likely to be a welcome blueprint for its business logic.

The market for ASPs is huge. Estimates put the market at somewhere between $1 billion and $3 billion now, growing to anywhere from $25 billion to $150 billion within four years. Four types of ASP players have emerged: startups, enterprise-software integrators, bandwidth and hosting providers, and the software vendors themselves.

Venture-funded ASP startups are popping up all over; the question is, will they last to see adulthood? The formula for such startups is an easy one: Take a few people from one of the Big Five consulting firms, add a few systems people, find someone who can run a help desk, strike a deal with a few software vendors and a co-location vendor, and presto! You've got an ASP. By far, the most common model for startups is to identify a vertical industry, develop some templates that fit that industry (which may look suspiciously like those of the consulting firm that spawned the ASP's consultants), and then add some services for the target market. Initial clients are often provided by venture capitalists that have interests in both the ASP and the client.

At first, these industry-specific ventures seem like the perfect solution for small businesses and midtier companies. The vertical focus of typical startup ASPs simplifies initial integration and maximizes the value of the ASP's in-house industry-specific expertise. But the success of these outfits may not spell good things for their customers. Obviously, successful startups are takeover targets as the ASP market matures. But what happens to the service during and after an acquisition? The relationship between ASP and client is precarious enough in this fast-changing market; an ASP that's the subject of an acquisition could easily be transformed from a dream business partner into an unresponsive nightmare. Unfortunately, no amount of due diligence will offer early adopters much protection.