Business and Finance - Fightin' Words

ASPs SQUARE OFF WITH AMBITIOUS NETWORK PROVIDERS FOR DOMINANCE OF HOSTED APPS

Data and telephone network operators control the wires and routers. They enjoy established brand equity among thousands of business customers and boast decades of experience in delivering and supporting complex services on the grandest of scales. Now many of them are building application hosting centers and buying up system integrators and other information technology companies in the ASP supply chain.

In June of this year, PSINet Consulting Solutions (www.psinetcs.com) acquired IT services and consulting firm Metamor Worldwide. The combined companies create an ASP with global Internet reach, hosting capabilities and enterprise application expertise. PSINet owns the broadband fiber optic cable in the ground and has built one of the world's largest data routing networks on top of the cables--connecting, among other things, its own data centers.

While pure-play ASPs may buy access from one company, hosting from another and application support from a third, says Art Slotkin, executive vice president and chief operating officer for PSINet, "we own the access, the hosting center and now have a team who can implement and integrate the application, providing a much cleaner solution and a much less risky solution than a pure-play ASP would. Basically, we provide the reliability and security you get when doing business with one firm."

The key point, Slotkin says, is not the shortcomings of pure-play ASPs, but the strengths of network services providers (NSPs). "There will be a massive shakeout in the marketplace," he says. "Some of the pure-plays, I predict, will be acquired. They won't be able to compete with the likes of PSINet. Only the strong will survive."

In addition to PSINet, Qwest Communications International Inc. (www.qwest.com), Sprint Corp. (www.sprint.com), Winstar Communications Inc. (www.winstar.com) and WorldCom Corp. (www.wcom.com) have spent the past year and more revving up their own data center, systems integration, value-added reseller and wholesale and retail ASP business units to take on the information technology market.

Some analysts believe their dominance is rapidly becoming inevitable, in part because the NSPs offer stronger marketing and sales channels for the leading independent software vendors (ISVs).

According to Jennifer Rosenberg, consultant for TeleChoice Inc. (www.telechoice.com), ISVs like Oracle Corp. (www.oracle.com) and PeopleSoft Inc. (www.peoplesoft.com) have only been waiting until their own web-based applications were fully cooked to begin showing their hands on the channel front. The reading of that hand began to take shape last winter, when Oracle unveiled its own web-only ASP service, Business Online (www.businessonline.com), and again in June, when PeopleSoft followed suit. One month later, Oracle selected Winstar among its first authorized ASP channel partners.

In Rosenberg's view, those and other events point to less and less ISV dependence on pure-play ASPs and more ISV deals with ISPs, incumbent telcos and CLECs. "PeopleSoft 8 was shipped in September and operates in a browser," she says. "In the future, PeopleSoft [will have] its own eCenter up and running, so why should they refer customers to [pure-play ASP] Corio [Inc., www.corio.com]?"

Although the pure-plays act as resellers for many major ISVs, most of those same ISVs continue to directly sell their software, she notes, predicting that many ASPs will disappear--being acquired by the big NSPs--because the ASPs have gained no direct control over either the application development or the networks.

Sprint similarly points to network service control as the ace up every NSP's sleeve. "ASPs can only scale the server network, but you have to be able to also scale the data network," says Gayle Howard, director of e-business applications for Sprint. "A lot of ASPs can't see all of the traffic going into their clients if they don't host the application. Only an NSP can."

Howard also expects more ISV-to-NSP channel deals to come. "Oracle realized that working with an NSP is a strong position for them to take," she says. Sprint, she adds, is positioning for similar announcements.

Where's the Middleware?

Kirk Krappe, Senior Vice President of Marketing, Corio Inc.

Executives of ASPs of the likes of Corio and USinternetworking Inc. (www.usinternetworking.com) and some of the NSPs as well, beg to differ with any doomsday scenario.

"ISVs know what it takes to host an application," explains Kirk Krappe, senior vice president of marketing for Corio. "There is no way we will see ISVs going directly to an NSP [for] application administration and database administration," he states. "It would be a very silly bet."

NSPs, he and other ASPs argue, cannot catch up overnight with the hosted applications management infrastructure that ASPs have slaved for two years to develop--an infrastructure that provides an essential glue joining applications, network delivery and service support.

According to Krappe, Oracle's partnerships with Winstar and Qwest are unique among ISVs and will prove a miscalculation. "Oracle's bet is that the NSP will build out the application management end of the equation, but that will take 12 to 24 months. In that time, the market will have changed."

He breaks down the ASP value chain into four components: the data centers consisting of companies like Exodus Communications Inc. (www.exodus.net); long-haul network providers such as Qwest and Level 3 Communications Inc. (www.level3.com); NSPs that own the last mile, such as BellSouth Corp. (www.bellsouth.com) and Winstar; and the application management component, or the people who make sure the services in the boxes actually work.

"Look at each component as a separate value-added component of the chain--they are very different businesses," he says. "All these players believe they can move into each other's space, but if you dare venture out without the core competency, you will be at a disadvantage against a specialized company."

Indeed, he adds, NSPs are aware of Corio's "middle layer" value--aware enough to have approached Corio about filling that role for them. "Oracle said they'd do everything end to end, and that wasn't successful," says Krappe. "The marketplace is taking off in front of them, and they will realize they need that middle layer."

At the same time, he adds, pure-play ASPs such as USinternetworking may be making a similar mistake in trying to take on the NSP's role on top of the middle-layer role. "USi builds, owns and manages all the infrastructure end to end across the entire ASP value chain," he explains. "The reality is that each component of the value-added chain comprises a whole, large, separate industry, and there are companies that focus on that one business sector alone and can do it better than USi."

By biting off less, Corio maintains a lower cash requirement than an end-to-end player like USi, which "has to invest [in network facilities] as it grows." For that reason, Krappe adds, "they would look attractive to a telecom company."

So what does USi say? Senior vice president of corporate strategy Jim Stalder believes the complementary aims of ASPs and NSPs will start to blend in a year's time. "The NSP's primary drive is to increase consumption of the bandwidth. The ASP cares more about the mission-critical application provided to the customer."

In some measure, he says, the NSPs will add new revenue streams in the form of the hosted applications they control, but these will not be the expertise-intensive applications now hosted by USi. "Telcos started to introduce value-added applications--features like caller ID--to drive revenues," Stalder explains. "If you use small applications, then you increase use and revenue on the same model used by ASPs."

In the long run, he says, NSPs will be great at providing turnkey applications that don't require maintenance or support. In contrast, "we're not about just turning on the service. We're here with a contract." A look at USi's client base would show that each client is being served by an NSP, "but the key is that they chose USi to deliver their app to them."

Massive Shakeout?

So far, some NSPs are talking "coopetition." Others hint at all-out war.

Armed with the largest stake in high-speed, fixed wireless spectrum in North America and its own data centers and ASP operations, Winstar is "working with Oracle to take the application, put it in an ASP environment and take certain applications geared to certain types of customers and offer a prepackaged set of apps geared to multiple [desktop] clients," explains Rich Rupp, vice president of systems and technology for Winstar.

On one hand, Winstar expects to cooperate with other ASPs, including Oracle's own Business Online unit. "Winstar in a sense competes with Oracle Business Online, but we're working closely together in areas that address specific markets like the small professional services vertical," Rupp says. "Oracle is out there with us selling and bringing many deals to us."

On the other hand, Winstar is counting on a big edge over ASPs that "don't own their own data center or network," says Rupp. "They are willing to give any type of SLA [service level agreement] to the client, but we can deliver [SLAs] from desktop to data center over the Winstar network."

In other words, end-to-end facilities ownership translates to essential service control and accountability.

PSINet's Slotkin compares that control to a three-legged stool. "There is the NSP leg, the service provider leg and the applications leg," he explains. "The pure-play has no legs and is basically sitting on the ground." In contrast, he says, PSINet wields branded and custom-built apps, and has the service provider leg as well. "So we are pretty stable. By the end of this year, we will be a couple billion dollar entity. Who would you rather do business with?"

At the same time, Slotkin says PSINet will continue to support and compete with ASPs, and currently has several ASP deals in the negotiation stages. "Either way, we will be a large player in this market."

Essentially, it may be easier for wealthy, established NSPs to build or buy what the pure-play ASPs have built than vice versa.

Sprint, one of the world's largest telephone and data network owners, is building out high-speed DSL and broadband wireless LANs. With its extensive telecom equipment reseller and professional services operations to support business IT services and infrastructure, Sprint also has the forces in place to directly compete on all fronts except complex applications development.

Constructing the infrastructure requires a tremendous amount of mapping out, even if you are a small ASP, Howard says. "There are process management and tools that need to be put in place. It is a very infrastructure- and process-intensive environment to build out." There, she says, lies the ASPs' value, "standardizing how the application is built and supported ... mapping out the service, the customer [premises support] and the specific end-user requirements. The worst thing you can do is go to market with a hosted application without the support."

For that reason, Howard sees the NSPs and ISVs pulling the apps into a centralized and managed environment, with ASPs partnering with NSPs to run the application layer.

Sprint, she readily concedes, will never be an application developer or programmer. "We will always work with ASPs and ISVs from this angle." However, she concludes, the long-term game will flow to the NSPs. "It takes time to establish the ability and the position in the marketplace for this changing model."

Like Sprint, Qwest, PSINet and Winstar, NSP Verizon Data Services (www.verizon.com), which combines the former Bell Atlantic Data Services and GTE Internet, seeks both a wholesale and retail role in the ASP value chain.

"New players in the ASP market may know a particular app well, but not have a handle on the customer service aspect," says Robin Pokoj, director of Verizon Data Services. "NSPs are better positioned because they have networks set up." Beyond mere wires, that network infrastructure increasingly includes data center and IT expertise, as well as decades of experience in handling customer care service management and billing on a very large scale.

"The more aggressive NSPs will jump right in, becoming an ASP or servicing the ASP market," she says, adding that in response, pure-play ASPs must carve out niche values before a market shakeout over the next 18 months. "The ASPs with a tightly focused niche market seem to be doing very well," says Pokoj. "ASPs that won't succeed are the ones trying to be all things to all people or those still searching for an identity."

With strong incentives to add more value to their business services--not to mention the dollars to build and buy value-added assets and expertise--few are doubting that NSPs are out to dominate the ASP market as a sales channel.

In the coming months, the answer to whether some of them are underestimating the complexity of this goal may become the dominant subject of conversation in boardrooms across these heretofore distinct businesses.

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