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Just Don’t Call Them ASPs
IDC survey finds ‘Software as a Service‘ making comeback
By Jennifer deJong
October 1, 2004 — What ever happened to the application service providers?
They all but disappeared when the Internet bubble burst. But according to a recent survey, companies delivering software as a service are making a comeback, although this time they hope to leave the ASP name behind.
“ASPs were closely associated with the Internet boom,” said Amy Konary, a program director at IDC, in Framingham, Mass. “When the dot-coms fell out of favor, the ASPs did, too.” An IDC survey conducted earlier this year predicts that the market for what it calls “Software as a Service” (SaaS), will grow steadily, albeit slowly, over the next four years. By 2008, 34 percent of worldwide software revenue will be derived from subscription licensing methods, compared with 19 percent in 2003, the survey found.
“The lofty expectations for ASPs in the 1998 to 2000 time frame were pretty much unattainable,” Konary said. But beyond the Internet hype that characterized that period, there were other reasons why the subscription model didn’t work. “Neither the customers or the technology were really ready for it,” said Tom Kucharvy, president of the Boston-based research firm Summit Strategies Inc.
But both have evolved since then. Today, customers are familiar with the concept of subscription-based software, and the broadband connectivity such services require is widely available at a low cost. Also, vendors that provide Internet-based applications have optimized their offerings to be delivered that way. Initially, many of them simply took their existing applications and hosted them, said Kucharvy. “But they weren’t designed to be run that way.”
Over the past year, the acceptance of the Internet delivery model has skyrocketed, said Bernie Mills, vice president of marketing at Brisbane, Calif.-based CollabNet Inc., which delivers its development framework as an Internet-based service. “We are over the hump in terms of credibility.” Thanks to the widely publicized success of companies such as Salesforce.com Inc., the concept of software by subscription is no longer new to enterprise buyers, he said, referring to the San Francisco-based company that delivers Customer Relationship Management (CRM) software over the Internet. The success of Salesforce.com proves that it’s safe for companies to house sensitive customer data in subscription-based applications, claimed Mills.
In August, Salesforce.com reported a net income of US$1.2 million for the second quarter of its 2005 fiscal year, an increase of 859 percent, compared with $122,000 for the same period last year.
Another factor that hindered success of the subscription model is that many of the early players came out of the Windows camp, offering accounting, CRM, e-mail and other business applications that ran under Windows 2000. Unlike Unix and Linux, Windows 2000 simply didn’t scale economically for the ASP, said Steve Dunton, CTO of ActivAeon, a division of Techtonik Ltd., in Sunderland, U.K. “They had to put up a dedicated environment for every company they hosted.”
Not Necessarily Cheaper
Is it cheaper to subscribe to a hosted application than to license the software outright? “No, but it’s cheaper to get started,” said Summit’s Kucharvy. But the longer you plan to use the software, the more it makes sense to consider purchasing the system, he said. “People are concerned with life-cycle costs.”
The subscription model lets customers get their feet wet without having to “plunk down half a million dollars for a CRM system,” added Dunton. “That avoids sticker shock.” Instead, they pay on a per-user, per-month basis. Office applications delivered that way could cost as little as $10 per user, estimated Dunton. Pricing for CollabNet’s offerings start at US$75 per developer, per month, said Mills.
Buying software that way keeps costs predictable, said Dunton. “If your business peaks and declines in terms of staffing, the pay-as-you-go-model makes sense.” More important, it saves companies the time and costs associated with managing virus attacks and security breaches, he said. “No matter how many attacks occur, your costs are fixed.” Another benefit of the subscription model? “We can bring a new developer on board in less than an hour, compared with weeks to get a server provisioned,” said Mills.
But the subscription model is not the right approach for every customer, said IDC’s Konary. Customers have to analyze monthly, versus licensing, costs. What’s likely to emerge is a mix of subscription offerings running alongside licensed software, she said.
However the subscription model shakes out, one thing is clear: “The term ‘ASP’ has been buried, and it will remain buried,” said Mills. “There is just so much baggage associated with it.”
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