The ASP business model
Assuming that early ASPs acquired companies with different technology expertise, today any vendor running an application off the web is termed as an ASP. Is this also likely to change? How do you see the nature of the ASP vendor changing? Is there a change in the acquisition model?
ASP is a consortium business. Take the example of an IDC. It is a full-fledged managed facility for the purpose of colocation of servers. Now the margins are shrinking and the IDC doesn't get enough boxes to put there. So the IDC says "why don't I tie up with application software and networking companies and become an ASP". Or take the case of the network service provider (NSP). The NSPs have smaller IDCs for their own captive tools. But they say, "why don't I go up the value chain and become an ASP. After all I am the guy who is carrying the application."
Similarly for the ISVs. They say, "it is my application that is going to be running, I have the domain knowledge and expertise, so lets tie up with an IDC and become an ASP." So everybody wants to become an ASP and everyone wants to be called an ASP. In reality as the thought process goes, technology companies, box companies, ISVs, IDCs, NSPs, ISPs, all put together form a good consortium and can be called an ASP. This is the model that has evolved over the last two-three years.
Now as part of the learning curve and in the second phase, companies realised that you do not need to acquire--partnering is better. So ASP companies approached IDCs and NSPs and said, "You are my partner. These are the services that I require and this is your core competence. My core competence is ASP delivery and customer acquisition. You do your job and I will do my job and lets share the revenue." It started like that and the entire chain started forming. But some of the things like hardware were still missing and the learning curve continued.
Some ASP companies then said why should we invest in hardware. "Let's have a leasing model because redundancy and obsolescence are the biggest issues in hardware." So they approached Sun, IBM, Intel and others and said, it is your responsibility to keep replacing the hardware in my server farm and we can share the revenues. So the model drifted from buying, acquiring and building to partnering and revenue sharing.
One important thing that happened when customer orders started coming in was putting all these pieces together--or systems integration. And this was not a joke. Providing the application, network, datacenter, NOC in a timely and managed manner through an SLA (service level agreement) took a longer time than expected. For the ASP front end you need to have trained and skilled people which was missing in the other parts of the world. There was a huge scarcity of right people in the other parts of the world. So left, right and center, the global ASP companies--I will not name them--all of them acquired companies with system integration skills.
What you are saying is that multiple technology players need to team up in an ASP delivery model. But the basic issue is whether the ASP business and revenue model is sound? Is the premise of running an application off a remote server with users paying on a rental basis commercially viable in the current technology environment?
We studied the US, European and Asia Pacific markets to confirm our thought processes. What we found is that the ASP business model is very new--it is just two and half to three years old. While outsourcing is dog years old, the ASP model is new and has many pitfalls and requires long thought out processes. Now when you acquire a company, you pay a price and you cannot filter that price into your bottom line in a three-quarter time period.
So called ASPs, have been in situations where they have acquired up to eight companies in a quarter. Those acquisitions will take four, five, six years to show results, not in the first two years. Although ASP companies have not fared well, the opinion built up by media and analysts is that the model is not working. See, the concept is one-to-many--it is so beautiful that the model has to work. There is no way this business model cannot work. To make a judgmental remark on a business model at a two-three year point of time is really, very early.
Now the ASP business model is not very complicated or highly technical. But the way it has been perceived and the way it has been structured is different from what is required. In a particular business model you can see the results in an optimum manner if it is structured well. That was the flaw with the ASP model. It will take some time for this industry to mature and get the right kind of backend infrastructure and products for high customer satisfaction.
