ASPs Smell Bloom

While the European market has been slow and watch ful towards
the ASP model, companies in the US are responding well, and are busy redefining
their strategies and changing their business models to exploit the opportunity.
Skepticism of the European market notwithstanding, Indian corporates have been
quite receptive to the concept. Their only problem so far-the lack of a
high-speed and reliable connectivity.

So, what happens if India has the adequate bandwidth-300GB
by 2005 (the demand projected by Nasscom) to be precise, as against the
currently available 325Mbps? To quote Scot McNealy, CEO, Sun Microsystems,
“Five years from now, if you are a CIO with a head for business, you won’t
be buying computers anymore. You won’t buy software either. You will rent all
your resources from a service provider.” Does this mean that the present
day ASPs will emerge in a new avatar and change the way enterprises work, or
that the good old software companies will adopt a new business model to hawk
their products?

New driving force

Experts believe that once the bandwidth issue is resolved,
ASPs will emerge as the new driving force for enterprises. Says Balu Doraisamy,
President HP India, Compaq Computer India, “The ASP model will help
enterprises enhance their productivity and competitiveness. While the
fundamental tenants of business will not change, what will definitely undergo a
metamorphosis is the TCO model of owning infrastructure and the people around IT
services. IT enablement of a large number of SMEs will facilitate the
proliferation of end-to-end supply chain solutions.”

Adds Ashutosh Yadav, CEO, Ideas 2 Dotcom Ventures, “ASPs
will have the same revolutionary impact on business that cell phones had on
personal productivity-it is like leveraging the technology without caring to
know or being concerned about the systems in use behind the screen.”
According to him, once there is enough bandwidth, ASPs are bound to change the
way business is done in the country, and for the first time the true benefits of
IT would reach businesses across all sectors.

Anil Bakht, CMD, Eastern Software Solutions (ESS), a company
that recently switched over from selling its ERP package to offering it on rent,
says “All companies, especially the SMEs that cannot retain EDP staff and
do not know which server to buy, will log on to the ASP model. All they will
need is a PC and a browser to be able to avail of every application on the
Net.”

Bakht’s statement sums up the benefits of the ASP model
from the end-user perspective. The fact that it allows businesses to leverage
the technologies, processes and expertise from leading providers of enterprise
applications, without having to make investment in owning them, is a big drawing
force. Add to this issues like implementation time, manpower shortage, insurance
from obsolescence and simplicity, and it becomes clear why the user industry
world over is hopping on to the ASP model.

However, Bakht faces a problem-one that is common to all
ASPs in the country. While enterprises are impressed by their offerings, they
are also skeptical of the reliability of the services, mainly on account of the
poor accessibility of the applications on the Net. The culprit-bandwidth.

The new model

A typical pure-play ASP aligns with one or more ISVs,
performs the initial application implementation and integration, controls the
data center management, and provides continuous, uninterrupted connectivity and
support. In fact, to the end-user, it is the ASP who manages the client
relationship acting as a complete end-to-end solution provider. ISVs are
transparent to the user.

Doraisamy feels that the large number of first-time IT users
in the country would propel the emergence of a new breed of small ASPs.
“These would be the companies who would have moved up from providing LAN
and infrastructure services and would be leveraging their relationship with a
defined set of customers,” he says. According to him, these ASPs would use
shared physical infrastructure and their proliferation would depend on the
availability of high bandwidth and better communication infrastructure in the
country.

Licensing to stay

What does that mean for the packaged software business? Will
the industry have to suddenly change from selling packaged products for an
up-front licensing fee to running an online service with revenue on a monthly
billing cycle?

The State of ASP Affair in
India

ASP market in India is in an early phase. Players are busy

  • Making partnerships
  • Experimenting with small base

The ASP business model in the country is

  • Based on direct sales channel, consultative selling approach
  • Generally on per user per month basis, but would move to a transaction-based arrangement

ASPs include IT companies with

  • Either application strength
  • Or networking strength

Although the Internet penetration is on the rise, the speed of access remains a big issue

Concept awareness is low, especially in the SME segment

Outsourcing is new and growing but vendors will have to deal with the traditional mindset.

The answer is perhaps no. Experts believe that despite the
hype about ASPs in recent months, rumors about the death of the packaged
software industry have been greatly exaggerated. For one, software companies
would still sell their products for an up-front licensing fee. Only the
consumers will change-ASPs instead of end-users. Two, ASPs make sense mostly
for those small and medium-size companies that have not already invested in a
technological infrastructure. Analysts believe that software vendors will still
have a sizable market in large companies, which will continue to buy
applications and manage them in-house through their large and deeply entrenched
IT staffs.

But that means a significant shift in favor of ASPs, as they
would be replacing software vendors as the customers’ point of contact. It
also means that software companies will have to seriously rethink their business
models to accommodate these new intermediaries. According to Arjun Vallury,
chairman, Intelligroup, “As the application vendors will no longer directly
own the customers, with the ASPs owning them instead, software companies will
have to let go off their traditional pricing policies.”

Says Doraiswamy, “What emerges would be a mix of per
user per month (PUPM) and the base license fee for using a specified software.
However, this would work only if it is bound by a defined minimum time frame and
minimum quantity of users with well articulated service level agreements (SLAs)
and exit clauses.”

Meltdown ahead?

While Forrester Research has put the size of the global ASP
market at $6 billion by 2003, IDC India estimates the size of the Indian slice
to be around Rs 100 crore by 2004. According to Bakht, the Indian market offers
a huge opportunity because the country does not have much of the legacy software
to worry about-an issue that has a major implication in the more developed
markets of the US and Europe. This also means that once India is able to sort
out the bandwidth problem, there would be a sudden spurt in the number of ASPs.
Experts feel this growth could be much like the dot-com hype that took the world
by storm.

According to a Gartner Group report, the ASP industry is
poised for an explosive growth worldwide-from $1 billion in 1999 to more than
$25 billion by 2004. The report says that ASPs would grow at the cost of more
than half of the current players in the arena. But it also forecasts that 60% of
current ASPs would fail by the end of the next year-the dot-com collapse would
pale in comparison to the looming ASP meltdown.

According to experts, the winners would be those ASP
businesses that offer a mix of neutral applications, scalable platforms,
operational sound data centers, heavy-duty networks and customer relationship
management. ASPs would also need to be experts in legacy integration services
and adopt bandwidth management tools to remain profitable. The impact: they will
move towards a new era of operating through strategic alliances. And the trend
has already started in the mature ASP markets, globally.

As per IDC India, more than 80% of ASPs are actively seeking
to tie up with ISVs, resellers, telecos, ISPs and even hardware vendors. The
Durlacher Research report on ASPs suggests that a variant of the ASP model would
emerge, with ISVs selling directly through tie-ups with ISPs. In fact, many
analysts believe that software vendors adopting the ASP model would have a
better chance of surviving than those that don’t. That could well explain why
Microsoft, Ariba, Intelligroup, SAP and the likes joined hands in July this year
to create the Forum for Application Service Providers in India (FASPIN).

Besides, ASPs would also have to deal with issues like the
client organization’s apprehension about security of its sensitive data,
vendor stability and longevity. These were the three main concerns that
respondents expressed in a survey conducted by the Information Technology
Association of America (ITAA). Similar sentiments were also echoed by a Zona
Research report that found that general optimism of ASP users was countered by
security and performance concerns. So, while an adequate bandwidth will
definitely push the ASP model in India, like elsewhere in the world, ASPs will
be expected to address the end-user concerns satisfactorily in order to
establish the model.

Shubhendu Parth
in New Delhi

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