2001

An emerging market with rapid growth prospects

By Nathaniel Ives

Telecommunications companies can take a lead role in the development of the rapidly growing application service provider business, says Nathaniel Ives of PA Consulting Group

Global Business Telecommunications,  01 February 2001

The Internet has already proved itself as a business enabler and given birth to numerous organisations now valued in billions of dollars. Many of these operate with completely re-defined business models that could not have existed without the cheap and publicly accessible connectivity that the Internet provides.

Among these new business models is the application service provider or ASP.

An ASP supplies multiple customers with software applications through an IP-enabled connection. This is achieved through hosting applications and computer services in data centres that are then delivered to remote multiple users via the Internet in a similar manner to Internet service providers (ISPs) hosting Web sites for clients.

The objective of the service is to offer users software on tap and comparisons are often made between the ASP model and conventional utility services such as water or electricity supply.

Growth in the market is predicted to be rapid with global spending on services offered by ASPs estimated at $150 million in 1999 and reaching $2 billion by 2003. Key players in the hardware, software and network sectors have already signalled their support as the recent wave of strategic e-business partnerships between leading companies clearly demonstrates.

Wide-ranging and complex

The ASP model is wide-ranging and complex, requiring multiple competencies. This is reflected by the diversity of key players from the information industries who are fulfilling roles in recent ASP initiatives.

ASP is not just a case of adding the Internet to the outsourcing model. In fact, the potential customers and the method used to deliver the applications make it so distinct from outsourcing that the names of companies such as CSC and EDS are lost amongst the software vendors, ISPs, telcos and hardware providers also appearing in the daily news on ASP.

In particular the ASP market offers excellent opportunities for telcos, especially given the need for connectivity in the ASP mix.

Although the competencies of the telco are not end to end, PA Consulting Group's analysis shows that telcos are well positioned to take the lead role in service provision and hence maximise revenue potential by leveraging their strong branding, excellent client coverage and ongoing investment in IP-enabled networks.

Despite the importance of the software content to the end user, other key areas entail more investment or complexity, and it is this distinction that allows telcos to be differentiated from other likely participants.

In analysing the ASP business model, PA has identified several key success criteria, highlighted in the figure below.

In order for a new entrant to succeed, it must fill any gaps in its competencies so that every link in the chain of the model is fulfilled. These criteria, as the key links in the ASP value chain, are categorised in four general areas: client management, content, platform and connection.

The larger chevrons to the right of the picture are an indication of the increased amount of complexity involved in fulfilling these areas of the chain.

The investment behind providing the connection with a robust IP-enabled network is more than that required when providing the content. A potential ASP which lacks the connection can, of course, choose to lease the connectivity rather than to invest in building a network.

However, this is likely to involve deals with multiple telcos, hence adding to the complexity.

The issue is that the complexity of the investment, resources or management needed to fulfil the complete ASP chain is less if connectivity is already in place. It is much harder to migrate into the ASP role starting from the left of the model.

This contradicts the clients' perception where the software content is the most valuable, since this is effectively what they are paying for. However, as the diagram implies, each general area is a link in the chain and hence all are equally valuable to the ASP itself in terms of delivering the application content to the client in an effective and cost-efficient manner. 

In order to determine how telcos are positioned to exploit the ASP opportunity relative to the other potential entrants, each type of organisation has been assessed against the components of the model. The diagram above summarises the results of the analysis.

Software suppliers have an obvious advantage in the content area, combined with considerable competence in sales and marketing due to the highly competitive nature of the market.

However only a few software vendors have enabled their software to take full advantage of the ASP offering.

The key advantage that software vendors have over all other entrants is that they have control over the software licensing agreement. However it is likely that competition will induce a small number of vendors to relax their licensing agreements and force others to follow suit.

Hardware suppliers will naturally excel in the platform area but are less well positioned in other areas of the value chain.

Their role in the ASP model differs little from any they currently fulfil in other markets and as such the ASP market will simply mean increased sales volumes, although they may offer additional expertise in the server management area.

This limits the ability for hardware suppliers to take a lead role in the ASP opportunity, but many are ensuring they do not get left out entirely by forging alliances with players in other sectors, such as that between Microsoft and Compaq.

Telcos can provide the IP networks for applications service provision, simply transporting the bits and bytes. This is the very bandwidth that has fuelled the emergence of ASP.

For instance, AT&T has pledged $250 million of upgrades to make its IP network fully ASP enabled, thereby ensuring a robust and high performance network to support the business objectives of its ASP clients.

However, most telcos also have experience with server support through their network management systems and all telcos have excellent client access through their network coverage and billing, supplemented with appropriate technical support capabilities.

Recent intensification of competition has also increased the competence of many telcos in the area of sales and marketing. Furthermore, this marketing push, combined with wide client coverage, has led to many incumbents now being synonymous with strong, easily recognisable branding.

This analysis shows that telcos are naturally well positioned to fulfil all the connection criteria by combining their conduits and real estate, positioned at nodes on the network.

Indeed, Cable & Wireless has taken this approach to entering the ASP market and aims to have the most extensive and unchallenged global IP network by 2001. It has combined with Compaq to provide the server farms as well.

In doing this, C&W has satisfied the platform and connection areas of the model and will be poised to create a full global ASP offering by fulfilling the content area through agreeing licences with a software vendor.

This method of market entry has clearly differentiated C&W from AT&T and shown its intent to be more than just a data transporter.

The preceding analysis stressed how investment increased along the chain and this implies that telcos are well positioned since they have competency in the areas associated with the highest investment and complexity.

Despite this, Cisco, Oracle and Hewlett-Packard have pooled resources of $90 million to start a pan-European IP network. Initiatives such as this are potential threats to telcos but the areas where telcos have gaps in their competencies, such as platform hardware and software content, are relatively easily filled.

We in PA believe that the telco case is strong and the C&W example shows how a telco can leverage its reputation as a carrier and network operator to take the first step towards being an ASP.

Telcos can take this lead role through three fundamental steps:

• invest in their IP networks and data centres;
• carefully assess and choose applications that will be in demand;
• use their strong brands and client coverage to actively lead sales initiatives.

Incumbent telcos with more presence in the local access area can add excellent client coverage and branding to secure the lead role in an ASP initiative, or start one of their own.

The ASP model operating over the Internet represents the latest stage in the evolution of e-commerce and offers an excellent opportunity to software vendors, hardware suppliers and telcos alike.

Rapid growth is predicted, fuelled by opening up the SME market and the high bandwidth availability supplied by the very same telcos with whom this analysis has been concerned.

Although there are gaps in their competencies, our analysis shows that telcos are well positioned to seize this opportunity, take the lead role in service provision and hence maximise revenue potential.

This can be done through leveraging their strong branding, excellent client coverage and ongoing investment in IP enabled networks.

Telcos can choose not to do this and ignore the ASP opportunity but, as the initiative by Cisco, Oracle and HP suggests, unless telcos pursue this aggressively they will be bypassed and miss out on this latest e-commerce development.

PA Consulting Group is a management, systems and technology consulting firm with around 4,000 people operating worldwide from over 40 offices in more than 20 countries.

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