Thriving in a climate of change: natural selection picks a few ASPs

In an economic climate where online pretenders are being slaughtered like chickens, some application service providers are not surviving; they’re thriving. In a few cases, they’re gaining rapidly on their traditional, package vendor competitors.

Companies like NetLedger, the online accounting supplier, and, the online sales force automation vendor, continue to grow their services and revenues as winded package vendors struggle to keep up.

When it comes to analyzing data from Websites – known as Web analytics – and the more general field of data analytics, companies such as digiMine.Inc., WebSideStory Inc., WhiteCross Systems, Keylime Spftwae and NetIQ’s Web Trends division are taking market share from package vendors. The field also includes lesser known players such as Intellitracker Ltd., RedSheriff, TopicalNet, Inc., and Omniture.

In tough economic times, these sellers of application services-by-subscription have an advantage over the companies that rely on one-time license deals. They have a low upfront cost, do not require large amounts of in-house training or additions to the IT staff and can provide their services quickly.

“Chief financial officers love application service providers because they can treat their service as an operating expense rather than an asset on the balance sheet,” said Guy Creese, analyst with the Boston-based Aberdeen Group. In a close contest between an ASP and a packaged supplier, the CFO will ask, “Why the hell can’t we use the application service provider?” he said.

Thriving in a climate of change natural selection picks a few ASPs Guy Creese Aberdeens Web analytics analyst


Guy Creese, Aberdeen’s Web analytics analyst


NetLedger, which launched three years ago charging $4.95 per user of its small business accounting software application, now charges $50 per user and adds new customers each month.

In today’s tight-fisted budgeting, a subscription represents a smaller outlay than a long term software license running into hundreds of thousands of dollars. As a result, companies that used to provide their own in-house applications are looking more frequently toward application service providers.

Last month we had revenues of $860,000. In October, we’ll have our first month of $1 million dollars of revenue”, said Zach Nelson, president of NetLedger, whose accounting application suite has been available online for three years. On Oct. 14, it added the NetSuite set of applications, combining accounting with inventory and customer relationship management for mid-sized companies.”

“Our renewal rate is 130 percent,” said Nelson, meaning existing customers not only renew their subscription but buy additional application services each succeeding year.


Thriving in a climate of change natural selection picks a few ASPs Zach Nelson, NetLedger President

Zach Nelson, NetLedger President 

That doesn’t mean NetLedger is profitable But continues growth at the present pace means the gap between expenses and revenues “is closing rapidly” and the start-up will turn profitable “maybe in the middle of next year”, said Nelson, who was named president July 9. NetLedger has rapidly expanded its product line and staff and in May opened three offices in Phoenix and Portland, Ore.

Former Oracle “rookie of the year” Mark Benioff has said publicly that his sales force automation service provider,, is making headway as a monthly subscription service versus sales force automation package vendors. Benioff said that the firm enjoyed a jump to $13.5 million in its most recent quarter from $5 million at the same time last year, Benioff sometimes refers to “the end of software”, meaning the demise of the older licensed package vendor marketplace.

In the data analysis space, vendors who order analytical applications as a service over the Web are also gaining revenues faster than most analysis package vendors, according to analyst Guy Creese a the Aberdeen Group.

In the year 2000, application service providers represented just 13 percent of the Web analytics space, compared to 62 percent for traditional license vendors. The overall market represented $400 million.

In 2001, the balance began to shift, with ASPs growing to 22 percent and the package vendors declining to 47 percent. The overall market declined to $372 million last year.

In 2002, Creese expects the ASPs will move up to 31 percent of the market and package vendors will drop to 38 percent. Next year, he said, the ASPs will nose ahead of the traditional suppliers, 35 to 34 percent, he predicts.

“Some ASPs say software vendors will eventually be gone. I don’t believe that,” Creese adds. “Some customers just want to manage the application themselves in-house.”

In addition, the online analytic companies sometimes run into a brick wall when they would like to provide a service that compares a customer’s Web site data to customer data from other channels, but the company won’t turn over such key information to an outsourcer.

But the application service providers as a whole can offer several enticing advantages that seem to be breaking down the resistance. For one thing, the IT staff doesn’t need to staff up a new area of expertise and deploy an expensive application.

To understand what masses of customer data means requires experience in data warehousing, data mining query formation and report formatting. Analytics companies already have that expertise. A company turn its data over to digiMine and “we’re like a bunch of doctors in a teaching hospital sitting in a room discussing the patient,” said Omar Tawakol, vice president of product marketing.

In addition, an ASP’s primary business is developing and selling an application, so its engineering staff has command of the application programming interfaces that allow it to connect with other systems and the outside world. That puts the ASP in a position to customize the application to a customer faster that the customer’s in-house developers might.

In the same vein, the ASP is heavily invested in keeping each customer’s initialization of the application running, so its own data centre and that of its Internet service provider will be built up ahead of demand on the scalability curve.

Creese said the analytics vendors in many cases still fall short of being able to integrate data from many sources to achieve a holistic view of the customer, but their capabilities are growing in what would seem an unfavourable economic climate. Customers think they can take their regular analytics application and “just apply it to the Web site, but it’s not that easy. Web sites are generating big, big volumes of data,” he said.

In some cases, adds Creese, they are helping the customer “to understand what kinds of data to ignore.” While both in-house and outsourced suppliers of analytical reports can fill pages with numbers, the ASP can point out, “Nine months ago, your shopping cart was state of the art. Now it’s harder to use that your competitors,” he said.

The ASPs started out with the idea of serving dotcoms. With the demise of their original customers, the surviving application service providers are finding they haven’t necessarily been left out in the cold. When they can provide value at a reduced cost, their service model has suddenly become more appealing to companies looking to contain their own costs, Creese said.


By: Charles Babcock

Source: Charles Babcock


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