Of the multitude of new markets that have sprung up in recent years, the application service provider (ASP) market is one of the hottest. Like other markets in this so-called "new economy" era, it has flashed into a prominent position in a very short amount of time. The ASP market has garnered the intense interest of high-tech vendors, start-ups, investors and IT organizations alike. Much attention has been devoted to determining the market's size and potential, to praising its purported benefits and to marketing its many entrants.

As with many Internet-related markets, the ASP market is beginning to receive its share of close scrutiny. Despite early predictions of frenzied growth, there are hints of a substantial market shakeout in the not-too-distant future. Customers are attempting to cut through the hype, and industry pundits are beginning to ask pointed questions. Are customers really flocking in droves to this market? Has the business model matured enough to sustain the predicted growth? Are ASP offerings sufficiently robust and cost- effective in the long run?

Injecting a Dose of Reality

We ought to inject some reality into the picture to better understand the evolving ASP market. To begin with, we need to answer questions such as: How many users are willing to have their applications hosted by a third party? What are the key concerns? Are ASP offerings packaged correctly? An analysis of ASP customers and suppliers by Survey.com turned up a number of interesting insights into these questions.

The first bit of reality we need to acknowledge is that every organization is not moving all, or even a few, of their applications to ASPs. Being a young market, many potential customers are not yet swayed by early hype and are taking a wait-and-see attitude. Many are comfortable with the way their applications currently run. In the study, 63 percent of potential ASP customers were screened out because they did not utilize or have any intention to utilize ASP services.

The next bit of reality we need to recognize is that there are a number of issues that need to be addressed effectively to win over the skeptics and secure the customers ASPs have won over. Both internal and external security issues are quite clearly the most disquieting of ASP customers' concerns. Nearly 48 percent of the study's respondents cited security as their primary concern when selecting an ASP. Two other issues, networking and resources, also cause trepidation among customers.

Fortunately, ASP suppliers recognize these issues as customers' greatest fears. Close to 36 percent of ASP suppliers cite security as the issue of most concern to their customers. They also acknowledge that the network and resources are areas that customers deem as worrisome. How ASP suppliers address these issues is likely to be crucial to their longevity.

Hosted Applications

We recognize there are certain realities that the ASP market must address to achieve real and sustainable growth. Where do things sit with the customers that have already chosen to work with an ASP and their ASP suppliers? More than 1,000 customers and prospects responded to the Survey.com study stating they had already engaged an ASP or were planning to do so. The application hosting providers are ready for business too. More than 1,000 respondents, from ISP/Web hosting firms to specialized ASPs, said they are in the ASP business now or were planning to be soon.

With large numbers of customers and suppliers already in the mix, the number and kind of hosted applications also expands. Customers, though, are rightly taking a somewhat cautious approach and are less likely to allow critical applications to be hosted. Consider the type of applications that are hosted most often – e-mail/ messaging, Web hosting and database – versus those that are hosted least often – human resource management, vertical applications and complex e-commerce applications.

Data Warehousing in the ASP Mix

Data warehousing and data mining applications are not the most, or the least, popular applications to run in a hosted application environment. More than 60 percent of ASP suppliers offer or plan to offer data warehousing or data mart hosting services. A similar number of customers have or plan to have these applications hosted.

Customers and suppliers both agree that the key benefits to hosting are increased data security and increased uptime/operational stability. A number of customers state they will seek IT services from their ASP suppliers, and a majority of suppliers state they will provide IT services in addition to hosting applications. It begins to look as if there is a pretty good match in the data warehousing space.

Stay Tuned

It is evident that the ASP market is in its early stages. However, unlike emerging technology markets of the past, it will not be given the luxury of an extended period in which to mature. At the current rate of change, customers are not apt to be indulgent with ASPs, particularly when they are dealing with customers' critical and sensitive data. The match-up between customers and ASP suppliers on data warehousing applications bodes well, but it's only one of many application areas. Data warehousing customers, like any others, need to consider whether the benefits that ASPs can provide in the near term are solid enough to counter the existing risks.

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