Buzz
Application Service Providers (ASPs) offer an innovative approach to selling and distributing software and services. Teera Konakan / Getty ImagesThe Web and the Internet gained significant momentum and media attention beginning in 1994. Initially, the Web served as a valuable tool for academics and researchers to share information. However, as millions of consumers embraced the Internet, it gave rise to entirely new business models. Three prime examples of these groundbreaking models include:
- Amazon - Launched in July 1995, Amazon boasts a massive database of millions of products available for browsing at any given time. Compiling such an extensive list would have been impossible in any medium other than the Web.
- Ebay - Online auctions have made it simple and cost-effective for millions to buy and sell virtually anything. Achieving this in a timely and affordable manner would have been unimaginable without the Web.
- Epinions - A community-driven platform where thousands contribute product reviews. One of the greatest strengths of the Web lies in its global reach and collaborative potential.
These various business models are readily visible to anyone browsing the Web. One particularly intriguing behind-the-scenes business model that the Web has brought to life is known as the ASP, or Application Service Provider. ASPs offer a completely new approach to selling and distributing software and software services. While the concept of ASPs was possible before the Web's existence, the Web has made it so much easier to create these models, leading to their rapid proliferation in recent years.
The ASP model can be incredibly attractive to businesses, especially small businesses and startups, as it can drastically reduce software and service costs. We will dive deep into the ASP model, exploring how it functions, why it emerged, and why it has gained such widespread popularity.
Understanding an ASP
Though ASPs are often portrayed as complex and perplexing in the media, the basic concept has been in use for centuries. By examining one of these pre-existing models and seeing how simple they are, you can gain valuable insight into Internet-based ASPs. A classic and easily understandable example of a non-Internet ASP is an airline, which serves as an excellent starting point for understanding ASPs.
Nearly every Fortune 1,000 company, as well as numerous small businesses, makes extensive use of airlines. Many individuals also frequently fly for both business and leisure. However, the number of businesses and individuals who own their own airplanes is incredibly small. Instead, we rely on airlines to provide us with travel services on a pay-per-use basis.
The primary barrier to plane ownership is the prohibitive cost of acquiring one. Suppose you wish to own and operate your own jet. Here are some of the associated expenses:
- You must purchase the jet itself, which can cost millions of dollars.
- Regular maintenance of the jet is required.
- You need to hire staff for the jet's operation, including a pilot, who can be very expensive.
- The jet must be in the right location when needed. If it's not, you’ll have to move it, incurring high costs in fuel, maintenance, and more.
In nearly all situations, these costs are so high that, when compared to the price of individual airline tickets, they are simply not economically viable. Even the most frequent traveler, flying every week of the year, would spend no more than $104,000 annually on flights. That amount wouldn't even cover the pilot’s fee, let alone the costs for the plane, fuel, maintenance, and other expenses of owning and operating a private jet. Private jet ownership only makes sense in two rare circumstances:
- You are regularly transporting a group of people together.
- The value of the individuals flying is so high that it justifies the cost of operating the jet. For instance, if you have executives whose time is worth $2,000 per hour (e.g., a CEO making $4 million annually), you’ll want to minimize any wasted time and ensure their comfort so they can work most effectively. In cases like this, owning a private jet could be worth the investment.
These two situations are exceedingly rare, which explains the scarcity of private jets. Additionally, those who do own private jets often travel between the U.S. and Europe on the Concorde, a high-speed European travel ASP. No company can justify the immense cost of owning and operating a supersonic jet on its own.
Airlines serve as a classic example of ASPs because they offer flexibility. You can choose to own and operate your own jet, or you can charter one from an airline when needed (for instance, see How NFL Equipment Works to learn how NFL teams use chartered flights), or you can opt to pay a low fee each time you fly, sharing the cost of the plane's operation with other passengers. This concept of 'paying a small fee per use' versus 'owning the service outright' is also common among Internet ASPs.
Many other ASP-like models are integrated into our daily lives. For instance:
- Shipping services - Instead of maintaining your own delivery system, you pay a small fee to send packages through services like the post office, FedEx, or UPS. Companies like BMW and McDonald's do so much shipping that they operate their own truck fleets, but this is quite rare.
- Telecommunications - It's impractical for companies to own and manage their own nationwide fiber optic network, so we all pay a minimal fee for each minute of long-distance service we use.
- Electricity providers - While it’s technically possible for every household or business to generate their own power, it would be too expensive to do so at a reasonable cost. Therefore, it makes more sense to purchase power from a utility company, which distributes the significant cost of building and maintaining power plants across all its customers. Some businesses, particularly those in industries like forestry, can affordably generate their own power thanks to a source of free fuel or waste heat from other processes in their operations.
In some instances, we choose not to use the ASP model. For example, many Americans prefer to own and operate their own cars rather than rely on the ASP known as 'public transportation.' Similarly, large companies often justify the costs of owning big copying machines, while smaller businesses use the ASP service called Kinkos.
The key takeaway is clear – ASPs are all around us in various forms. Our decision to use them depends on economic factors, primarily our frequency of use and the cost of entry and upkeep.
Understanding an Internet ASP
Although airlines do fit the ASP model, they are not commonly labeled as ASPs. The term 'ASP' or 'Application Service Provider' is specifically used to describe companies offering services through the Internet. More often than not, the term ASP refers to businesses that provide software applications or related services via the web.
Here are some of the key characteristics of an ASP:
- The ASP owns and operates the software application.
- The ASP is responsible for managing the servers that run the application, and also employs the necessary personnel to maintain it.
- The application is made accessible to customers globally via the Internet, either through a browser or a 'thin client.'
- The ASP charges customers for the application either based on usage or via a subscription model (monthly or annual). In some cases, the service may even be provided free of charge, or the ASP may compensate the customer.
Benefits of ASPs
The ASP model has evolved due to its clear advantages over more traditional approaches. Below are some of the most notable benefits:
- For small businesses and startups, one of the major benefits is the low cost of entry and, in most cases, a rapid setup process.
- The pay-as-you-go model is typically far more affordable for everyone except the most frequent service users.
- Much like any outsourcing arrangement, the ASP model reduces headcount. IT personnel are often expensive and highly specialized, similar to pilots in the airline example, so this can be particularly beneficial.
- The ASP model also removes the need for specialized IT infrastructure for the application, as well as the associated supporting applications. For instance, if the application you need requires an Oracle or MS-SQL database, you'd otherwise need to manage both the app and the database.
- With the ASP model, bandwidth costs are shifted to the ASP, which can usually provide it more affordably.
One of the driving forces behind the rise of ASPs is the soaring cost of specialized software. As these costs continue to increase, it becomes nearly impossible for small businesses to afford such software, and thus the ASP model allows these businesses to access it.
The growing complexity of software and frequent software upgrades has also played a major role in the emergence of ASPs. Distributing large and intricate applications to end users has become prohibitively expensive in terms of customer service, and software updates exacerbate this issue. In a large organization with thousands of desktops, simply distributing a new release of Microsoft Word could cost millions of dollars. The ASP model alleviates most of these challenges.
Examples of ASPs
ASPs exist in many forms and sizes. To better understand them, it's helpful to examine various real-world examples from different perspectives.
Basic ASPs
If you were to start a small business today, you’d likely first reach out to a few widely used and often overlooked ASPs:
- A Web hosting provider - Companies like Verio and WebHosting.com offer a typical ASP model, specifically virtual web hosting. They supply hardware, software, bandwidth, and personnel to host websites for businesses and individuals. Typically, they charge between $15 and $30 a month for the service, hosting hundreds of accounts on a single server.
- An email service - Most web hosting companies include an email service with your hosting account. Other alternatives include free services like Hotmail or Yahoo! Mail, or email server ASPs that manage exchange servers, POP servers, or IMAP4 servers, charging a monthly fee. For instance, a company in Raleigh called Interpath offers a complete email service for $8 per account per month (as of 4/10/2000). The key advantage of this model is that the email addresses can be tied to your company's domain name.
- A fax service - Efax provides a free service that sends faxes directly to your email inbox, offering a classic example of a free ASP.
The major benefit of using these ASPs is that they allow you to get started without any setup on your part. Just five years ago, a small business seeking these services would have had to:
- Set up an Internet connection and acquire a router
- Purchase one or more servers to run Web server software, email software, etc.
- Hire someone to install and manage the software
- For a fax machine, buy the fax machine along with a separate phone line
These steps represent major obstacles. Today, all of these services can be ordered and set up on the same day, and the total monthly cost for all of them is probably under $50. The latest addition to the list of start-up ASPs is eCommerce Storefronts – a storefront typically costs between $200 and $400 a month.
Another important point is that the ASP versions of these services will typically outperform anything a small business owner could afford. For instance:
- For Web hosting, the provider generally offers vast amounts of bandwidth, often with redundancy at multiple levels.
- If an issue arises, trained staff are available 24/7 to resolve it immediately.
- If more capacity is required, it can be easily arranged with a phone call and a slight increase in the monthly fee.
- The ASP handles regular data backups and is responsible for disaster recovery.
No small business could afford this level of service with a self-managed server infrastructure.
Traditional ASPs
The 'traditional' ASP typically offers a high-end, costly application aimed at large enterprises, but also provides a flexible pay-as-you-go model for smaller businesses. A common example would be software for ad-serving or auctions on websites. For instance:
- Engage provides ad-management software for websites. This software can be bought with an annual license costing tens of thousands of dollars, but also requires an Oracle database. If the database is already set up internally, it's not an issue, but if not, it becomes a major obstacle. The alternative is to use Engage as an ASP, paying them on a CPM (cost per thousand) basis. Unless your ad impressions run into the millions each month, the ASP model is a highly cost-effective option.
- DoubleClick (and other similar companies) is an example of an ASP that offers advertising software and a sales force. What makes this approach especially interesting is that the ASP pays the customer!
- OpenSite is a major provider of auction software. You can either buy the software and run it with your own database, or use it through an ASP model.
Almost any expensive software, including massive programs like SAP, PeopleSoft, and Oracle, is now available in an ASP format, making it possible for these companies to offer affordable solutions to smaller clients.
Things to Ask a Prospective ASP
Modern ASPs offer virtually any service a business might require. Many of these services—such as e-mail, website hosting, advertising, invoicing, payroll, and more—are critical to daily operations. Therefore, it's crucial to ensure that the ASPs you choose manage your data and relationships with the same level of care. Here’s a list of key questions to ask any potential ASP:
- How is the software accessed by customers? Is it through a browser or a dedicated app? If it’s browser-based, what’s the overall user experience like?
- How are support issues addressed? If you or your team face issues or have questions about the software, how are they resolved? Does the ASP offer training?
- How secure is the data? You’ll want to understand the internal security measures for protecting your staff, including policies around passwords and access controls, external threats such as firewalls, and data recovery solutions like tape backups for hardware failure.
- How is the connection between the ASP and the user protected? Data is exchanged between the ASP and the user every time it’s accessed. Is this connection encrypted, secured through a VPN, or protected by another method?
- How is the application hosted? Is your data on a dedicated server or a shared one? Both options are common, and typically you can choose (with dedicated hosting being more costly).
- How does the ASP manage redundancy? In case of machine failure or network issues, what backup systems are in place to ensure your services stay online?
- What’s the ASP’s approach to hardware/software failures? If a hard drive fails or the application freezes, what are the procedures for recovery?
- How does the ASP handle disaster recovery? If something catastrophic occurs, such as a building fire or natural disaster, what’s the ASP’s plan for restoring services? How long would it take?
- Who owns the data? The customer should always own the data, but this should be clearly stated in the contract.
- If I switch ASPs in the future, how can I retrieve my data? For more complex applications, this question becomes important. Be sure to consider how easily you can move your data if you decide to change providers.
- How do I transfer data between my current system and the ASP? For example, if you use a custom ledger system and need to move data to a billing ASP, how would that work? Many ASPs have already designed solutions to handle this seamlessly.
There may be additional questions tailored to your specific needs, particularly for more complex applications. If the ASP addresses all of these concerns adequately, it’s a strong indicator they’ll be able to support your business effectively.
