1. © 2003 UMFK. 1-1 Application Service Providers internet business models text and cases Tony Gauvin

2. © 2003 UMFK. 1-2 Overview Definition Taxonomy How do ASP’s create value? Barriers to Adoption ASP economics GBF??

3. © 2003 UMFK. 1-3 The Future of Computing Five years from now, if you’re a CIO with a head for business, you won’t be buying computers anymore. You won’t buy software either. You’ll rent all your resources from a resource provider. –Scott McNealy, CEO, Sun Microsystems –May 2000

4. © 2003 UMFK. 1-4 ASP An ASP is a organization that manages and delivers application capabilities to multiple entities from a data center across a Wide Area Network –Software is “rented” for a recurring fee –Can add multiple service offerings Application Software System Integration Services Data Center and Connectivity Services Application Monitoring, Metering/billing, and End-user support Defining characteristic was that an ASP is the sole owner of the customer relationship Expected 6-fold increase from 2000 to 2003 –$1,964,000 to $11,311,000

5. © 2003 UMFK. 1-5 Taxonomy Four dimensions –Solution Focus Internal <> external Horizontal <> vertical <> enterprise –Customer focus Age, size, growth rate, complexity –Breath of application solutions Single application <> portfolio –Applications sourcing strategy Internet enabled vs. Web-native

6. © 2003 UMFK. 1-6 Solution Focus Application classified along two vectors –Externally versus internally focused External connects a company with outside partners –CRM, Supply Chain, Internal used by company employees –HRM, Financials –Horizontally, vertically or enterprise focused Horizontal is across a wide range of industries –E-mail Vertical is for a specific industry –CollegeNET Enterprise is for large complex organizations

7. © 2003 UMFK. 1-7 Customer Focus Characteristics of Customers –Size Small <100 employees Medium >100 < 999 employees Large >1000 < 4999 employees Very Large > 5000 employees –Pace of Growth –Business Complexity

8. © 2003 UMFK. 1-8 Breath of Application Solutions Single applications –SAP R/3 Portfolio of products –May not be their products but that of another vender (Microsoft)

9. © 2003 UMFK. 1-9 Application Sourcing Strategy Internet-enabled applications –Originally built for client/server and then retooled for the Internet –Often only had a web based front end Web-native applications –Designed from inception to operate only over the Internet

10. © 2003 UMFK. 1-10 How ASPs Create Value Create “Frictionless commerce” –Reduce high-cost of shrink wrap software –Reduce difficulty of recruiting and retraining IT staff –Reduce the need to build and maintain IT infrastructure Compensate for lack of in-house expertise Low up front investment and predictable cost Speed of deployment –For ERP – 90 days versus 3 years

11. © 2003 UMFK. 1-11 Barriers to Adoption Security –Internet –Outsider Data Center Lack of personalization and customization –Generic (one size fits all) solutions Untested business model What happens if the ASP goes under?

12. © 2003 UMFK. 1-12 ASP Economics Tough to collect data –Diversity of ASPs activity –Only a few ASPs were publicly traded Sources of Revenue –Rental fees for software Long term –Fees for Professional Services Short term

13. © 2003 UMFK. 1-13 ASP Cost Factors Cost of Services (mostly personnel) –Network operations –Data Center operations –Customer support –? Licensing fees if using other vendors Sales and marketing –Direct sales reps Product Development –Depends on whether the ASP developed or bought Applications G&A

14. © 2003 UMFK. 1-14 GBF or GIRF? Network Effects –Varies based on application sourcing strategy –Higher for Web native then Internet enabled Scale economies –Good if ASP developed their own applications –Operations costs vary with transaction volumes Incremental gains Customer retention –Very HIGH –First mover advantage –Lower for Web native then Internet enabled