Why Many ASPs Will Become ex-SPs

If history is any guide, today's ASPs are facing the fate of many ISPs in the salad days of the Internet: disappearance — in waves of mergers and acquisitions (M&A), market consolidation or simply running aground.

Only a few years ago, providing Internet access became an opportunity for thousands of well-intentioned but ill-equipped entrepreneurs. A tiny few survived, becoming large and prosperous; many more, however, failed - lacking sufficient business skills, technical expertise or capital.

Aberdeen's recent research suggests that history may be repeating itself. In the summer of 2001, Aberdeen conducted a wide-ranging survey of the ASP industry. We polled more than 600 ASPs and received over 140 usable responses. On the funding front, our findings were sobering:

• Three out of five ASPs will seek one or more new rounds of funding by the end of 2002.
• One quarter of the respondents will be searching for money during the remaining months of this year.
• About 60% of ASPs plan to go public in the future, but 80% will wait at least a year.
• And one out of five ASPs is currently involved in some form of M&A activity.

However, investors have been spooked by the dot-com meltdown. The earlier torrent of venture funds has slowed to a trickle: Investments in 2001 are only 25% of last year's levels. A shortage of capital will lead to a market shakedown, resulting in higher acquisition activity and numerous failures. Our research suggests that the shakedown's effects will become evident in the first half of 2002.

The Market Is Whispering

Signs of an industry in trouble have been evident: Industry pioneers FutureLink and Breakaway filed for bankruptcy — as did AristaSoft, an ASP with a seemingly bright future. Agilera acquired Applicast, another early market entrant. USi, the largest ASP by revenues (and another pioneer), shed most of its marketing and sales staff and is likely to be controlled by a private investment firm.

The failures were predictable. Those with business models built like a house of cards have, not surprisingly, imploded. ASPs who considered robust process and disciplined project management as afterthoughts watched customers bail. And any ASP that spent more on customers than their lifetime value quickly ran out of cash.

An Industry Just Like Any Other

Keeping a rational perspective on these events, however, remains vital. The ASP industry, like any other emerging sector, is simply following a well-beaten evolutionary path. Its failure rate is no higher than others'. By most measures, around 8 of 10 startups of any kind die in their first five years. And in times of experimentation and non-stop innovation, the best business models are always up for grabs.

In the long run, failures actually benefit any industry by weeding out unsustainable business models and practices. And a cursory historical review of any industry also shows that consolidation typically results in huge opportunities for new, more focused niche players.

The ASP playing field is still governed by universal, tried-and-tested business rules. The laws of economics have not been rewritten. IBM, in a series of ads, said it best: "Profit is not a paradigm. Valuation does not equal value."

Success lies in the fundamentals — i.e., realistic market segmentation, precise targeting, and clearly differentiable positioning along dimensions of value that matter to the targeted customers. Focus inevitably befriends success.

Aberdeen Conclusions

Has the bloom fallen off the ASP rose? No. The ASP value proposition is still sound, and recent Aberdeen publications have reaffirmed our faith in it.

So, post-shakeout, who will be left standing? Our prediction: ASPs such as Appshop, Interpath, ManagedOps, Qwest Cyber Solutions, Surebridge, and scores of other smart, but lesser-known ASPs. These companies will continue to build their businesses on fundamentals, with little or no fanfare, one customer and one success story at a time. They will trust their market. Grand visions are irrelevant now. And if ASPs listen to the market whispers, they won't need to hear the shouts.

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Lew Hollerbach is research director, service providers for Aberdeen Group. He focuses on the evolving service providers industry, concentrating on ASPs, MSPs and associated providers of outsourced services.