The Last Dance

There were many reasons for the ASP implosion. One was that people who actually used Web-based applications discovered that in terms of usability and power, the applications, well, sucked. The Web in the late 1990s and early 2000s wasn't designed to act as an application interface, but to allow you to jump around from file to file quickly. It did this well enough if you had a reasonably fast connection to the Internet, but it didn't do much else very well. People accustomed to responsive application interfaces, spreadsheets that raced through huge wads of numbers, and word processors that cut and pasted big blocks of text with alacrity rebelled as they fumbled with slow, clunky, Web-based products that felt as if they were being run on a TRS-80 circa 1978. Only slower.

Another problem for ASP World was that the NC was dying, strangled in its cradle by Moore's law as it wound its coils of relentless price erosion around Ellison's fair-haired silicon progeny. Initially designed to be sold at the "bargain" price of about $1,000.00 per unit, the NC soon found itself competing against nicely loaded desktops for around the same price. (And unlike the PC, NCs offered computer resellers no good opportunities for upselling accessories and extra goodies, making them extremely unappealing to the distribution channel.)

Also, as the Internet grew, the desirability of the thin-client model underwent a reexamination. A thin-client computing environment meant fat servers, huge storage centers, and big thick digital "pipes" to provide, store, and transmit applications and data. Such an environment may have been an IT manager's dream, but corporate CFOs blanched when presented with the bills. Maybe it made sense to offload some of these computing expenses onto increasingly dirt-cheap PCs, after all. And heck, even CFOs like to play a quick game of Minesweeper every once in a while.

The Napster tune-swapping service's mass popularization of peer-to-peer computing also led to a reconsideration of the thin client versus fat client debate. Although Napster's approach of using the Internet to allow people to transfer music directly from one PC to another was a smash success (at least in terms of usage; Napster had a hard time demonstrating how you make money from the concept), the system suffered from a fatal flaw. Unfortunately for fans of 24/7 mass violation of copyrights on a global scale, Napster's system used servers to create centralized directories of all those purloined files residing on everyone's hard disk. This weakness allowed the recording industry to convince the U.S. legal system to shut the network down until it mended its ways. (Napster could never figure out how to profit from its "mass theft" business model and was driven out of business by the recording industry. The company's assets were put up for sale at fire sale prices, and the Napster name was bought by Roxio, who went on to create "Napster 2.0," a "pay-for-play" download service most people never use.)

But new peer-to-peer technology didn't suffer from this weakness. Networks such as Gnutella and FastTrack required no centralized servers but relied on individual PCs to store information about file requests, manage transfers, and create virtual directories to speed up performance. The more fat powerful clients out there, the better, as far as these networks were concerned.

Then there was the issue of information control. Many companies, after taking a look at the hosted model, decided there was no way they were going to entrust mission-critical data to unknown third parties. In fact, they weren't going to entrust it to known third parties either. Ditto for anything that involved critical real-time transactions, such as credit card processing. Many companies insisted that ASPs offer their products for sale the old-fashioned way, via the purchase of a license that enabled them to maintain control over both the software and their data.

And on closer examination, although automatic software upgrades sounded great in theory, in reality they introduced a whole new set of headaches. The possibility of incompatible file formats corrupting data and the chance that an automatic upgrade could break macros, scripts, and applications that currently worked fine made many IT professionals nervous. As a result, many companies decided they preferred to continue to manage their upgrades internally, a choice that gave them more control over the process of testing the impact of new software on existing systems.

It also became clear that charging more for rented applications wouldn't be as easy as once thought. When a company was presented with a prospective tab for a software rental, nothing prevented anyone from doing some simple math that totaled up the yearly cost of renting software and comparing it to the cost of licensing the same product. At this point, software companies relearned the lesson that once markets have become used to existing price points and schedules, they're very resistant to attempts to change them. Arguments about IT savings were countered by rejoinders that the software company was saving money by not having to run an upgrade program.

Exacerbating the problem was the fact that many of the proponents of hosted applications were companies in the CRM and ERP markets. Ostensibly designed to offer business executives top-down views and management of every aspect of their company's operations, purchasers of these software products soon began to derisively refer to them as "shelfware." This unflattering designation arose from the fact that once a company bought one of these mega-sized, multimodule pieces of code and attempted to implement part of it, the expense, difficulty, and cost of doing so often led to the rest of the product being shoved on a shelf and buried.

ASPs also discovered that many segments of corporate America were reluctant to give up the "piracy" discount inherent in conventional software purchases.11 Software companies are fond of bemoaning the fact that in many markets as much as 50 percent of the software used by companies is illegally copied. And the companies are upset by it too! Very, very upset, and they're going to get on top of the problem and take care of it. Someday. Maybe next year. Or decade. Or whenever.

The upshot of it all is that by 2001, the ASP market bore a grim resemblance to the rest of the dot-com morass. HotOffice found out that banner advertising hardly paid for a single server and cooled into Chapter 11. Intel and SAP pulled the plug on Pandesic. RedGorilla.com turned out to be one sick chimp and died. Exodus and USI went bankrupt. People discovered that hard disk storage cost about $1.00 per gigabyte, so what was the point of renting Internet storage space? The trade shows folded. The ASP consortium closed up shop when most of its membership went out of business or decided that old-fashioned software licensing was still the way to go. In a desperate attempt to distance itself from the unrelenting stream of failures, the industry frog marched the ASP label up against a wall and summarily executed the unfortunate acronym. Taking its place were a plethora of new alphabetical appella-tions—MRPs, HSPs, HRPs, XSPs, etc.—intended to take everyone's mind off the current depressing state of affairs. Most were immediately hunted down and dispatched. The ASP designation crawled back from the grave and resumed its official role as the standard designation for hosted applications, but it was now in official disgrace and no one

11 In early 1999, I was invited to give a presentation at a Software & Information Industry Association (SIIA) seminar on the ASP market and its prospects for success. The SIIA is the latest incarnation of the old Software Publishers Association. One of the reasons consultants and analysts attend these events is to present themselves as experts on a topic and attract future consulting gigs. The hope is that after a stirring presentation, members of the audience will rush up with their business cards outstretched to hire you to put their myriad sales and marketing problems straight. Unfortunately for my plans, I decided to give a straightforward analysis of the ASP market that concluded that most of the current business models and approaches were horsesh- . . . not feasible. I was later informed by the SIIA that many in the audience had found my negative attitude discouraging, and I collected very few business cards (well, none, actually). This experience drove home to me the realization that a herd of lemmings in the act of flinging themselves over a cliff are primed to discuss the importance of teamwork, the need to stay focused on the task at hand, and the necessity of maintaining a positive attitude.

talked to it. It finally expired from all the sheer contempt directed at it in 2005, to be replaced by the fairly unpronounceable "SaaS" (Software as a Service).

To be fair, the news wasn't all bad. There were a few modest successes in certain markets, such as human resources. Although a company's resume database is important, the inability to access it for a few hours or even a day or so isn't critical. In markets with similar characteristics, such as scheduling, project management, and sales force and marketing automation, ASP firms made some headway, especially if their goals were modest and their prices low. By the end of 2001, the ASP market was determined to have generated about $600 million in revenue and very little in the way of profits. And even these figures were somewhat deceptive as many of the surviving ASPs were now also selling their software the old-fashioned way, via licensing. As with the dotcoms, not much of an ROI on a $10 billion investment.

But, good news! By 2002, industry gurus were proclaiming that, yes, there was indeed a fortune to be made by hosting applications. It was going to be done via a brand-new technology: Web services, new Internet-based protocols, products, and services that would allow all those desktop applications to communicate and collaborate in new and wonderful ways. And who was going to make all this money? Well, as the June 25, 2002, issue of Interactive Week (a publication that soon after folded, itself a victim of the Internet implosion) told us:

The key to the paradox is that growth will be driven not by start up ASPs—which have gained mind share but not market share— but by the folks that already sell software by the ton.12

And how were the folks already selling tons of software going to create ASP World? Well, later in the same article, Microsoft theorized that

It's a misconception that people will get Office off a Web site. What is Office in a software-as-a-service world? A client, a way for people to access some services.13

12 "Changing the economics of software business," Interactive Week, June 25, 2002.

13 Ibid.

Oh. In other words, get ready to pay for access to an updated spelling corrector for your word processor. Well, it was good to know what the future held. At least we weren't all going to end up having to wear love beads, acetate shirts with floral designs, and ultrawide ties. That was something.

Marketing Disasters

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