Upside Affiliations:

Posted 06/01/2001

Upside Affiliations:
ASPs and ICPs Discover They Need Each Other

By Gail Lawyer

Something is out of kilter in the competitive telecom universe.

The initial promise of choice of carriers, hot new applications and lower prices has not materialized. Providers of last-mile broadband connections--whether they are CLECs, ILECs, ISPs or IXCs--have been decimated as their access service quickly became commoditized and less profitable than anticipated. And ASPs have been battered, as acceptance of their offerings were not met with the fanfare they expected.

Part of the problem is that, while the carriers have that last-mile infrastructure, they don't have the applications, content and entertainment services businesses and residential customers want and for which they are willing to pay.

Another problem is that ASPs have not met with success, because they didn't have well-established direct channels to reach customers, and they were blazing a trail in a market that was technically complex and needed new usage-based monitoring and billing capabilities that previously did not exist.

These two groups have been so focused on deploying their networks or developing their applications that little original thought has been given to the best way of reaching the end users to make their business models work.

ASPs and last-mile providers now realize the importance of marketing channels and the effect that providing value-added services has on their bottom lines. They also understand that they need each other to find the success that has been elusive so far.

In essence, ASPs are the yin to the last-mile providers' yang. Together they can complete the circle of life necessary to ensure survival within the competitive telecom universe.

"If you look at the last-mile provider, they own a very valuable commodity--the relationship with the end customer," says Vikram Mehta, director of business development in the Content Networking Business unit of Nortel Networks Ltd. (www.nortelnetworks.com). But these carriers now face the fact that they've had to make significant capital expenditures on infrastructure and acquiring those customers.

And, he adds that if you look at ASPs, they're sitting at the other end of the Internet spectrum. They've placed their equipment in hosting facilities to keep their applications available on a 24-hour basis, but they don't have a close relationship with the end users.

"If they partnered, they can truly complement each others' strengths and deliver a better solution to the marketplace," Mehta says.

Other industry watchers agree with that hypothesis.

"The bottom line is that they can't do much without each other," says Harve Tannenbaum, an industry analyst with Summit Strategies Inc. (www.summitstrat.com). "They desperately need each other. Capacity service providers have all this bandwidth. But it's like a TV station with dead air ... they need something to put on it."

Filling the pipes with value is what it's all about, says Roy Vella, a marketing partner with Rivio Inc. (www.rivio.com). Rivio--an ASP that provides a platform to bring online payroll, expense and human relations functions to small businesses--has partnered with the likes of BellSouth Corp. (www.bellsouth.com), Verizon Communications Inc. (www.verizon.com), and VerticalNet Inc. (www.vertical.net) to reach its target audience.

"The best way to sell to a small or midsized business is through an existing trust relationship," Vella says. "Through our partnerships, we have access to 15 million businesses in the U.S. in our sweet spot of 15 to 50" employees.

But Rivio and its partnerships are the exception.

More than 70 percent of ASPs rely on direct sales for the majority of their revenue, according to an IDC (www.idc.com) survey.

"But given that they're targeting small and midsized businesses, they need to use other channels to increase profitability and the economies of scale they need," says Amy Mizoras, senior analyst for the ASP market at IDC.

CLECs and ISPs, in particular, are ideal partners, because many of them also serve the small and medium-sized business market, offering such services as local and long-distance telephony, high-speed Internet access and other telecom basics.

"ASPs could act as an engine and use the CLEC or ISP as a channel to get to the user," says Mizoras. "It's difficult for ASPs to distinguish themselves. These kinds of partnerships create value."

That value is easily evident to customers of last-mile providers who have already hooked up with ASP partners, according to Joseph Varello, executive vice president of corporate marketing and development at Everest Broadband Networks (www.everestbroadband.com). Everest is working with various ASPs to deliver applications such as Internet faxing, PC back-up services and collaboration tools to the businesses located in the buildings it serves. Everest also hosts software applications such as Lotus Quickplace and Microsoft Office 2000.

"The opportunity for joint marketing gives the ASP market something that is desperately needed--a local sales force with feet on the street," Varello says. "That can really light up the ASP sales channel."

While Everest has never claimed to be an applications expert, it believes its resale model for delivery of applications provides an important differentiator for it in the competitive market, and as a good distribution mechanism for ASPs.

In April, Everest debuted its Metropolitan Ethernet Services Architecture (MESA), a metro-area technology platform that enables seamless broadband connectivity, customer support and billing for delivery of converged voice, data, video and best-of-breed applications. The company also has its EverestXpress E-Care Portal, a customer care environment that lets end users self-provision and self-manage their various services online.

The distribution channel issue is possibly a reason that ASP offerings haven't taken off as expected in the primary market they were targeting--the small and medium-sized business.

"Initially, the ASP model [was supposed to have] tremendous value to small and medium-sized businesses," says Tannenbaum. "But they didn't adopt it as quickly as the ASPs might have liked. It's going to take the investment of bigger companies, who aren't betting their entire company on it. Once they start doing it, you'll see SMBs start to adopt it."

Larger enterprises have caught on more quickly than expected, because the value proposition of a hosted application is more apparent to companies that have the largest investments in IT infrastructure, says Alan Mitchell, general manager of advanced solutions in the network service provider group at Microsoft Corp. (www.microsoft.com).

"As they get to smaller companies, the value proposition becomes a little harder to prove [because] its compared against a cost structure that hasn't gotten large enough to make a difference," Mitchell adds.

The threat of a national recession may play an important role in the adoption of outsourced solutions by all types of businesses.

"A lot of ASPs are telling us the pipeline is bigger than ever before because of the slowdown of the economy," says IDC's Mizoras. "It will have a positive impact, especially for those targeting mid-sized businesses. People tend to outsource more when times get tough ... when they have to be more efficient."

Changing Channels

In the early days of the ASP business, direct sales to end users were the primary means for attracting new business. And there are established relationships with systems integrators (SIs) and value-added resellers (VARs), that tended to do much of the outsourced communications networking for businesses.

"Just because they are an ASP doesn't mean that a phone company is the ideal channel for them," says Tannenbaum. For some that have complex applications that need to be integrated into businesses' existing systems, SIs and VARs are probably the best channel.

Outtask Inc. (www.outtask.com) is one of those ASPs that initially went direct to businesses with their various outsourced IT solutions.

"They've done well, as opposed to others, because they're very focused on what they do," says Tannenbaum. "They're only taking on things they know they can deliver easily."

But Tom DePasquale, Outtask's president and CEO, says the company is exploring other channels for its applications and currently is negotiating with at least five broadband providers.

"There's an absolute need for each other, and a lack of understanding among broadband providers of how complex it is to be an ASP," DePasquale explains. "And you can build an easy argument that broadband providers would want higher-end services. But many are not doing it yet. We believe the broadband provider would be a great channel. But all we hear is that they'll give us floor space in their data center and charge us to be there."

DePasquale says he believes the problem is that telecom companies are concerned more with making money from the ASPs by providing managed hosting, than making money with ASPs through joint marketing and partnerships that reach the end users.

"Several large broadband providers are saying that they let ASPs come host," DePasquale says. "What do they mean, 'Let me host?'" That's a dime a dozen.

"Why would I want to live there if there was no channel involved?" He asks. "All of them have built these data centers. It's like Groundhog Day."

DePasquale says he believes these broadband providers are looking at the situation in the wrong way.

"They say they're going to make their money selling to ASPs, not the customer," he explains. "The value of what they're doing for me, the ASP, is nothing."

Cable & Wireless plc (www.cw.com) and Qwest Communications International Inc. (www.qwest.com) are among broadband providers that embrace the idea that they must create environments in which applications can be hosted, but also provide the channels through which the applications are sold to end users.

"We consider ourselves more than just an ASP ... We're more of a provider of managed computing services over the Internet," says Simon Angove, senior director of product management for C&W a-Services. For a monthly subscription fee, C&W provides businesses with end-to-end connectivity and client application devices from Compaq Computer Corp. (www.compaq.com) and hosted applications from Microsoft and others. C&W also has introduced its Webtop suite of services, which lets end users use applications securely from any Internet-connected device.

With its various a-Services offerings, "we're building an annuity stream, rather than a one-time payment," says Angove.

The Pure Play

While early ASPs developed interesting applications first and wondered how to market them later, one next-generation, pure play ASP did the opposite.

Bluetrain Inc. (www.bluetrain.com) spent three years developing the technology through which it could deliver applications through channel partners such as the CLECs, ISPs and ILECs.

"They were the only ones that went after the distribution channel," says Tannenbaum. "While a lot of other ASPs were trying to nail down the applications, [Bluetrain] was working on the platform. That's been the missing link."

Jack Weixel, Bluetrain's CEO, believes the only realistic thing for an ASP to do is create those necessary sales channels.

"But, the devil is in the details," he says.

ISPs, access providers and telcos don't have the proper equipment or the know-how to deliver and bill for hosted applications.

"If the ASP market is going to take off as expected, they need these capabilities," he adds. "Service providers realize they need to provide more than just bandwidth."

In late January, Bluetrain announced several channel partners, including C&W, Intermedia Communications Inc. (www.intermedia. com), MetroCon Communications Inc. (www.metrocon.com), and SpeeDsl Inc. (www.speedsl.com), among others. The partners have some 250,000 businesses and nearly 10 million users already paying them to deliver and manage their data and telecommunications services.

Bluetrain's flagship product, Passport, is what attracted Intermedia to the company. It "provides small and mid-sized businesses with applications that they would find on a LAN in larger corporations," says Mike Dimperio, vice president and general manager of Intermedia's Advanced Building Networks unit. Among the applications available on Passport are e-mail, shared documents and calendar task management and discussion forums.

The relationship with Bluetrain is ideal because Intermedia "can't afford to build everything that comes to bear on our customer relationships," he adds.

Dimperio says the companies have a revenue-sharing relationship that "takes into consideration the value they add to developing and recruiting the applications to the desktop, and the value we add to having a sales force to get the customer acquisition."

He also noted that Intermedia had some upfront development costs for ensuring that its billing systems and businesses processes would handle putting all of the application and telecom service billing information on one invoice.

Some CLECs find themselves in the hosted applications business without the benefits of partnerships. PaeTec Communications Inc. (www.paetec.com), for instance, leverages its purchase last year of Pinnacle Software Corp. (www.pinnsoft.com) to create a hosted solution for Fortune 500 companies and government agencies. The offering, called the Pinnacle Communications Management System, allows businesses to manage their own internal communications and handle the breakout of billing services to various departments.

"We're in a unique position to provide this service," says Rick Lines, a founder of Pinnacle Software. "We can provide the data network, T1 access, all the way to the end user, to the desktop if needed. The synergies work all around."

PaeTec will host the Pinnacle solution out of its own data center, and Lines says that the company is also considering other applications that it could bring to its customers, either internally or through partnerships with other ASPs.

Jumping the Hurdles

Intuitively, partnerships between ASPs and last-mile providers make sense. But just because it looks simple on paper, doesn't mean that it is.

Integration of applications with existing carrier services can be complex. And figuring out how to bill for application usage can be even more confounding. But ASPs, like Bluetrain, and equipment vendors are working to solve these problems.

Nortel, for instance, reportedly is working on a single- purpose device with Apogee Networks Inc. (www.apogeenetworks. com) that can be placed in hosting centers or the facilities of last-mile providers. The equipment would enable provisioning of value-added applications and the billing for usage of those applications.

At press time, the prototype device was in the labs, and Nortel said it expected to be in beta testing by the third quarter.

Finally, the unfriendly financial markets may put a crimp in the plans of ASPs and carriers to develop these potentially fruitful partnerships.

Like many other providers, "we're challenged with our own core competencies to conserve cash and get out to the market," says Everest's Varello. "And the capital markets haven't been warm to doing something different."

Only time will tell if the stars can align before it's too late.

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