Growth of ASPs provides quandary for distributors

Unless you've been reselling IT kit in Outer Mongolia, it can hardly have escaped your notice that a lot of people have got excited about the application service provider (ASP) model in the past year.

After the inevitable hype, it is becoming clear that ASPs will play a crucial role in the channel over the next few years. But to what extent they will be involved, and how the model will fit into the channel, is still being discussed by traditional players.

The debate was highlighted by James McNiel, senior vice-president at investment firm Pequot Capital Management, at the recent PC Expo trade show in New York. The growth in the number of ASPs that deal directly with software and hardware vendors could usurp distributors in their current channel role, he said in his keynote speech.

McNiel claimed that distributors are "dead" and suggested that ASPs are becoming the new channel for software and services. He also said the credit model distributors provide would be obsolete under the ASP model because ASPs go direct to the vendors. He added that distributors will be faced with the option to become ASPs or become obsolete warehouses.

According to McNiel, since ASPs are also forcing change upon software and hardware vendors by buying hardware as they sell seats, hardware vendors are going to have to match that financial model. Similarly, software vendors will have to adopt a subscription-based licensing model for ASPs and their customers. They also need to start developing robust, multi-user, scalable applications to fit the ASP model, as opposed to applications designed for individuals.

But Steve Raymund, chief executive of US distributor Tech Data, told Computer Reseller News he was 'nonplussed' by McNeil's comments. "Our business, particularly in the US, continues to boom as we expand our customer base to include service providers in general and ASPs as well," he said. "The ASPs need to run their operations on something, and it's more efficient to source from us than directly from the vendor, just like resellers."

The best way to add value
Preferring to play a watching brief on the UK ASP market, Julian Klein, managing director of Tech Data's UK arm, Computer 2000, said: "In its purest form, distribution has not been about shifting boxes, it has been about adding value to a combination of the customers: the resellers and the vendors. We are talking about different ways to add value. If a chunk of the market moves towards ASP, then almost certainly we will be able to add value to that.

"Because of our existing relationship with vendors, and particularly our existing relationship with resellers, we can use economies of scale to drive some of the back-office functions that are going to be needed around ASPs," said Klein.

Under the ASP model, the software is owned by the provider who then rents it to the customer, with the customer typically paying a rental fee based on use. The main benefit is that it removes the burdens of buying, upgrading and maintaining software from the customer.

Microsoft embraces the model
Software vendors have been falling over themselves in the rush to embrace the ASP model, so perhaps it was only a matter of time before some distributors felt it necessary to climb onto the bandwagon.

Microsoft certainly sees the ASP model as playing a big part in its future. It has made several large investments in ASP businesses and has a hosted applications initiative with Cisco. It has also signed Ideal Hardware as its fourth distributor, attracted by Ideal's thinking on ASPs.

Adele Knox-Roberts, channel manager at Microsoft, said she was attracted to Ideal's thinking on subjects such as licensing. "We found it refreshing. They were talking about simplifying licensing," she said.

None of this means Microsoft is looking for its distributors to adopt any particular model. "All we can do is ensure that they are familiar with our plans and thinking," said Roberts. She was clear that hosting is the way forward.

• Analyst IDC forecast that ASP spending in western Europe is taking off and will increase from $15m (£#10m) in 1999 to $850m by 2004.

THE RESELLER VIEW
Jonathan Chapple, chairman of reseller Equanet, believes distributors face serious stumbling blocks if they want to adopt the application service provider (ASP) model.

For one thing, distributors don't know how to sell direct to end-users, he said. Also, horizontal applications, such as those generally produced by Microsoft, often are not suited to the ASP model because they are coupled to a PC.

Chapple questioned the ability of many distributors to take the ASP route. "A managed hosting service needs a good infrastructure, fault-tolerant buildings and machinery," he said.