ASP's growth a quandary for distributors

Unless you've been reselling IT kit in Outer Mongolia, it can hardly have escaped your attention that a lot of people have become 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 the 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. In his keynote speech he said that growth in the number of ASPs that deal directly with software and hardware vendors could usurp distributors in their current channel role.

ASPs as the new channel
He claimed that distributors are "dead", and suggested that ASPs are becoming the new channel for software and services. He also said that the credit model which distributors provide would be obsolete under the ASP model because ASPs deal directly with the vendors. As a result, distributors will be faced with the choice of either becoming ASPs themselves or simply becoming obsolete warehouses.

According to McNiel, ASPs are also forcing change on software and hardware vendors. Because ASPs only buy new boxes as and when they sell new seats to customers, hardware suppliers will have to adjust their sales model to deal with this, while software vendors will need to adopt a subscription-based licensing model. They will also need to start developing robust, multi-user, scaleable applications as opposed to packages designed for individuals.

But Steve Raymund, chief executive at US distributor Tech Data, said he was "nonplussed" by McNiel'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."

Preferring to simply keep his eye on the UK ASP market for the time being, Julian Klein, managing director at Computer 2000, Tech Data's UK arm, 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 ASPs 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," he added.

Embracing the ASP model
Under the ASP model, a service provider rents software to the customer, who typically pays a rental fee based on usage. The main benefit is that the burden of buying, upgrading and maintaining software is removed from the customer.

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 launched 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 interested in Ideal's notions on subjects such as licensing. "We found it refreshing. [It was] talking about simplifying licensing," she said.

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

Analyst IDC has forecasted that ASP spending in western Europe is taking off, and will increase from $15m in 1999 to $850m by 2004.