The New ASP Market: Beyond the First Wave of M&A

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1 Market Analysis The New ASP Market: Beyond the First Wave of M&A Abstract: The 2003 application service provider market is almost unrecognizable from that of After a wave of mergers and acquisitions, the market has restructured and some suppliers are winning the ASP "wars." By Ben Pring Strategic Planning Assumption The application service provider (ASP) market will see much lower levels of corporate restructuring in 2004 than it saw in 2002 and has seen so far in 2003 (0.8 probability). Publication Date: 16 May 2003

2 2 The New ASP Market: Beyond the First Wave of M&A Ten Percent Survival Rate In mid-2000, Gartner Dataquest made the strategic planning assumption (SPA) that 60 percent of ASPs then operational would undergo some form of significant restructuring or be out of business by the end of At the time, this seemed to some an unduly pessimistic view of a market that, while already beginning to experience a post-bubble slowdown, was still populated by more than 700 vendors, all of which saw it as a new mother lode ready to be mined. In the almost three years since that SPA was made, it has become apparent that rather than being overly pessimistic the SPA was in fact overly optimistic. The continuing slump that the entire IT industry has experienced has been particularly hard on startups in emerging areas. Suddenly unforgiving macro market conditions created an environment in which operationally immature businesses have been ruthlessly exposed. The almost absurd imbalance between supply and demand (few mature markets, let alone immature ones, can support 700 suppliers) created by the abundance of venture capital led to the predicted 60 percent failure rate in fact being more like 90 percent. Although there have been a large number of simple business failures (with an organization simply ceasing to trade), there has also been a significant amount of merger and acquisition (M&A) activity. The ASP market of 2003 is almost unrecognizable from the ASP market of late Here are set out some of the most notable of these M&A deals deals that have created survivors set to exploit the increasingly favorable sentiment among buyers of ASP services and new prospects. Agilera Acquired by BlueStar Solutions The most recent deal, in April this year, was the acquisition of Agilera by BlueStar Solutions. Agilera, which had made two previous acquisitions of its own (of United Messaging and Applicast), was put up for sale by its parents (Verio and Ciber) when they decided that despite a series of executive changes in the past two years, customer uptake was still not growing quickly enough to justify continued investment in unlocking the potential of the ASP marketplace. BlueStar Solutions is emerging as one of the strongest of the original wave of venture-capital-funded "pure play" ASPs that emerged in the late 1990s. The acquisition sees it strengthen its core business of SAP management services but also add complementary capabilities around J.D. Edwards and Lawson Software products and, to a lesser degree, messaging-related skills Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 May 2003

3 Surebridge Acquires Transchannel and ManagedOps March saw two U.S. East Coast ASPs join forces in a deal that brought ManagedOps' strong Great Plains/Microsoft business into Surebridge's already established portfolio of PeopleSoft, Siebel Systems and Vignette. ManagedOps had established a good reputation in the midmarket for Great Plains-related services and, on Microsoft's acquisition of Great Plains, managed to leverage that into a broader set of services around Microsoft's push into the small and midsize business market. This deal followed Surebridge's acquisition in October 2002 of another PeopleSoftfocused service provider, Transchannel, which made Surebridge one of the key PeopleSoft-focused service providers. Corio Buys QwestCyberSolutions QwestCyberSolutions (QCS) was one of the earliest-founded ASPs and, at one time, was one of the largest and strongest. In 2000, it claimed to have revenue of more than $100 million. Its sale to Corio in August 2002 for $15 million suggests that not only were those claims overstated but that, in the intervening period, things had gone badly wrong for the company. Its parent, Qwest Communications International, is still in the process of rerighting its own core business and took the decision to offload its interest in QCS. QCS has, however, added revenue to Corio, and the combined business looks as though it is on the right track at the moment. Revenue and profit are going in the right direction, and, although humbled by the painful experiences of the past few years, the "new" Corio looks as though it is around for the duration. USi, Interpath and Bain USinternetworking, another of the early-stage ASPs, was among the most aggressive proponents of the "build it and they will come" mantra of the dot-com age. Although this led to an impressive ramp-up of size and presence between 1997 and 1999, the financial markets' implosion in March 2000 initiated a painful period of retrenchment and consolidation, ending up with the company filing for Chapter 11 protection under U.S. bankruptcy laws in USi's story is, however, far from over, and the company appears, in the first half of 2003, to be well-positioned to exploit increased market interest in what seasoned, experienced ASPs have to offer. USi's continuing future which was in doubt at one stage was secured by Bain Capital's injection of $100 million and USi's reversion to being a private company (it had been the first ASP to make an initial public offering in 1999). Bain also took the step of merging Interpath, another ASP in which it had a majority equity position, with USi, which created the largest worldwide "pure play" ASP Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 May 2003

4 4 The New ASP Market: Beyond the First Wave of M&A Loudcloud, Frontera and EDS Loudcloud was one of the highest-profile "new economy" vendors to enter the ASP space in the late 1990s. Founded by former Netscape executive Marc Andreessen, Loudcloud earned a reputation overnight as one of the companies to watch and was felt by some to be certain to succeed in the software-as-service arena. Flush with its founder's personal wealth as well as funds from eager investors, Loudcloud, like USi, expanded rapidly on the assumption that new business would be easy to come by. As this proved to be an unfounded assumption, the company began to revert to its software roots and abandoned its attempts to be a service-based company. Just before it changed its name to Opsware and licensed its IT automation software to EDS which also took over its managed service business it acquired another struggling ASP, Frontera, which at one stage had successfully developed an ASP niche around Vignette software. This acquisition, however, was executed during the late stage of its existence as a service company. By the time the ink was dry on the Frontera acquisition, Loudcloud was no more. Exigen Acquires Portera; Interliant in Chapter 11 In other ASP-related M&A moves, the Canadian-based business process outsourcing company Exigen acquired Portera, one of the creators of a new market space, professional service automation. Portera had been using an ASP delivery model. Another company to file for Chapter 11 protection under U.S. bankruptcy laws was hoster and application outsourcer Interliant, whose future is uncertain. ISVs' Continuing Uncertainty Toward the ASP Model Five years after the emergence of the ASP model, traditional Tier 1 independent software vendors (ISVs) still appear undecided as toward their commitment to the whole notion of ASPs or "software as a service." Some, Oracle and SAP for instance, are now squarely behind it. Others, such as PeopleSoft, have reduced their own emphasis on it and now regard the ASP model as simply a channel for software distribution. Others, such as Siebel, have little or no direct or indirect involvement currently, whereas once they had significant presence both through partners and via their own hosted offerings. This range of attitudes and levels of involvement reflects ASPs' continuing ability to be all things to all people. To some, the ASP model is the future of the IT industry; to others, it is one option among a number of options for the management and delivery of application functionality; to others still, it is a dying if not dead idea left over from the late 20th century technology bubble Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 May 2003

5 Survivors Live to Fight Another Day Although there will undoubtedly be further ASP-related M&A activity in the next few years, most of the first wave of the industry's restructuring appears to be almost complete. The companies listed here join those such as Appshop, Salesforce.com, TriZetto, UpShot, Agiliti and netaspx (which have all managed to thrive without yet experiencing the pain and pleasure of being the hunter or the game) in being providers that will be around for the duration and that will potentially execute on the undoubted potential benefits the ASP model can deliver to end users. Key Issue How will new service delivery technologies and new market entrants impact the competitive landscape over the next five years? Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 May 2003

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