How ASPs Work

ASPs tend to be made fairly complex and confusing in the media, but people have been using forms of the ASP for centuries. By looking at one of these existing models and seeing how simple they are, you can gain a great deal of knowledge about Internet ASPs. An airline is a classic example of a non-Internet ASP, and is extremely simple to understand. It therefore makes a great starting point into your understanding of ASPs.

Almost all Fortune 1,000 businesses, as well as many small businesses, use airlines extensively. Many individuals also fly frequently for business and pleasure. Yet the number of businesses and individuals that own their own airplanes is extremely small. Instead, we rely on airlines to provide travel services to us on a per-use basis.

The main reason for the lack of plane ownership is the extremely high cost of entry. Let's say that you would like to own and operate your own jet. Here are some of the costs involved:

In almost all cases, these costs are so high that, compared to the cost of individual airline tickets, they make no economic sense. Even the most intrepid traveler who flies 52 weeks out of the year would spend at most $2,000 per week ($104,000 per year) on airline travel. That amount of money would not even cover the cost of the pilot, not to mention the cost of the plane, fuel, maintenance, support, etc. involved in owning and operating a private jet. A private jet only makes economic sense in two possible cases:

These two cases are extremely rare, hence the rarity of private jets. Note also that people who own private jets frequently travel between the United States and Europe on the Concorde. The Concorde is an ASP for high-speed European travel. No company could justify the cost of owning and operating a supersonic jet.

Airlines are classic ASPs because they give you and/or your company a choice. You can own and operate your own jet, or you can charter a jet from an airline when you need one (see, for example, How NFL Equipment Works to find out how an NFL team uses chartered jet service), or you can pay a very low incremental cost to fly each time you need to travel (and share the cost of owning and operating the jet with hundreds of other passengers on the plane). The "pay a low price each time you use it" versus the "buy the service outright" option is a common feature of Internet ASPs, too.

There are many other ASP-like models that most of us use every day. For example:

There are cases where we do not go the ASP route. For example, a huge number of Americans own and operate their own automobiles instead of using the ASP called "public transportation." Most large businesses can justify the costs of large copying machines, while smaller companies rely on the ASP called Kinkos.

The point of all this is simple -- ASPs are all around us in many different forms. We choose whether or not to use ASPs based on economic factors that are driven largely by our frequency of use and the cost of entry and maintenance.

Even though airlines fit the model for an ASP, we generally do not refer to airlines as ASPs. The terms "ASP" and "Application Service Provider" are applied specifically to companies that provide services via the Internet. In most cases, the term ASP has come to denote companies that supply software applications and/or software-related services over the Internet.

Here are the most common features of an ASP:

The ASP model has evolved because it offers some significant advantages over traditional approaches. Here are some of the most important advantages:

One thing that led to the growth of ASPs is the high cost of specialized software. As the costs grow, it becomes nearly impossible for a small business to afford to purchase the software, so the ASP makes using the software possible.

Another important factor leading to the development of ASPs has been the growing complexity of software and software upgrades. Distributing huge, complex applications to the end user has become extremely expensive from a customer service standpoint, and upgrades make the problem worse. In a large company where there may be thousands of desktops, distributing software (even something as simple as a new release of Microsoft Word) can cost millions of dollars. The ASP model eliminates most of these headaches.

ASPs come in all shapes and sizes. One way to understand ASPs is to look at them from several different angles using real-world examples.

Simple ASPs

If you were to start a small business today, you would probably begin by contacting three or four extremely common and largely unnoticed ASPs:

The huge advantage of using these ASPs is the fact that you don't have to do anything to get started. Five years ago, a small business looking for these services would have needed to:

Those are tremendous hurdles. Now, all of these services can be ordered and delivered on the same day, and the monthly cost for all three is probably less than $50 per month. The latest product category to enter the list of start-up ASPs is eCommerce Storefronts -- a storefront might cost $200 to $400 per month.

The other thing to note is that ASP versions of these services will be significantly better than anything a small business owner can afford to provide. For example:

No small business could afford that level of service with a home-grown server infrastructure.

Traditional ASPs

The "traditional" ASP sells a large, expensive application to large enterprises, but also provides a pay-as-you-go model for smaller clients. A typical example might be ad-serving software or auction software for a Web site. For example:

Nearly any piece of expensive software, including giant applications like SAP, PeopleSoft and Oracle, now comes in an ASP version to allow these companies to reach smaller customers affordably.

ASPs today offer nearly any service a company might need. Many of these services (like e-mail, Web hosting, ad serving, invoicing and bill delivery, payroll, etc.) are mission critical. It is therefore important to make sure that the ASPs you choose will handle your information and relationship in a mission-critical way. Here are a set of questions you should ask any ASP:

There are probably many other questions specific to your situation, especially for advanced applications. If the ASP covers all of these bases well, then it is likely that the ASP can support your business adequately.

For more information, check out the links on the next page.