The Internet was awash with application service providers that would allow consumers and businesses to perform tasks, even in the very early days of the commercial web. After a few years and a burst of the Bubble, most of the companies that provided online services disappeared, leaving only a very few winners. This was true across horizontals, where only a few of the many related companies survived, and verticals, where only a few types of solutions did.
The bloodbath of 2000-2002 took a lot of ideas and concepts with it that were indeed unworkable and unnecessary. Many that survived that storm recall with particular amazement how the wave of ASP (application service provider) dot-coms cratered without leaving a trace. Consumer hosted services, on the other hand, did much better, as did business-to-consumer services. The former is most perfectly epitomized by the stalwart of consumer sites, Yahoo!, while the latter category is best represented by Amazon.com.
A great many dot-coms got busted because of incompetence of the management team, because of poor choices (in hindsight) as to deployment, cost structure, growth plan, because of the sudden drying up of funds (yes, some really good ideas died just because of the general panic). Some dot-coms though died because their business plan didn't work out, despite early hopes.
# Where Did ASPs Fail?
The standard ASP business model consisted in offering otherwise installed software in a managed, remote fashion. Instead of buying, say, 20,000 licenses of, say, SAP, an enterprise could *rent* those very same licenses from an ASP. This would allow BigCo to reduce the impact of licensing expenses, eliminated the need to have supporting IT staff, and allowed the enterprise to deploy faster than if it had to find resources for the long haul. An additional benefit was the ability to change to a different and better solution without spending one extra cent later on.
The ASP would make money by charging companies for the licenses it bought on an ongoing fashion. Assuming the licenses could be used over a long stretch of time, the rent vs. buy equation would invariably turn in the ASP's favor. The startup cost was very high, of course, requiring extensive capital resources in the form of cheaply available venture capital.
An ASP would be mostly composed of Sales and Marketing staff, selling a commodity product against an unbelieving market. On the technology side, the bulk of the staff would be IT, ready to keep applications available at all times, and fighting security holes, software bugs, and downtimes.
The surprising thing is that there was nothing wrong with this business model. Indeed, it could and should have continued as a possible and rational option for enterprises to this day. So what went wrong?
In one word: **customization**. In those days, the assumption was that everyone that would buy enterprise software would customize it to make it work in their case. The software itself was built around customization, and a lot of the energy of the development team went into making the application flexible, so that IT staff could customize it.
The expectation was that whatever solution would come from an ASP, it would need to be at least as customizable as installed enterprise software. Not a problem, said ASPs, and started tailoring the software to their clients' needs. They bulked up on developers that took on the customization, and became lopsided consulting houses.
The problem now is that the original model had a clause: in the rent vs. buy equation, the renter must be kept for a period of time long enough to cover the cost of the product, otherwise there wouldn't be enough money to pay. The more customization the ASP provided, the longer this time period was, and the end of the bubble forced ASPs to lose customers and sit on incredible amounts of customized software that wouldn't work for anyone other than the original customer who no longer could afford to pay for it and easily walked out of the contract.
# After the Bubble
In 2003 things got slowly sane again, and the Internet started a new period of expansion. Business hosted services (the name ASP was so tarnished, a new one was direly needed) were the slowest to gain momentum, but with the advent of **Salesforce.com** this last barrier to growth finally fell. Salesforce's success was directly related to its decision not to offer anyone else's software, but to create an application from scratch that would be easily customized.
The extremely successful IPO of the company led to a keen interest in other business hosted services, and a new category was born out of the ashes of an old failure.
# DNA of a Business Hosted Service
Trying to avoid the failure of the ASP, modern Business Hosted Service (BHS) providers do not rely on customization of enterprise applications. Instead, they focus on applications built in-house (or outsourced), typically on commodity hardware and using open source software to keep the cost of development low. Since customization is not an option, typical BHS providers tend to verticalize their solution, making it attractive to a specific market segment much smaller than those reached by typical software solutions.
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