Last week, I made a case for increased use of server-based computing inhouse. Although the argument is valid, I didn't take into account the FUD factor. As you know, FUD stands for Fear, Uncertainty, and Doubt. And FUD will affect all our decisions about where we do our computing—inhouse or through service providers. Casting FUD is a common ploy among those trying to stifle their competition, but it's not always just a ploy.
Let's not mince words; the past couple of weeks haven't been good for service providers. Not only are service providers struggling, but infrastructure providers aren't looking so hot. Compaq is cutting 5000 jobs (7 percent of its workforce), and Intel warned that earnings for the current quarter will fall short of expectations (sliding 25 percent this quarter over last) and that the company will merge some of its business units. CEO Larry Ellison says that Oracle's headcount will be reduced in all areas except R&D. And just in case the financials aren't bad enough news, a TCP/IP vulnerability can leave servers susceptible to Denial of Service (DoS) and other attacks (see Application Service Provider News and Views below).
Not just the past couple of weeks, but the last few months have been depressing. The best thing that can be said about the application service provider (ASP) market is that it's undergoing a shakeup or a correction. This statement translates to "we spent a lot of money on companies that didn't have a sustainable business plan, and now those companies have scaled back significantly or are out of business." True, the companies that survive this shakeup will do so because they have something to offer, and they'll probably be all the stronger for it: a) they'll have demonstrated that the ASP model is viable and will attract more customers, and b) fewer ASPs will be fishing in the customer pool. In the meantime, however, it's a tough time for individual companies and for the credibility of the industry as a whole.
What has happened to the ASP market? First, part of the ASP market dried up along with Internet-based businesses. One ASP opportunity came from businesses that had to get up and running quickly. Fewer online businesses means fewer ASP customers of this type. Although a few ASPs are making inroads into the larger-business market, the successful ASPs are those that look safe to their customers. As triCerat CEO John Byrne observed last week when we talked about the ASP market, "If I were a Fortune 500 company with millions of dollars in data, I'd be really nervous about entrusting it to a company with a stock price that's fallen to less than $1 per share." Second, the ASPs that depend on outside money—stock sales or venture capital—to keep going (which is most of them) have seen that source of income dwindle as well. Technical stocks are way down, and venture capital is hard to find. ASP customers aren't the only ones who'll have trouble finding money for infrastructure investment.
The bottom line? Outsourced ASP adoption will have a tough year. Technological and business factors support increased server-based computing within the enterprise, but adoption of new technology isn't determined only by rational decision-making. The perceived risk of managing resources inhouse is lower than that of entrusting them to an outside company that might fail. Although the FUD factor could slow adoption in companies where server-based computing is new, the FUD factor will affect outsourcing far more.