Nearly every major software company is looking at how to adapt its software so that users can rent the software. Application hosting is a new model for providing solutions to companies in which the complexity of managing the application and its infrastructure shifts to an application service provider (ASP). In the ASP model, the service provider hosts an application, and the enterprise or customer dials into the ASP's system to use the application on a pay-for-play basis. The client receives timely upgrades, saves money on installation and maintenance costs, and compensates the ASP for providing a well-maintained, well-serviced application.

According to a Forrester Research study, the ASP market will grow to $14.7 billion by 2003. Pooneh Fooladi, an Internet analyst at International Data Corporation (IDC), predicts that the ASP (hosted services) market will grow to $10 billion by 2003 and the overall hosted application market will grow to $78 billion by 2003. Several major players are investing heavily in the ASP market: AT&T, MCI WorldCom (now merged with Sprint to form WorldCom), GTE Internetworking, and Qwest Communications. Other players to watch are Cable & Wireless Communications, Exodus Communications, Global Crossing, Proxicom, US Interactive, and USWeb/CKS.

Intel certainly takes the ASP market opportunity seriously. Intel just started Intel Online Services and opened a 1000-server facility in Santa Clara, California, of Windows NT, Linux, and Sun Solaris servers. Intel's plans are to grow this hosting facility to 10,000 servers. By the end of 2000, Intel plans to spend $1 billion on 15 more service centers in worldwide locations including Tokyo, London, and Fairfax, Virginia. This new venture shifts the company to a competitive services business and is a big change from Intel's past business model. Analysts question whether Intel can build the corporate culture to thrive in the services market, but no one can question Intel's commitment to try.

FileMaker, Novell, and Oracle are also refining their products to accommodate the ASP model. FileMaker's FileMaker Pro 5 Unlimited extends FileMaker's desktop database to the Web. The product lets you design Web databases in FileMaker, publish them to the Web, and make them available to browsers that support cascading style sheets (CSS). The translation of a FileMaker database to a Web database requires only the selection of a check box, and the Web database is very reliable. Novell has abstracted the NetWare 5.1 management tools to form a browser-based NetWare management portal—a common practice these days—and the product ships with the IBM WebSphere application development platform. Oracle's product is even more compelling because Oracle8i has largely forsaken the traditional client/server model for the new distributed-computing model. Oracle is making a large investment in hosted applications and is building an impressive portfolio of businesses around the concept.

Hasso Plattner, cofounder, cochairman, and CEO of SAP, delivered SAP's plans for application hosting this past September during the keynote address at SAPPHIRE '99, SAP's annual customer conference. Plattner hopes to lead SAP to control the desktop applications market and intends for SAP to manage and host desktops remotely over the Internet. Doesn't this statement sound similar to something Microsoft might say?

The quick rise of the hosted software model and rent-to-use applications has taken many companies—but not Microsoft—by surprise. Microsoft's management team is well aware of the trend and has been working out new models of software distribution. Plans for hosted versions of enterprise software are well under way, and some have borne fruit. In late September 1999, Microsoft announced its Complete Commerce program, which was the result of an ASP pilot program to provide scalable and customizable transaction services for midsized and large businesses. Microsoft is seeding ASP hosting of Microsoft Exchange Server messaging, Microsoft Office 2000 collaboration tools, corporate purchasing, media streaming, and line of business (LOB) application services on NT Server through business partners. Microsoft intends to offer services through its newly reformed Internet services group. The focus of these services is on e-commerce, business-to-business activities, and The Microsoft Network (MSN).

The Microsoft Internet Services Network (ISN) Web site (http://www.microsoft.com/isn/ind_solution.asp) provides more information (e.g., materials to help market services and operational procedures to launch hosted commerce services) about the Complete Commerce program. Microsoft plans to add deployment kits to support application hosting of LOB, knowledge management, corporate purchasing, customer relationship management (CRM), and financial management applications.

Steve Ballmer, president of Microsoft, announced the company's Complete Commerce program. Ballmer said, "We are seeing a lot of demand from customers for applications hosting on the NT platform to save on total cost of ownership. Microsoft has been engaged in a variety of commercial licensing, certification, and application-service deployment pilot projects in the past year to better understand market requirements across a variety of applications and customer needs. Based on this learning, several of these projects are now moving to the next phase or into full production."

In a program code-named Central Park, Microsoft is working with customers, trading communities, and ASPs to host specific business application services. Central Park lets an organization deploy a Web site, custom applications, and LOB applications, then link the applications to business partners. Microsoft's partners on the project access Central Park over secure VPNs. Resulting from these partnerships are deals such as the announcement from the Ford Motor Company and Microsoft of a build-to-order system that customers can use to specify car choices and make car purchases over the Internet.

The ASP model is most appropriate for large-scale, complex applications such as enterprise accounting and enterprise resource planning (ERP). To go after the low-hanging fruit in the ASP market, Microsoft is deploying enterprise applications such as a BackOffice suite for ASPs. Oracle is betting the farm on the ASP market for its enterprise application software, and Oracle intends to create this business alone—without working through its partners.

Many players are coming to market with hosted accounting solutions (e.g., Oracle), personal information managers (PIMs) and calendars (e.g., Yahoo!), and other traditional desktop applications. Speculation that the ASP model will work for productivity software is widespread, but no one has substantively proved this model to be the case. Industry experts base the argument that a lucrative market for service-provided productivity software for small business exists on the success of low-cost services such as Internet email.

I believe that providing ASP services for productivity software will be a transitional model that broadband connectivity and its high-speed access will make extinct. People like to own and control their software when economically and technically possible, and broadband networking will make the fast transmission of large amounts of data technically feasible. (For more information about broadband connectivity, see News Analysis, "The Coming Broadband Monopoly," October 1999.)

Companies such as Sun Microsystems and Microsoft are going to run the service-provided experiment in the office productivity software market. For more information about Sun's plans for the office productivity software market, see "Sun's StarOffice Play," page 48. Microsoft recently launched Office Online. The company seeks to implement this service in a manner that will neither reward nor penalize users from accessing Office over the Web. Office Online is available through several ASPs and the company's Central Web services portal for small businesses.