In the recent past, an average ISP could get by with providing quality customer service and a descent dialp connection. Today, there's more to being an ISP than plain old Internet access.

by Jim Wagner of internetnews.com [November 9, 2001]

The relationship between ISPs and Application Service Providers (ASPs) has been strained, to say the least, for years now. ASP businesses once marched onto the service provider scene like ants to a picnic during the investor-friendly times of the mid to late 1990s. They cared little for their connection-minded cousins and tried to undermine ISPs customer relationships by demanding control of billing and support roles.

Between that and legitimate concerns over the ASP industry's continued existence outside of investor bailouts, ISPs were quick to rebuff any ASP offers. And at the time, that separation didn't hurt the average ISP operator one bit.

Well, times change and so will ISPs who think that continued isolation from the generic xSP market segment is a smart business move. As margins for dialup and broadband wring out smaller and smaller profits, ISPs have begun to realize that outsourcing popular services can keep their business afloat.

What's more, they will probably bring in a tidy profit.

The concept
Bringing the estranged SP industries together won't be easy. In fact, ASPs are just now beginning to realize the damage their arrogant predecessors caused when they tried to shove unfavorable business terms down the throats of ISPs in the past.

ASPs by their very nature try to attract clients in the enterprise and small to medium enterprise (SME) markets. It's only inevitable that they would butt heads with ISPs who already have relationships established with those companies.

They are now extending an olive branch to ISPs, creating service plans specifically tailored to the ISP. In many cases, the business has been almost exclusively tailored around the ISP industry.

Take, for example, Postini. The popular e-mail filtering company has met with glowing reviews from ISPs around the nation, mostly due to its pricing plan based on subscriber counts and great customer service. In past times, an ASP like Postini would have tried to undercut the ISP and try to control the billing and support itself.

Marc-Andre Beauchemin, an Internet-Intranet services manager for the Canadian Department of National Defense, said it's past time for the ASP sector to come in line with the way the industry really works.

"(ASPs) are finally getting it," Beauchemin said. "At any point in time, you have five separate components that make up an operation. On our side, we have the Web masters and people like myself who deliver only a part of a complete function. ASPs are one of those five components, not the whole thing."

Taking Postini for an example again—not only would a local ISP be hard-pressed to come up with a similar product, it would cost a ludicrously large amount in terms of time and money to develop on their own.

The pitch
Tom McCafferty, managing partner and analyst at ISP-Market, said that ISPs would certainly profit more by bringing in an outsourced service like those offered by xSPs.

"We've found that ISPs are definitely interested in outsourcing xSP services and that's because their customers are asking for these applications," McCafferty said. "ISPs have the customer relationship and they have the Internet, they just need to bring in the service, and that's what xSPs do for them."

McCafferty and company recently released a report about the xSP industry dubbed, ISP to xSP: Putting Service in Service Provider. In the report, ISP-Market analysis shows ISPs are increasing the amount of services they outsource to xSPs. That increasing popularity, the report concludes, should spur companies like ASPs to create strong alliance with ISPs to survive.

Here's a breakdown on future ISP outsourcing goals, according to the report:

• 60 percent of ISPs offer or plan to offer monitoring and reporting services for networks, applications and security.
• 14 percent of ISPs are currently planning to partner with high-end application vendors like Oracle and PeopleSoft
• More than 25 percent of ISPs are planning to deploy and implement new security related technologies and services.
• 15 percent are planning to include outsourced storage as a service.

That's where xSPs and ASPs come in—they take in the up front and infrastructure costs and provide a manageable and controllable service for their customers. What's more, the only relationship between customer and ASP/xSP is through the ISP.

The findings reveal a little tidbit of information that ISPs should press to their own advantage: xSPs and ASPs are going to be fighting for your attention soon.

The hook
A report by online analysis firm IDC shows a threefold increase in the xSP industry in the next four years, a $392 billion yearly industry that will surely bring in a host of new companies to fill the demand.

Increased xSP demand is going to, in turn, give ASPs an "incentive" to reach deals with ISPs before they lose them. For ISPs, it will just be a matter of picking the best one for their customers.

Dave Wesley, senior director of business development for ASP Bluetrain, said that its easy for ISPs to dictate the relationship between ASP and ISP, it just has to be done upfront, before any damage can be done.

He gave three tips for any ISP that was looking to sign a deal. They are:

• Choose an ASP that won't displace your customer base
• Avoid partnerships with ASPs and independent software vendors (ISVs) who want to bill directly.
• Avoid dependence on partnerships that deliver closed environments. The ISP, not the ASP, should dictate which applications can be offered to the customer.

"The question isn't if you should adapt to this market, but when and how," Wesley said. "I think you need to look at what you can offer and marry it to what other businesses already offer."

The ball is in your court, ISPs. In the past, you could get away with a superior connection, but not today. The national ISPs, with a- few notable exceptions, are correcting and improving their connection offerings and signing deals every day with xSP and ASPs to provide timesaving and cool applications that will bring customers to the fold.

The growing demand for these applications is sparking increased competition between the two SP industries, one that suits ISPs perfectly. Not only will ISPs have more control over terms, they will likely get it at cheaper rates than the past.

All it takes is the first step.

— End