Gamers using the Xbox and Games for Windows platforms are already familiar with Microsoft Points (aka Xbox points), a virtual currency used for in-game microtransactions. An upcoming game for Windows Phone called Birds & Beaks, developed internally by Microsoft Game Studios, now brings the in-application purchases into the Windows Phone universe–though given current trends, it could lead to a legal challenge. READ MORE
Salesforce.com is one of the technology industry’s more recent Cinderella stories. Less than a decade ago, it was just another Silicon Valley startup operating out of the home of its founder, Mark Benioff, with three employees, $6 million of his own seed money and an idea that was the laughing stock of the business section. Some implied he had his head in the clouds and in a way, he did. Benioff, a former Oracle executive, had a vision to develop software, but not sell it. Instead his customer relationship management (CRM) applications would be offered on a subscription basis while empowered and housed on his company’s maze of servers and computers (euphemistically referred to as a “cloud”), not to mention storing and securing the entire body of client data created in its wake. CRM applications, formerly cost prohibitive for small to mid-sized businesses, would now be affordable, scalable and turnkey living on Salesforce.com’s more robust data grid than the more limited networks of its clients. Back in 1999, that idea was considered voodoo. Critics at the time predicted companies would never be willing to offload control of such core business applications. Pioneer in cloud computing In 2008, the now publicly traded company has more than one million subscribers from its 41,000 subscribing companies and works in partnership with some of the biggest names in technology and on Wall Street. As for the power of the company’s data grid or “cloud,” there are now days it accommodates more than 100 million user requests. “Salesforce.com is a really a pioneer in cloud computing. It identified a specific need; that it’s hard for a small to midsize business to manage a CRM system. With Salesforce.com, now those same companies only need a web browser. It’s effective and it addresses a clear pain point,” says Andrew Reichman, a senior analyst from Forrester Research. Software-as-a-Service (SaaS), data centers, Web-based applications and virtualization, along with cloud computing, are some of the most over used and misunderstood buzz words floating around in business technology circles these days. They all have one thing in common: they are often confused in various combinations as the same thing. Though similar, they are not interchangeable terms. “It’s easy to confuse. From the standpoint of the user, there isn’t a difference between cloud computing or SaaS or Web-based applications,” says Frank Scavo, president of Computer Economics, based in Irvine, Calif. Historically, jobs requiring serious computing power have been performed by powerful mainframes, supercomputers, and over the past two decades increasingly by the ever more capable desktop or laptop PC souped up with the latest and most powerful microchips, RAM and sophisticated operating system that can run multiple applications simultaneously. Cloud computing is the alternative to all that high powered computing generating from one place. Cloud computing, instead, takes place within a integrated ballet of algorithms and code among cheaper, low powered computers and servers and third party networks “out there.” What IT types eventually started referring to as “the cloud” and what is increasingly becoming the platform of choice for many companies who no longer want the headache or expense of housing and maintaining all that cumbersome computing. Coming to terms So how is this different from all those other terms mentioned? Here’s a quick primer: Software-as-a-service: This is the business model, an alternative to the generations old business model of marketing software by selling usage rights with an “end user license agreement” (EULA). Web-based application: This tells you where the software lives. Traditionally, software applications have lived on a centralized mainframe or server or on the individual user’s PC. Web-based applications live on the Internet and are accessed with a Web browser through a password protected website. Data centers: A data center is the physical location of a farm of servers and computers. Data clouds are typically much bigger, involving perhaps thousands of computers across data centers around the globe. Clouds are automated. Data Centers involve human management. Virtualization: This is the programming mechanics of optimizing and integrating servers to act in concert as one external interface for the end user. It’s a great way to create redundancies, maximize the equipment’s efficiency and conserve energy. The benefits of cloud computing While Salesforce.com has proven itself a success serving small to mid-sized businesses by delivering CRM from the cloud, the cloud computing trend has hardly hit its tipping point. Here are some of the reasons many industry watchers say it’s only a matter of time: Save money. Through the business model of SaaS, applications living on the cloud are much cheaper for companies. Organizations save on the expense of implementation, maintenance, and security while benefiting from the economy of scale a massive “cloud” can offer compared to even a large company network. Access to more sophisticated applications. Salesforce.com is a great example of this with its offering of CRM tools to smaller businesses, whereas before CRM was completely out of reach for most modest budgets. Downsize the IT department. The more applications that are farmed out to a cloud, the fewer that have to live on the company network. That translates to fewer bodies for deployment, upkeep and updates, as well as less hardware in the building and less square footage taken up in the office. Saving energy. This is a factor on everyone’s mind given the economy, concerns for the environment and the growing energy crisis. “No one really thought about it up until now. But there’s a real focus on power, cooling and space because there’s a general mood of concern over energy costs,” says Reichman. Saving data. “Cloud computing relieves the smaller business from things like backup and recovery, which most don’t do a good job of doing anyway,” says Scavo. Any company big enough to provide data cloud services is likely to have more infrastructure to handle data security than the average small to midsize business. SIDEBAR: Cloud Computing Vendors Amazon EC2 — A funny thing happened on the way to becoming the biggest bookstore on the Internet. First, Amazon expanded to selling just about everything else available in retail making it the virtual Sears and Roebuck of the new millennium. More recently, with the launch of EC2 (Elastic Compute Cloud), which is still in beta, Amazon has revealed what is likely its long term business plan; to become the cloud service provider of choice for small businesses at affordable rates. Google — was perhaps the first company to build itself from the ground up as a data cloud, spending billions of dollars each year on additional servers and PC’s. There is no mother data center at Google headquarters running all those algorithims to conduct lightening fast searches while hosting email, dynamic calendaring and collaborative office applications. Google’s cloud is estimated to involve over one million PC’s and servers parceled out around the world. It’s only natural that they would monetize access to their subscribers. EMC Cloud — EMC is another one of the clouds gathering as this emerging market creates more buzz. The first tip off was the acquisition of online storage provider Mozy and more recently the startup cloud company, Pi Corporation. Pi stands for personal information. Cloud computing would be a natural progression for EMC, as it is one of the most popular vendors when it comes to virtual machine software (VMWare). Windows Live — Nothing could be more counter to Microsoft’s core mission than embracing and enhancing cloud computing. After all, Microsoft made its bones (and billions) selling software licenses by the seat and pushing its increasingly powerful Windows browser version after version. But clearly the folks in Redmond have seen the writing on the wall from the strong interest of web-based services like Google Docs & Spreadsheets and Salesforce.com. Windows Live is in the early stages of what industry watchers refer to tongue in cheek as the Windows Cloud O/S 3Tera — It’s a small company, but based on open source solutions and with its own patented Applogic technology is now in the process of rolling out its CloudWare services in stages. IBM’s Blue Cloud — It’s also still in the process of rolling out and is based on open source code. It could prove too pricey for smaller businesses, appealing more to the budgets of mid-sized and enterprise level companies.
High Concept For the first time, sales of wireless devices declined in 2001 despite all the hype and investment in the industry. The drop-off left many people shaking their heads, not least because one of the few healthy and profitable segments of the business was decidedly low-tech. Worldwide sales of faceplates — pieces of hard plastic that snap onto the front of cell phones — climbed to roughly $1.7 billion. While interest in the wireless Web is spotty, a simple fashion accessory that costs next to nothing to make is selling for as much as $25. Its success has led Seattle-area start-up Wildseed to develop a “smart” faceplate that can customize a phone’s internal systems as well as its appearance. The idea dates back to May 2000, when a group of Microsoft millionaires asked fellow Redmond alumnus G. Eric Engstrom to look for ways to sell wireless services to teenagers. After four months of research, Engstrom’s team decided to redesign cell-phone handsets and to create compatible taco-shaped faceplates dubbed “smart skins.” Each skin has a teen-oriented theme; the company plans skins featuring U.K. soccer players (we love Michael Owen), musicians, and movie stars. Once a skin snaps into place, software on a chip embedded in the plastic customizes the phone’s ring tones, the screen interface, and the bookmarks on the wireless browser. Amid the static of the wireless market, ex-Microsoft execs offer teenagers a clear pitch. If the skins take off, Engstrom believes they will transform the wireless industry. Since they streamline the downloading process, they will drive more users onto the wireless Web, he claims. He also hopes that the skins will help service providers reduce costly subscriber churn. Today a customer who trades in an old phone often selects a new service plan; smart skins provide customers with a way of upgrading a phone without being tempted to buy a newer model. The idea that cheap pieces of plastic are poised to drive sweeping changes in a sophisticated industry may seem unlikely, but it fits into a familiar pattern, according to Harvard Business School professor Clayton Christensen, author of the groundbreaking 1997 book The Innovator’s Dilemma. Oftentimes, new technology emerges at the low end of the market in the form of a simple, seemingly trivial invention, Christensen says. One of his favorite examples is the transistor pocket radio. Made popular by Elvis-loving teens in the 1950s, it seemed more like a toy than a serious product. But because it was cheap and easy to use, it was suddenly everywhere and eventually drove vacuum-tube radios out of the market. In the same way, if today’s teens embrace Wildseed’s smart skins, the playful products may prove to be a powerful way of introducing the latest advances in wireless technology into the mainstream. Incubator High Concept: This Phone’s for You Dossier: Trade Secrets Main Street: The Barber of Civility 60-Second Business Plan: Blot-com Business for Sale: A Mogul’s Mogul Please E-mail your comments to editors@inc.com.
Cover Story Blue-collar communities are designing their own high-tech networks to attract business Tacoma, Wash. Stand on a street corner and you can feel it. Not the unstoppable rush that hits you when you emerge from a New York City subway station. Not the charged air hovering about MIT in Cambridge, Mass., or the relentless new-day vibe of a Silicon Valley morning. But there’s something brewing in Tacoma, this city on the south shore of Puget Sound. Young men and women on their lunch breaks dot the sidewalks. Men in hard hats pop in and out of boarded-up, abandoned warehouses and mills that they’re renovating into San Francisco-style loft offices. Cranes swing around the waterfront, where new buildings are going up. “I can’t say I’ve ever seen that before in 20 years,” says Rob Grenley, an area native who cofounded two companies in downtown Tacoma: Grenley Stewart Resources Inc. and ID Micro Inc. How is it that after decades of stagnation the city of Tacoma is sputtering back to life? For starters, it’s only about 30 miles south of Seattle, where the high-tech growth spurt has gobbled up almost all the available space and ratcheted up real estate prices to twice what they are in Tacoma. And there’s another ace up the smaller city’s plaid-flannel sleeve: a state-of-the- art, high-speed fiber-optic network that covers the city. Tacoma — rich with small-city business perks like a sane commute, ample parking, and a start-up-friendly permitting process — is now technologically equipped to play ball with the big kids. Two or three years ago, says commercial real estate broker Eric Cederstrand of Colliers International, corporate clients refused to even drive past Tacoma and look out the car window. Seattle was the city they wanted on their business cards. Now, he says, the Tacoma warehouses he’s renovating are filling up faster than he can sandblast the timbers and hang the reproduction windows. “It’s like Tacoma was put in a time capsule,” he says. “All of a sudden we’ve broken open the time capsule, and we are literally creating a brand-new city.” The new network in Tacoma represents another chance at economic viability — perhaps even boomtown success. As is true with many small cities, all this might not have happened if Tacomans had waited for the local cable or phone company to install the high-speed networks that businesses now demand. Frustrated with the inattention of big cable and phone companies, publicly owned utilities in tiny towns and small cities in states all over the country have taken matters into their own hands. They’ve dug up streets, laid fiber-optic cable, and connected residents and businesses to new high-speed lines. Service providers are rushing in to sell Internet access through the new infrastructure. (In some cities, the utilities are even selling the services themselves.) The introduction of choices has made life easier for the businesses already in place and made the cities more attractive to start-ups. For Tacoma, the new network is much more than a tangle of glass threads. It represents another chance at economic viability — perhaps even boomtown success. City of Destiny Nearly surrounded by water, with preposterously huge Mount Rainier looming in and out of the clouds to the southeast, Tacoma tends to hang back behind its sexier sister, Seattle, just up Interstate 5. In 1873 the Northern Pacific railroad chose Tacoma over Seattle for its western terminus, and ecstatic Tacomans tagged their town the “City of Destiny.” For many years paper mills choked the air with an acrid stench that came to be known as “Tacoma’s aroma.” In the 1960s a shopping mall was built in Tacoma. Almost immediately, the downtown retail district started to collapse. Buildings stood abandoned for decades. Crime rose; street gangs moved in. To business owners in those days Tacoma’s nickname must have sounded ironic. “We were the corner business on both corners,” says Steph Farber, whose family’s LeRoy custom-jewelry shop has occupied a storefront in the middle of a downtown block since 1942. For years buildings on both sides were blighted all the way to the end of the block. By the 1980s, Tacoma was standing still as Seattle flourished. Thousands of people from the Tacoma area clogged I-5 every morning on their way to jobs in Seattle and surrounding King County. When Rob Grenley left for college, Tacoma had “a postapocalyptic look,” he recalls. “You didn’t want to do business there unless you had to.” Grenley worked first on Wall Street and then in Seattle, but returned to Tacoma in 1990 to start a truck-fueling business with Greg Stewart, a childhood friend. Things were just beginning to turn around then. City officials were working hard to clean the place up. They threw all their resources at improving public safety. They ripped down offending buildings and put grassy parks in their place. And they clung tightly to Tacoma’s marquee business, the Frank Russell Co., a multimillion-dollar international investment-services firm that is headquartered on Tacoma’s waterfront. But in the early 1990s the city’s communications infrastructure was still stuck in a technological tar pit. “You’d get on the phone and it would be, ‘All circuits are busy,’ ” recalls Steve Klein, superintendent of Tacoma Power, the municipally owned electric utility. The cable service was equally poor. “They had a monopoly, with no incentive to improve the infrastructure,” Klein says. The Energy Policy Act of 1992 had deregulated the wholesale side of the power business. To stay competitive, Tacoma Power was planning a fancy digital network that would allow it to operate switches, read meters, and manage power loads from remote locations. Klein calls this type of service electricom, from electricity and telecom. “Microprocessors are in everything,” he says. “They need electricity to power them, and they need telecom to interact.” The SRI International consultants Klein hired to review the plan told him that while he was at it, it made sense to install a bit more fiber than was called for, to wire the city for high-speed Internet access and other applications. The city surely needed it; its franchise office had been negotiating with cable provider TCI Inc. for service upgrades, but TCI representatives were stonewalling. Klein approached TCI and phone company US West about teaming up to share the cost of the new network. “They told us to get lost,” he says. In 1997 the city council approved Tacoma Power’s plan to spend $100 million on a fiber-optic network. (The money came from the utility’s wholesale revenues; residential and business customers saw no rate increase. Tacoma Power customers have the second-lowest rates per kilowatt hour in the state, according to the company’s government and community-relations manager, Diane Lachel.) Construction of the network began in January 1998, and by July the power company had its first cable customer. Today the Click Network, as it is called, covers 180 square miles. Tacomans now have choices, which forces better customer service. The city’s marketing people claim that 100 start-up companies have located in Tacoma since Click went live; some have relocated from Seattle. Those businesses (and city residents) can choose from five different Internet service providers that the network supports. But the real surprise came along in the same month that Tacoma Power broke ground on Click. TCI suddenly announced a decision to invest $30 million to upgrade its own infrastructure. “When they finally woke up to the fact that we were a reality, they tried to stomp us,” Klein says. But, he adds, Tacoma residents and businesses now have choices, which forces better customer service. Tacomans also have seen hundreds more jobs, more venture capital, and better workforce training in their hometown. Dublin transplant Bill Towey runs a high-tech incubator through his private-investment firm Tacoma Venture Partners LLC. “A lot of these workers were already here,” he says. “They just don’t drive north to Seattle or Redmond anymore.” Towey plans to raise $15 million for his incubator. He and various local companies are involved in a technology boot camp for Tacoma high school teachers. Giddy with the first signs of success, and eager to tout its prospects, Tacoma has retained the New York City marketing firm Development Counsellors International for $127,000. Tacoma’s economic-development director, Juli Wilkerson, is touring the country, promoting “America’s #1 Wired City” to site-selection companies. City employees now have E-mail addresses that end in wiredcityusa.com. And broker Eric Cederstrand is hot on the idea of changing the names of Broadway and Commerce Street to Broadway.com and E-Commerce Street. “There’s a positive-multiplier effect,” Rob Grenley observes. “More people come, which means businesses will grow and flourish, as opposed to people not wanting to come here on a bet. It’s nice to be heading toward that in your hometown.” Naturally, AT&T, which bought TCI in March 1999, says the company had planned to modernize its services all along. “Regardless of whether Click Network was in place or not, TCI would have upgraded Tacoma because plans had always been in place to upgrade at that time,” says Steve Kipp, executive director of communications for AT&T Broadband’s Northwest division in Seattle. Yet the Tacoma experience with TCI was echoed in Cedar Falls, Iowa, and Boulder, Colo. In fact, some 65 municipalities have made end runs around their cable or phone monopolies to offer telecom services, says Martin Gidron, managing editor of UT Digest, a newsletter in Silver Spring, Md., that has chronicled the phenomenon. The trend will continue, Gidron says, since “the demand for telecom services seems to be insatiable.” Heart of the Commonwealth Some 3,000 miles east of Tacoma, nestled among seven green hills far less dramatic than Mount Rainier, lies the city of Worcester, Mass. Worcester — birthplace of Abbie Hoffman, the diner restaurant, the smiley face, and the Pill — has long been known as the Heart of the Commonwealth. The name fits: the city’s central location and highway and rail infrastructure make it a natural for commerce. Worcester has also been known as New England’s utility closet, because it was a manufacturing center for many years. Most of Worcester’s industrial powerhouses have moved on to cheaper pastures, leaving the city with an assortment of old, abandoned buildings, including a cold-storage warehouse that burned catastrophically last December, killing six firefighters. In the 1960s, Worcester replaced a massive piece of its core with a suburban-style mall. The shopping center never really caught on, but like the one in Tacoma, it sparked the collapse of the city’s formerly thriving downtown retail base. In the past few years Worcester officials have staked the downtown’s future on another huge, single-use project — a mammoth medical facility — and have restored the 90-year-old Union Station, a beaux arts train depot that had been left to rot for decades. (Tacoma also recently restored its own Union Station, which is being used as a courthouse.) Worcester residents have always suffered from a bit of an inferiority complex, partly because their town, like Tacoma, is within the shadow of a larger, more vibrant city (in this case, Boston). Even the restoration of Union Station, the pride of the city, came only after years of contentious intracity squabbling and institutional paralysis. Now, nearly a year after the project was completed, its beckoning retail space is almost entirely unoccupied. Like Tacomans, Worcester, Mass., residents have always suffered from a bit of an inferiority complex, partly due to their proximity to a larger, more vibrant city. Another part of the problem may be Worcester’s form of government. The chief executive is not the mayor but rather the city manager, who is appointed by the city council instead of being elected by residents. Worcester has had only three city managers since 1953 (when business leaders succeeded in instituting this “professionalized” municipal structure), and none of them has been directly accountable to voters in the way elected officials are. That can make it difficult to create real change. “Worcester has gotten a little bit behind the curve,” says Arthur Couture, an entrepreneur who eyed neighboring towns before choosing Worcester and its easy commute for his software and computer-services company, ICAL Systems. Now, Couture says, Worcester officials are being pressured to leapfrog ahead. A new fiber-optic network has been installed in the city, and local businesspeople are relying on it to lure new companies to their hometown. A marketing brochure only slightly less effusive in tone than Tacoma’s PR avalanche labels Worcester “America’s #1 Cyber City.” Worcester’s network differs from Tacoma’s in one fundamental way: a private-sector builder of fiber-optic networks called NEESCom, which was established as the telecom subsidiary of the electric utility formerly known as New England Electric System, installed it at no expense to the city. Gidron of UT Digest says that more than 150 private electric utilities have similarly entered the telecom market. Tom Wharton, a former bankruptcy-turnaround consultant, is the man who turned NEESCom’s head. In 1998, Wharton bought a bankrupt Internet service provider. Bell Atlantic was going to charge him $6,000 a month for connectivity in Worcester. So he drove 45 minutes to Providence, R.I., where he could colocate his servers with another provider for $250 a month. On the drive back to Worcester, he mused that it was unfortunate he couldn’t locate his business in the city where he lived. Why, he wondered, was Worcester’s technology infrastructure so far behind that of other New England cities? Wharton wrote a letter to the editor of the city’s daily newspaper. “The next thing I knew,” Wharton says, “I was heading a task force.” He began working with the Worcester Area Chamber of Commerce to bring the city’s technology infrastructure up to speed. Hearing about Wharton’s efforts, NEESCom figured that Worcester would make a great hub for its new regional fiber-optic network and offered to wire the city at its own expense. About half a dozen competitive telecom companies have since moved in and started selling services on the new network, and Wharton estimates that the influx of providers has drawn at least 10 start-ups to Worcester. That includes a new venture for native entrepreneur Steven Rothschild, who, after having run a family furniture business for 16 years, had started Furniture.com in Worcester. In 1997, Rothschild’s high-speed T1 line was costing him $1,800 a month. He was having trouble finding tech-savvy executives who were willing to work in Worcester, and venture capitalists weren’t breaking down the door to fund a company in the former mill town. All of that, combined with the tough time he was having in getting tax credits, prompted him to move the company to Framingham, halfway between Worcester and Boston. But earlier this year Rothschild launched an online lightbulb store, called Bulbs.com, in Worcester. High-speed Internet service costs him $168 a month — less than a tenth of what he was paying three years ago. He’s also having an easier time recruiting managers. And there’s even a new $15-million fund for early-stage Worcester businesses. “The technology infrastructure is taking out some of the roadblocks to staying in the city,” Rothschild says. Wharton’s task force — the Worcester InfoTech Project — has taken on the mantle of marketer for the city’s new high-tech offerings. But the NEESCom network hasn’t been a panacea. “This isn’t Field of Dreams — ‘If you build it, they will come,” says Couture, who hasn’t even been able to connect his business to the network yet. Another prominent local company, Tatnuck Bookseller, is situated just a few hundred feet away from one of the city’s three network rings, which cover the downtown business district, a biomedical park, and Worcester Polytechnic Institute. “We are betting our company’s future on giving our customers access to us and having access to them,” says Tatnuck owner Larry Abramoff. “Not being wired is hurting my business right now.” (Until the network reaches him, he’s making do with leased T1 lines and a wireless service.) Still, Worcester’s model — in which a private company, rather than a public utility, installs the network — may prevail in future business-community resurrections. Tacoma’s model has goosed some big privately owned phone companies. In Washington state, GTE Northwest sued the Douglas County Public Utility District to stop it from expanding its fiber-optic network (the suit was later withdrawn following changes in state law), and the Washington Independent Telephone Association took Pacific County Public Utility District to court to stop it from providing Internet service to customers. So far, Texas, Missouri, and Virginia have passed laws limiting publicly owned electric utilities from offering telecommunications services. AT&T’s Kipp views the public companies’ inroads in this area as a conflict of interest. “We’re beholden to our shareholders,” he says. “Then we have to go in and compete with the government, who’s also the regulator. That could have a chilling effect on competition.” Steve Klein of Tacoma Power doesn’t really care if Click loses residential customers to the new AT&T offerings; he built the network for the power company’s own purposes, and the Internet-access stuff is just gravy. The mayor’s office doesn’t mind if some Tacoma residents think “Wired City” sounds as if a bunch of caffeine addicts have staged a coup. Some of the new start-ups may not even survive. But 100% success is not the point. The point is to get things going. The more that entrepreneurs hear about Tacoma, the more seriously they will consider starting or relocating a business there. For the first time the people of Tacoma — and Worcester and other old-economy communities like them — are leveraging their technological assets to promote entrepreneurial businesses. They’re grabbing the reins and kissing destiny good-bye. Jill Hecht Maxwell is a reporter at Inc. Technology . Question Authority Small cities want their zip codes on your letterhead, and they’ll try their darnedest to convince you that their technology is state-of-the-art. Don’t believe the hype. Here are some key questions you should ask regarding tech infrastructure before you relocate: Can I connect to a fiber-optic network in your city? How much will it cost to plug in? How long will it take? Who’s competing to provide me with service? What are the rates? Is the network connected to major cities nearby? How many other companies are there? Do they use the network? Can residents connect to the high-speed network and telecommute? Are wireless services available? Up to Date in Kapolei Remember when every burg across the nation was billing itself as the next Silicon Whatever? Well, now several cities and at least one state want to be known for their wired wonders. Here’s a sampling of the claims: The Wired City Kapolei, Hawaii America’s Most Wired City Louisville, Ky. The Most Wired City in America Stillwater, Okla. America’s #1 Wired City Tacoma, Wash. America’s #1 Cyber City Worcester, Mass. The Internet Capital The state of Virginia Please e-mail your comments to editors@inc.com.
Software on the Web ASPs are coming ASAP The entire software industry is about to be turned upside down. Say good-bye to software as we know it You know the computer industry is innovating too fast when it has to start recycling its acronyms. The term ASP was once known in Webspeak as an “active server page,” referring to a Web page that’s generated at the time it’s downloaded. But the term has recently taken on another meaning, and a host of start-ups are using the idea behind it to turn the traditional, shrink-wrapped software industry on its head. The “new” ASP refers to a type of computer business called an application service provider, which offers outsourcing with an Internet twist. An ASP hosts software applications, which its customers access over the Web instead of running them on their own computers. ASPs aim to save their customers the costs and hassle of owning and managing technology, by “renting” to them whatever software they need. Rather than wrestling with a new upgrade, say, an ASP’s customers are free to focus on better things. “We tell our customers to mind their own businesses,” explains Jostein Eikeland, a 32-year-old Norwegian former rock-video and movie producer, who launched one of the first ASPs and is credited with having coined the term ASP in 1996. The exciting — and befuddling — thing about ASPs is that the software they offer can be anything under the sun, ranging from a consumer application like Microsoft’s Hotmail (a free Web-based E-mail service that the Redmond giant hosts — which made the company an ASP before the term came into vogue), to bundled office suites (spreadsheets, word processing, and so on), to complicated enterprise applications like customer-relationship management or sales-force automation. But as with any big market change, this upheaval has created a window of opportunity. Right now that window is incredibly wide. Many different kinds of companies are jumping into the ASP industry, including computer hardware and software makers (such as Sun and Microsoft), network service providers (AT&T and Qwest), Internet service providers (UUNet), and newly minted start-ups. As Forrester Research senior analyst Stacie McCullough wrote in a recent report on the ASP industry: “More than 300 vendors claim to be an ASP — each offering a different story and solution. … It’s no wonder users are confused and skeptical.” Lost amid the hype is the fact that the ASP sector, with $933 million in revenues last year, is still minuscule compared with the $74-billion software-application market. McCullough estimates that less than 1% of companies are renting their software through ASPs, though that number is projected to grow exponentially as the market swells to $11.3 billion by 2003. What follows is a selection of the variety of ways start-ups are joining the ASP gold rush. The ASP department store Jostein Eikeland happened on the idea of a one-stop, soup-to-nuts ASP in 1995 — the equivalent of ASP ancient history. Back then he was a 27-year-old working in sales for a systems integrator, which was having a bear of a time completing a massive software installation for a Norwegian bank. Eikeland’s hunt for a solution led him to Citrix, whose technology allowed the bank’s desktop applications to run from a centralized server managed remotely. It struck Eikeland that “this would be the new wave of outsourcing.” Five years, some 200 employees, and some $50 million in funding later, Eikeland’s company, TeleComputing Inc., based in Fort Lauderdale, Fla., is one of the leaders in the ASP field. TeleComputing has more than 100 customers and hosts hundreds of applications, including industry-specific systems, such as those for car dealerships and law firms, as well as business-function-specific software, for operations like accounting or human-resources management. Customers pay an average of $350 per month per user for a three- to five-year contract. Given that so many companies are reinventing themselves to jump onto the ASP bandwagon, Eikeland is particularly proud to be the bandwagon. “Every revenue dollar that we have has come solely from ASP services,” he says. Enabling other ASPs One of the trickier aspects of launching an ASP is figuring out how to charge for your services. Pricing models in the industry are almost as numerous as the applications themselves. Many companies even offer customers a choice of how they would like to pay — by subscriber, by transaction, or by number of ports or concurrent users. So billing can quickly become an ASP entrepreneur’s biggest nightmare. And as Scott Swartz, CEO of MetraTech, likes to say, “without billing, it’s just a hobby.” Swartz, who in a former life helped Fortune 500 companies develop their accounts-receivable systems, entered the ASP market almost serendipitously, in late 1997, when he started MetraTech to sell a “next-generation Web-based billing system.” His plan was to build, host, and sell his system piece by piece to customers — largely telecommunications companies — on an as-needed basis. “I can’t tell you I started off going after the ASP market,” he readily concedes. Swartz quickly realized that MetraTech’s flexible billing software could help ASPs of all sizes — from “one person in a shoe box to a tier-one telecom company” — price their services. “We ASP to the ASPs, allowing them to do their ASPing,” he says with a straight face. The privately funded Waltham, Mass., company began selling its products (ranging in price from $20,000 to $1.5 million) in mid-December and expects to achieve revenues of $6 million this year. Zeroing in on one industry AristaSoft’s story sounds like the quintessential Silicon Valley soap-opera plot. Venture capitalist named Rich issues $10-million challenge in Upside magazine to find the person who can deliver enterprise resource planning (ERP) software — which manufacturers use to integrate all their internal applications — over high-speed phone lines. Indian technologist — call him Lucky — who has written a white paper on software as a shared rental service, reads Upside article and sends Rich E-mail. Rich (last name Shapero), managing partner of Crosspoint Venture Partners, meets with Lucky (a.k.a. Amar “Lucky” Lakhtakia). Three months later, in January 1999, Lucky is in business in an ASP start-up positioning itself as the IT department for high-tech manufacturers, with an enviable $5 million in the bank and a top-notch CEO. Ten months later Lucky’s company, AristaSoft, in Mountain View, Calif., has $30 million more in the bank, 60 employees, and its first live customer, a Silicon Valley high-tech manufacturing start-up. In a dramatic illustration of the economies wrought by ASPs, AristaSoft implemented in 60 days what could have taken its customer up to a year to do on its own: namely, install a complete finance, distribution-and-logistics, and manufacturing software system, which AristaSoft now hosts, services, and maintains. AristaSoft CEO Drew Hoffman says that the company will eventually host 30 applications (“light, heavy, and medium”), for which it will charge customers from $5,000 to $30,000 a month, depending on the application and the number of users. Software for the masses Most players in the ASP space are going after the business-to-business sector of the marketplace, but not Cameron Chell, founder of C Me Run, a new consumer-oriented ASP service company that incorporated last November. At the age of 31, Chell is an industry veteran and the founding president of the ASP Industry Consortium. In 1996 he launched a business-to-business ASP. Today that company, the publicly traded FutureLink Distribution Corp., in San Francisco, has a market capitalization in excess of $1 billion. Now Chell has teamed up with four FutureLink colleagues — as well as Warren Talbot, who started up Microsoft’s ASP licensing program — to tackle what the founders think is an overlooked sector of the ASP boom: brand-name software for consumers. C Me Run will strike licensing deals with well-known software developers (Microsoft comes to mind, but the company is also in discussions with Corel, Lotus, and several game and educational developers, among others) and then host their applications for Internet service providers, portals, and telecom companies. In turn, these businesses will offer those bundled programs to their subscribers for monthly fees (ranging in price from free to $15, depending on the number and type of programs). By serving the AOLs, MSNs, Qwests, and Yahoos of the world (the company is also in discussions with the second-largest ISP in Europe), C Me Run aims to alleviate what Talbot zealously describes as “the biggest civil-rights problem of the 21st century”: access to information for general consumers. Q&A Mining for ASP Gold Phil Wainewright, founder and managing editor of ASPnews.com, likens himself to “the guy who was already there selling the maps when the prospectors started turning up at the gold fields.” Wainewright has tracked the emerging ASP sector full-time since October 1998, when he established his Web site to be “the source for ASP news and analysis.” He recently spoke with contributing writer Alessandra Bianchi about the ASP gold rush. Inc.: It seems as though everyone and his brother are calling themselves an ASP these days. How would you define an ASP? Wainewright: People use the term ASP to mean many things, but from an end user’s point of view, the concept is very straightforward — an ASP is someone that operates software so that you don’t have to. ASPs take care of all the complexity of getting it working in the first place and all the worry of keeping it working from then on. An ASP does all of that on its own premises and lets users access the applications across a data link, usually the Internet. Inc.: Outsourcing is not a new idea. What makes ASPs different, and why have they suddenly become a hot opportunity? Wainewright: ASPs spread the cost of designing their solution across several customers who all take pretty much the same recipe. As time goes on, that cost-sharing element is going to really drive prices way down, much more than most people currently expect. Inc.: What about the broader business implications? Is the traditional software industry dead, as many headlines have announced? Wainewright: People will continue to buy software but will get an increasing proportion of it via subscription or on a pay-as-you-go basis. The software industry believes the ASP model will make software more popular because it makes it easier to use, and with a subscription-based payment method, it costs less to start using it. But the established players are also worried it could mean a short-term loss of revenues while they change from the purchase model, where they get all their money up front, to a subscription model that spreads the revenue stream out over time. The more serious threat to traditional software players is over the longer term because new generations of software are much better suited to the ASP model than today’s leading packages are. Inc.: What are some of the smarter new ASP players doing to compete against the established giants who are also entering the ASP arena? Wainewright: Start-ups are much better positioned than the established giants, who don’t yet realize how much they’re going to have to change to adapt to the ASP model. One of the biggest differences is that ASPs sell a service, whereas the computer industry has always focused on product sales. Building a sustained relationship with a customer takes a completely different mind-set. For instance, ASPs can monitor how customers use the software, and if they spot something that needs changing, they can do it right away. Please e-mail your comments to editors@inc.com.
