FUTURE TRENDS: INDUSTRY DYNAMICS AND EVOLUTION

FUTURE TRENDS: INDUSTRY
DYNAMICS AND EVOLUTION
The guiding principles of the industry evolution, which
have been leading the industry to face proliferation of ASP
business models, are summarized into (a) economies of
scale through positive feedback from the market and (b)
integration across the value chain for attaining cost reduc-
tion and differentiation.
First, it is the economies of scale or increasing return
that serves as the core economic guiding principle for
ASPs. A survey on the Korean IT outsourcing market
reveals that, in terms of the TCO (total cost ownership) of
a typical ERP package, IT outsourcing through ASPs
enables clients to save roughly 20% of their up-front
license fee and 80% of the implementation and mainte-
nance service costs (Kim & Choi, 2001). Accordingly,
ASPs that host these applications basically seek to lower
this 80% portion of the TCO upon the notion of a one-to-
many relationship between an ASP and its clients. An ASP
is usually able to leverage standardized solutions across
multiple clients. Attaining client momentum and reducing
the overall costs per client are the major economic motiva-
tions for ASPs to compete with each other, thereby creat-
ing a positive feedback mechanism through network exter-
nality on the demand side. In sum, the competition keeps
going for the expansion of a customer base or market share,
which provides a good surrogate measure of profit for this
case.
Second, the competitive landscape is also defined by
the unique nature of a service system market where inde-
pendent hardware and software resources are combined
and reorganized into a new package in alignment with
partners along the value chain and even a customer’s
business process. These offerings aim at designing a
seamless and proprietary service delivery process to
sharpen the competitive edge while raising the entry bar-
rier. This essential feature of integration in the service
delivery process makes the various possible business
models reduce into the different types of service product
combinations along the value chain as presented in Table
1. The integration, however, should be verified by achiev-
ing savings in TCO, though it is not easy to measure the
amount of cost reduction by a certain partnership struc-
ture. Accordingly, the cutthroat competition fueled by
business domain integration not only drives down the
price to an acceptable market price, but also creates di-
verse market segmentations based on the service prod-
uct differentiation.
Furthermore, increasing switching costs and rising
entry barriers, two basic phenomena regarding the guid-
ing principles and competitive landscape, are common to
all the business models. As a result, efforts to penetrate
into different market segments and build new customer
relationships at the niche will inevitably run into strong
resistance from the incumbents. Some events like tech-
nological breakthroughs will be required in order for a
specific ASP model to consolidate another. Therefore,
various business models will thrive over a period of time
before some giant players in each business model emerge.
Despite a unique coexistence of diverse ASP business
models, some hypotheses on the industry structure
change and evolution can be derived from those obser-
vations together with the guiding principles.
First, the general trend will be that the total number of
ASPs in the industry will reduce since the customer base
is not large enough to keep all the incumbent ASPs alive.
Cash flows generated from the market give winners
resilience to possible occasional failures and allow them
to better manage risk by diversifying a portfolio of value
components to open a new market niche. It is this kind of
positive feedback loop (Arthur, 1989; Nelson & Winter,
1978) from the economies of scale that accelerates the exit
of losers from the market and shapes the industry struc-
ture (Shy, 2002).
Second, the industry has been concentrating more
around horizontally and vertically specialized ASPs than
around the pure ASPs (that is, a simple partnership with
an ISV). The primary concern of the emerging ASPs is to
build some value-added components to the service ar-
chitecture, thereby making it hard for competitors to
replicate their business model and for customers to
replace the current provider. However, reliance on third-
party ISVs could make it more difficult to resolve under-
lying performance issues that have been the subject of
customer scrutiny. On the other hand, looking up the
capability profiles of the ASP business models, we can
conclude that both H-ASPs and V-ASPs hold a dominant
position from this standpoint. If some technical con-
straints such as SLA and security requirements come to
rise to the surface, AIP will gain technological competi-
tiveness since delegating the control of core enterprise
applications to an external provider requires ASPs to
prove their capability of reliable and stable operations.
Last, we predict that the rate-of-demand increase will
affect the industry structure: the pattern of market seg-
mentation, the market share of each ASP type, and so
forth. The speed of the market expansion will affect
ASPs’ selection of competitive priorities.