Will Cloud Computing See an ASP-like Burst?

The May announcement of vSphere’s debut elevated its status from a mere Virtual Data Center OS to its lofty designation as a Cloud Operating System. One can hardly fault VMware, though, for joining the marketing fray. Even Oracle’s Larry Ellison succumbed as he acknowledged, “We'll make cloud computing announcements. I'm not going to fight this thing. But I don't understand what we would do differently in the light of cloud."

Nearly every manufacturing and consulting firm in IT has seemingly hitched its wagon to the cloud as the hype has grown toward epic proportions. Just try to obtain a unique URL with anything cloudlike: “Versacloud.com” – Ha! “Silverlining.com” – Please. “Muteablecloud.com” – Forget about it. The media and research firms are all abuzz as well. Gartner says that cloud computing will hit $150 billion by 2013.

But then, we’ve seen this before.

The ASP Industry Implosion

A decade ago, ASPs suddenly emerged as the inevitable alternative to more expensive, less predictable and less responsive internal data processing architectures. Gartner Group boldly predicted that ASP revenues would jump from $900 million in 1998 to $23 billion by 2003. The research firm gushed, “Despite market debate, the shift toward the ASP model is inevitable…we believe this model will survive and flourish, simply because the benefits are indisputable.” Gartner was far from alone in its optimistic predictions. IDC projected a $24 billion ASP industry by 2005 while Zona Research estimated it could reach $48 billion by 2003. 

For fiscal year 1999, the top five publicly traded ASPs had combined losses of $485 million versus sales of only $464 million. Despite these horrific numbers, their total market cap reached an astounding $23.6 billion by March of 2000 (Table 1). Clearly, Wall Street shared the research organizations’ exuberance for the ASP model.

Unfortunately, someone forgot to tell the customers. While total fiscal year 2000 sales of the top five publicly traded ASP firms climbed slightly to $547 million (most of which was not due to hosting), total losses soared to nearly $1 billion. Not surprisingly, the subsequent burst of the ASP bubble was far more dramatic than the dot com collapse. By 2005 three had gone bankrupt, and the remaining two had combined sales of $135 million and a total market cap of $111 million – a 99.5% decline in total valuation.  

ASP	12 Month Revenues	12 Month Earnings	March 2000 Market Cap
FutureLink	$  99.9	-$95.2	$  2,147
Breakaway	$  98.6	-$43.5	$  3,680
Interliant	$128.8	-$125.1	$  2,294
NaviSite	$  49.8	-$  58	$  8,790
USInternetworking	$  86.9	-$163.6	$  6,686
Total	$464.0	-$485.4	$23,567

  Table 1: Top 5 publicly traded ASP financial metrics as of March, 2000

Cloudy Forecast

Cloud computing may be all the rage in the media, but market valuations of cloud providers are hardly in the stratosphere. VMware, for instance, recently paid $20 million for 5% of cloud computing provider, Terremark. This $400 million valuation is quite reasonable when considering Terremark’s rapidly increasing revenues and EBITDA which were $250 million and $51 million respectively for the last 12 months.

The overwhelming hype around cloud computing compels CIOs to evaluate it, if for no other reason than being able to demonstrate their diligence. But that doesn’t mean they’re clamoring to roll out cloud services. On the contrary, we’re seeing an unusual skepticism regarding claims of security and SLA capabilities. Organizations want to understand how they can optimally delineate internal versus external computing along with the trade-offs between cost, performance and risk.

Unlike the ASP industry which was doomed from the start by technology limitations, virtualization provides cloud computing with the foundation for technological success. The healthy caution with which organizations are approaching clouds, undoubtedly motivated at least in part by the difficult economic climate, will in the long run help shape a more practical and resilient cloud computing industry.

Comments

[Fletch]

Steve,

Great piece on the Cloud/ASP paradigm. You clearly hit the nail on the head. I saw the last iteration of this in the late 90's and in 01 and 02. I was at Avcom, a large Var in Sunnyvale with clients like Concentric, Exodus, CKS and Hotmail. All ASP like in their own right. Some attempted to build out their shared storage platform. Others outsourced to SSP's. (Storage Service Providers). I later went to SiteSmith, which was acquired by AboveNet. A complete managed services platform. Essentially business models with a core competency in dropping and pulling fiber along with PPP (Ping-power and pipe). Once dense wave division multiplexing hit, that glass got awfully cheap, awfully fast. Forcing many such providers to layer higher value/margin services to their hosting repertoire.

Coreo , Appshop and others including Sitesmith did their best to host apps, which would only be effective if the client gave up root. Without root access to the app, five 9's sla couldn't be given, unless it was merely a marketing piece rather than a "Houdini" agreement with teeth in it, and financial concessions if a downtime event exceeded a predefined threshold.

It will be interesting to see how much 3rd party exposure companies are willing to palate, once there is a brighter economic outlook.