application service provider (ASP)

Traditionally, software applications such as office suites are sold as packages that are installed and reside on the user’s computer. Starting in the mid-1990s, however, the idea of offering users access to software from a central repository attracted considerable interest. An application service provider (ASP) essentially rents access to software.

   Renting software rather than purchasing it outright has several advantages. Since the software resides on the provider’s server, there is no need to update numerous desktop installations every time a new version of the software (or a “patch” to fix some problem) is released. The need to ship physical CDs or DVDs is also eliminated, as is the risk of software piracy (unauthorized copying). Users may be able to more efficiently budget their software expenses, since they will not have to come up with large periodic expenses for upgrades. The software provider, in turn, also receives a steady income stream rather than “surges” around the time of each new software release.

   For traditional software manufacturers, the main concern is determining whether the revenue obtained by providing its software as a service (directly or through a third party) is greater than what would have been obtained by selling the software to the same market. (It is also possible to take a hybrid approach, where software is still sold, but users are offered additional features online. microsoft has experimented with this approach with its microsoft Office Live and other products.)

   Renting software also has potential disadvantages. The user is dependent on the reliability of the provider’s servers and networking facilities. If the provider’s service is down, then the user’s work flow and even access to critical data may be interrupted. Further, sensitive data that resides on a provider’s system may be at risk from hackers or industrial spies. Finally, the user may not have as much control over the deployment and integration of software as would be provided by outright purchase.

   The ASP market was a hot topic in the late 1990s, and some pundits predicted that the ASP model would eventually supplant the traditional retail channel for mainstream software. This did not happen, and more than a thousand ASPs were among the casualties of the “dot-com crash” of the early 2000s. However, ASP activity has been steadier if less spectacular in niche markets, where it offers more economical access to expensive specialized software for applications such as customer relationship management, supply chain management, and e-commerce related services—for example, Salesforce.com. The growing importance of such “software as a service” business models can be seen in recent offerings from traditional software companies such as SAS. By 2004, worldwide spending for “on demand” software had exceeded $4 billion, and gartner Research has predicted that in the second half of the decade about a third of all software will be obtained as a service rather than purchased.

web-based aPPLications and Free soFtware

By that time a new type of application service provider had become increasingly important. Rather than seeking to gain revenue by selling online access to software, this new kind of ASP provides the software for free. A striking example is google Pack, a free software suite offered by the search giant (see google). google Pack includes a variety of applications, including a photo organizer and search and mapping tools developed by google, as well as third-party programs such as the mozilla Firefox Web browser, RealPlayer media player, the Skype Internet phone service (see voip), and antivirus and antispyware programs. The software is integrated into the user’s Windows desktop, providing fast index and retrieval of files from the hard drive. (Critics have raised concerns about the potential violation of privacy or misuse of data, especially with regard to a “share across computers” feature that stores data about user files on google’s servers.) America Online has also begun to provide free access to software that was formerly available only to paid subscribers.

   This use of free software as a way to attract users to advertising-based sites and services could pose a major threat to companies such as microsoft that rely on software as their main source of revenue. In 2006 google unveiled a google Docs & Spreadsheets, a program that allows users to create and share word-processing documents and spreadsheets over the Web. Such offerings, together with free open-source software such as Open Office.org, may force traditional software companies to find a new model for their own offerings.

   microsoft in turn has launched Office Live, a service designed to provide small offices with a Web presence and productivity tools. The free “basic” level of the service is advertising supported, and expanded versions are available for a modest monthly fee. The program also has features that are integrated with Office 2007, thus suggesting an attempt to use free or low-cost online services to add value to the existing stand-alone product line

   By 2008 the term cloud computing had become a popular way to describe software provided from a central Internet site that could be accessed by the user through any form of computer and connection. An advantage touted for this approach is that the user need not be concerned with where data is stored or the need to make backups, which are handled seamlessly