Rebirth of the Timeshare Industry

To enliven the industry's boring stability, there's a rapidly emerging trend that hasthe potential of changing how computing power and applications are delivered to businesscustomers, as well as the terms of competition in virtually every segment of the computingand telecommunications industries. That trend is Internet Applications and BusinessSolutions Hosting (IAH).

With IAH, business applications are hosted remotely by a new-generation InternetBusiness Solutions Provider (IBSP), rather than run locally by the business user. Thistrend has the potential of leading to a new computing model that we call the InternetApplications and Business Solutions Hosting model where computing power and applicationfunctionality are delivered to customers over the Web on an as-needed basis.

The emergence of IAH could well result in the return to a new, much more flexible formof timesharing -- where companies source complex computing infrastructures to a servicebureau (in this case, an IBSP) and the business customer is freed to focus on their owncore business.

The implications of this development are phenomenal. Consider, for example, some of theoutstanding questions within the context of three broad constituencies: 1) businesscustomers; 2) ISPs; and 3) computing industry vendors.

Business customers are being whipsawed by confusion. On one hand, they recognize theincredible value of computers and computing -- from their role in reducing costs, to thatof creating new business opportunities and allowing businesses to change the rules ofcompetition in their favor.

In contrast, computers are almost becoming more trouble than they are worth. Companieshave to upgrade software every six to 12 months, upgrade computers every 18 to 36 months,retrain people continually and worst of all, redefine entire computing models every fiveyears -- from host-based, to client-based, to client-server, to network computing and allthe permutations of these various models.

As if this weren't bad enough, every new computing model and in some cases, every newplatform requires different skills scarcely available in the market, much less in eachindividual company. And consider the plight of small businesses, which can't afford asingle MIS person, much less the latest technologies and skills. What if all of theseproblems could be solved at once, by offloading all of these infrastructure issues to aspecialist who assumes all of the headaches and charges for just the resources utilized?

Large corporations understand the value this kind of service would bring, but many havealready built their own infrastructures. Small businesses could certainly benefit fromthis form of outsourcing, but will require extensive education and handholding. Whichapplications will each class of customer want hosted and how much will they pay? How muchcustomization will companies require? What is the need for specific, vertically focusedservices? And what about the security of critical business data?

Next, look at ISPs -- the huge, ill-defined agglomeration of local, regional andnational access providers, global content providers (like America Online and MicrosoftNetwork), telcos, CATVs, utility companies and innumerable other types of companies thatare entering the business. This industry -- which is made up of 4,500-plus companies -- isin trouble, with too many sources of low value-add, low-margin services and too fewopportunities for differentiation.

These companies are crying out for opportunities to escape the crushing commoditizationentailed in providing raw access services, and are gradually moving up the hostinghierarchy -- progressing from hosting access, to content, to e-commerce sites, topersonalization services. A few are even moving higher, hosting e-mail, basiccollaboration capabilities and Virtual Private Networks (VPNs).

What if these ISPs could move to a new level -- hosting true business applications likeaccounting, sales force automation, customer call center, inventory planning or even ERPand specialized vertical applications? Sound far-fetched? Not to application vendors likeSAP, JD Edwards and Siebel, or leading edge ISPs like IBM Global Networks, Digex, GTE, 9Net Avenue and Data Return, which are already experimenting with application hosting. Andcertainly not to vendors like IBM, Sun Microsystems, Microsoft, Compaq Computer, Oracleand Netscape, which are focusing on IAH.

ISPs may find that progressing from access hosting, through content and applicationhosting to becoming a comprehensive IBSP for subscribers, may seem like Nirvana. Itfurnishes an opportunity to provide high levels of value-add and to become a trustedbusiness partner to their subscribers. It also offers innumerable opportunities fordifferentiation, with one ISP focusing on SAP applications, one on sales force automationand another on medical applications.

However, when you dig deeper, this progression is fraught with risks. After all, whatdoes an ISP know about ERP applications? How much customization do individual customersrequire? How can ISPs fund the costs of entry on the basis of current access margins? Howcan they market these specialized services? Are VARs and systems integrators better suitedto providing these services than are ISPs? And what competition will ISPs face fromcompanies that want to provide hosting for their own business partners, suppliers,resellers and customers?

Meanwhile, many business software vendors are facing a crisis. The market is rapidlymaturing and small and midsize businesses have been slow to recognize and buy into thevalue proposition of server-based applications. Database and ERP growth rates are slowingand even mighty Microsoft insists that desktop growth rates will lose speed.

On the hardware side, UNIX systems growth is slowing in the face of the explosivegrowth of NT and the sustained demand for mainframes. UNIX vendors, however, maintain avirtual stranglehold on the booming telecom and ISP markets. Given the critical importanceof these two markets and the new opportunities created by IAH it's no wonder that the mostforward-thinking hardware vendors, as well as systems and application software vendors,are now designating these markets as strategic priorities.

But IAH raises even more questions for these vendors than it does for customers orISPs. For example, over what timeframes will small, midsize and large businesses adoptthis model and how large will each segment be? What applications will be most importantfor each segment and how will one application build on top of the other? Will IAHstimulate or cannibalize the traditional on-site hosting market? How should ISVs changetheir licensing models to accommodate this type of outsourcing? How will ISVs determinewhich ISPs will be best suited to host these applications and what role will traditionalchannels play? Should vendors host their own services or leave the entire market topartners? Will ISPs and telcos continue their romance with UNIX, or migrate to NT as theirservices expand from access to include applications?

Sure, Internet Applications Hosting may turn out to be just another flash in the pan ofhype -- like artificial intelligence, object-oriented computing and network computers --that regularly zaps the computer industry. But it also has the potential of creatingtotally new markets, obsoleting existing markets and completely changing the rules ofcompetition in virtually every segment of the computing and communications industries.Given the huge potential rewards of winning and the possibly deadly consequences ofmissing such a critical new wave, nobody can afford to sit out.

--Thomas Kucharvy is president of Summit Strategies, a BostonMass.-based marketing and channel strategy consulting firm.
Originally published in the August 1998 "View From The Summit."