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The early application service provider (ASP) market promised outsourced access to business software, operated and supported by a provider. Between 1999 and 2001, that promise ran into high infrastructure and sales costs, slow customer adoption, difficult integrations and demand for industry-specific features. Gartner’s widely cited 2000 estimate that 60 percent of roughly 500 providers would disappear was a forecast—not a verified final exit count.
What an application service provider was
An ASP rented business applications and related services, commonly hosting, operating and supporting the software for clients. The model was therefore more than software rental: customers outsourced part of application delivery and administration. The Office québécois de la langue française defined an ASP as a company that rents business application software, notably online, with associated services.
That distinction matters when comparing ASPs with later software-as-a-service businesses. The contemporary ASP proposition combined hosted access, implementation, operations and support; it was a sourcing and service-delivery model as well as a licensing arrangement.
What the 2000 shakeout forecast actually said
In Christopher Koch’s CIO article, “The Shakeout of the ASP Market,” published November 15, 2000, Gartner Group expected 60 percent of an estimated 500 providers to be gone by the end of the following year. The figure describes an analyst forecast made at the time, not a measured result. No authoritative source in the period material establishes how many firms ultimately survived that forecast window.
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| Figure | What it represented | Qualification |
|---|---|---|
| 60% of about 500 providers | Gartner Group’s expected share of providers that would disappear | Forecast reported by CIO in 2000; not a confirmed exit rate |
| $300 million | IDC’s estimate of ASP revenue in the preceding year | Contemporary historical estimate reported by CIO; not a current SaaS market figure |
The 2001 Computerworld account “What went wrong with ASPs?” describes the same period as a shift from revolutionary expectations toward slower evolution and consolidation. It does not supply a definitive survivor count either.
Why so many ASPs struggled
Standardization collided with enterprise requirements
Shared hosted software depended on serving many customers with a common platform. Large organizations, however, often needed industry-specific functions, links to legacy systems and workflows tailored to their operations. Providers faced an unfavorable choice: keep the application generic and lose deals, or add custom work that weakened the scale economics of a shared service.
Some prospects concluded that building applications internally offered more control than accepting a generic hosted system. Others could not justify a provider’s implementation and tailoring charges alongside recurring service fees.
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Costs arrived before dependable revenue
Providers had to fund data-center infrastructure, software operations, implementation staff, support and customer acquisition before a large installed base produced predictable revenue. The period sources describe substantial spending and limited or delayed early income. If adoption took longer than promoters expected, cash requirements grew while the promised economies of scale remained out of reach.
Implementation was expensive and slow
Hosting an application did not remove the work of mapping processes, moving data, integrating systems and training users. A provider that sold rapid deployment could still encounter enterprise projects requiring extensive consulting. Those projects consumed resources and made a supposedly repeatable service look like a series of custom engagements.
Customers did not adopt the category instantly
Laurie McCabe, then vice president and service director at Summit Strategies, captured the period’s overconfidence: “Everybody expected this to be instantly adopted, that customers would just stop dead in their tracks and say, ‘Wow! This is what I’ve been missing all my life!’ — like a revolutionary kind of thing,” she told CIO. Actual buying decisions were slower, and customers evaluated operational risk, integration effort and long-term fit rather than novelty alone.
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Pandesic: a specific failure, not a universal explanation
Pandesic announced that “We are winding down our business,” according to a customer email reproduced by CIO. The company attributed its decision to slower-than-anticipated market acceptance of its business-to-consumer e-commerce solutions and the absence of a timely path to profitability.
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What analysts thought a surviving ASP needed
Contemporary analysts did not expect a broad catalogue of interchangeable providers to remain. David Boulanger, AMR Research’s service director for enterprise applications, said: “You won’t see good ASPs going after 20 different companies in 20 different industries anymore.” The implication was focused specialization rather than undifferentiated breadth.
- Clear application or industry focus: A provider needed functionality and expertise that matched a defined customer segment.
- Reference customers: Demonstrable implementations could reduce buyer uncertainty and prove that the service worked outside a sales presentation.
- Integration capability: Connecting hosted applications to legacy systems and business processes was central to enterprise value.
- Fast, disciplined implementation: Shorter deployment reduced consulting cost and helped providers reach repeatable economics.
- Reliable service: Operations, support and continuity planning had to compete with established outsourcers and systems integrators.
- Scale or strategic backing: Large outsourcers, integrators, telecommunications companies and software vendors had deeper resources and could acquire or consolidate smaller specialists.
Traver Gruen-Kennedy, chairman of the ASP Industry Consortium, emphasized a remaining opportunity: “These customers are looking for innovative solutions, and I think the innovation component is something that the traditional companies haven’t fully understood yet.” This was a period assessment of competitive positioning, not evidence that any particular provider ultimately prevailed.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How the market was expected to consolidate
The likely winners were not necessarily the companies with the largest application menus. Period commentary pointed toward specialists with a strong vertical proposition and toward larger service organizations able to absorb infrastructure, integration and support costs. Academic discussion around 2002 likewise treated ASP sourcing as a developing model likely to be aggregated or consolidated by major outsourcing providers.
That expectation explains the “shakeout” label: failure, acquisition and combination were all plausible outcomes of the same economic pressure. The available sources support that direction of market evolution, but they do not establish a complete list of exits or a final ranking of survivors.
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If your ASP closed: the continuity problem
A provider failure created a practical customer emergency: access to the application, stored data, integrations and support could all be at risk. The period’s customer-facing guidance framed this plainly in the headline “Your ASP has closed shop: Now what?”
For an organization evaluating an ASP at the time, continuity therefore belonged in the buying decision. Relevant questions included:
- Who owns the application data, and in what export format can it be retrieved?
- How quickly can data and configuration be returned if the provider stops operating?
- Are source records, interfaces and documentation sufficient for migration?
- What support and access arrangements apply during a wind-down or acquisition?
- Is there a credible parent company, escrow arrangement or replacement path?
What the ASP shakeout does—and does not—prove
The episode shows that outsourcing software delivery is not automatically economical. A hosted platform can lower some internal operating burdens while still demanding difficult integration, implementation and change-management work. It also shows why a provider can have functioning software and paying customers yet fail to reach profitability.
It does not prove that hosted applications as a category were impossible, nor does the 60 percent figure establish a verified historical exit rate. Later SaaS growth figures should not be substituted for the narrowly defined early ASP market without a comparable definition and source.
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