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The early application service provider (ASP) market was expected to expand rapidly, yet contemporary analysts predicted a severe shakeout. In a November 2000 CIO report, Gartner Group forecast that 60% of roughly 500 providers would disappear by the end of the following year. That was a forecast—not a verified final exit count. The underlying problem was a difficult business model: providers had to fund infrastructure, sales, implementation and support before enough customers produced sustainable revenue, while customers still expected applications tailored to their industries and existing systems.
What an ASP was supposed to provide
An ASP rented business application software, commonly delivering it online while operating and supporting the application for the client. The Office québécois de la langue française defined the term as a company renting business application software with associated services. In practice, the proposition was outsourced application access and management—not simply a software license paid monthly.
The model promised lower up-front investment, faster deployment and an alternative to running applications internally. Providers would host a shared platform and spread infrastructure and operating costs across many customers.
How large was the expected shakeout?
The most frequently cited number came from Christopher Koch’s “The Shakeout of the ASP Market,” published by CIO on November 15, 2000. The article reported Gartner Group’s expectation that 60% of an estimated 500 providers would be gone by the end of the next year. Because this was an analyst forecast made in 2000, it should not be presented as a measured result.
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The same article attributed $300 million in ASP revenue for the preceding year to IDC. That figure is a contemporary estimate for the early ASP category, not a current SaaS market total. No authoritative source establishes how many of the forecast providers ultimately survived.
Why the economics broke down
| Pressure | Why it mattered |
|---|---|
| Infrastructure spending | Providers had to finance data-center capacity, software platforms, security and operations before customer revenue reached scale. |
| Customer acquisition | Sales and marketing costs were high, while adoption arrived more slowly than promoters expected. |
| Implementation and customization | Integration, migration and industry-specific changes consumed resources and weakened the economies of a standardized shared platform. |
| Delayed or insufficient revenue | Subscription or usage payments did not necessarily cover implementation, hosting and support costs quickly enough. |
| Customer resistance | Many businesses would not accept generic applications that failed to match their processes or connect to legacy systems. |
The standardization trap
Shared software worked financially only when many customers could use substantially the same product. Large enterprises, however, often needed links to legacy systems, specialized workflows and industry features. Providers could either refuse the work and lose the customer or perform custom work that reduced the benefits of a common platform. Some prospects chose to build applications internally rather than compromise on fit.
Adoption was not instantaneous
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,” as quoted in the period coverage. The 2001 Computerworld account described the market moving from revolutionary expectations toward slower evolution and consolidation.
Pandesic: a specific failure, not a universal template
Pandesic announced that it was winding down, telling customers, “We are winding down our business.” Its stated reasons were slower-than-anticipated market acceptance of its business-to-consumer e-commerce solutions and the absence of a timely path to profitability. The CIO analysis also described the difficulty of serving both smaller start-ups and larger retailers whose requirements differed substantially.
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Pandesic’s experience shows why working software and satisfied customers were not enough. A provider still needed a cost structure, pricing model and customer mix capable of producing profit. Its explanation should remain a company-specific account, not a claim that every ASP failed for the same reason.
What analysts thought survivors needed
Contemporary analysts did not expect a broad provider population offering essentially the same service to remain intact. David Boulanger, an AMR Research service director for enterprise applications, said, “You won’t see good ASPs going after 20 different companies in 20 different industries anymore.” The implied direction was narrower specialization and stronger execution.
- Application and industry fit: Focus on a defined vertical or application where standardized functionality genuinely meets customer needs.
- Reference customers: Demonstrable deployments that reduce buyer uncertainty and prove the service works in a comparable environment.
- Integration capability: Practical expertise connecting hosted applications to legacy systems and business processes.
- Implementation speed: A repeatable way to configure and deploy without turning every engagement into bespoke consulting.
- Service quality: Support and operating discipline able to compete with traditional outsourcers and systems integrators.
- Strategic scale: Sufficient capital and backing to sustain infrastructure and customer support while the market develops.
Traver Gruen-Kennedy, chairman of the ASP Industry Consortium, argued that customers wanted innovation that traditional companies had not fully understood. His observation reflected the period’s competitive debate, not a guarantee that innovative providers would survive.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why larger companies were positioned to consolidate the market
Large outsourcers, systems integrators, telecommunications firms and established software vendors could combine hosted applications with network operations, implementation services, customer relationships and financing. That combination addressed several weaknesses of small independent providers at once. It also meant that consolidation could occur through acquisition or absorption, not only through outright closure.
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Academic discussion around 2002 likewise treated ASP sourcing as a developing model likely to be aggregated by large outsourcing providers. These were contemporary expectations about market direction; they do not identify a definitive list of winners.
What a customer faced when an ASP closed
Provider failure created an operational problem beyond finding replacement software. Customers had to preserve access to hosted applications, recover their data, understand who controlled custom code and interfaces, and keep business processes running during a transition. The period headline “Your ASP has closed shop: Now what?” expressed that continuity risk directly: Computerworld’s 2001 guidance on a provider shutdown treated recovery as a practical customer concern.
For the early ASP model, continuity planning therefore belonged in the service proposition itself. Contracts and operating arrangements needed a credible way to retrieve data and move applications or records if the provider failed.
What the shakeout actually tells us
The evidence supports a clear interpretation: the market’s early promise was broader than its economics and delivery capabilities. Providers tried to sell standardized hosted applications into organizations that often required customization and integration. They spent ahead of demand, encountered slow adoption and faced customers unwilling to trade business fit for generic software. Analysts consequently expected specialization, stronger references, integration expertise and consolidation.
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It does not support a precise final survivor count, nor does it justify substituting later SaaS market totals for the narrowly defined 1999–2001 ASP cohort. The ASP shakeout is best understood as a transition from an expansive new category to a more selective service model in which scale, specialization and operational credibility mattered.
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