"It is impossible for ideas to compete in the marketplace if no forum for
  their presentation is provided or available."           Thomas Mann, 1896

Contributed by Madison Laird 

Encanto Networks, Inc.

Introduction

Although very few small businesses rent application software from the internet today, these are the same small businesses who first accessed the internet several years ago.  The same millions of businesses who eventually followed their lead and now have internet access are the same ones who will follow again and rent application software from the internet in the future.  For this reason, analysts estimate that the market for internet delivered applications and services for small businesses will swell from a relatively modest base today to a multi-billion dollar industry within a few years.

A few companies have begun to establish themselves as pioneers in this marketplace.  Many of them embrace different business models and different components of the value chain for application production and delivery.  This paper argues that the most viable long-term approach to this marketplace is the position of application broker – defined as the provider of an integrated platform where multiple software vendors can provide applications through multiple distribution channels to millions of small business end-users.

This paper also illustrates how Encanto Networks has embraced this role by developing the core competencies necessary to establish itself as a viable long-term application broker serving the small business marketplace.   The paper concludes by detailing the infrastructure and business processes in which Encanto has invested in order to establish these core competencies.

I. The nature of the small business market.

There are millions of small businesses that fall into almost every imaginable industry segment and business type.  The factors that make a segment attractive in this market are typically not common to the segment itself, but are common to enough businesses in the segment to make it approachable.  These characteristics, which occur in greater proportion in certain segments, include high propensity-to-adopt qualities.  These qualities include specific internet-related features such as high bandwidth adoption, repeated internet purchasing, and use of online applications (e.g. -groupware tools or sales force automation).  

Among all segments, ease of use is one of the most important and common characteristics of online application consumption.   Small business customers who use the internet most aggressively are also the most comfortable entering their credit card number for conducting online transactions.  However, these same businesses often do not have an extensive IT infrastructure and gravitate toward simplicity and ease of use in application software.

II. Defining Web Rentable Applications

History Revisited

Rentable applications are not new.  The concept of renting software from a service provider is as old as the pre-PC “time-sharing” days when dumb terminals could leverage the processing power of mainframes.  At that time, few companies were able to afford the network connectivity and technology infrastructure required to make the time-sharing model an attractive solution.

The Rise of the ASP Model

With the advent of the internet and relatively cheap, fast connectivity, the idea of renting applications from a service provider has come back into vogue.  The term ASP (application service provider) was coined to describe vendors of these services.  Now, businesses that previously could not afford powerful software applications find that the rental model makes some of these applications accessible to them.  Furthermore, many companies have been able to save money by relying on an ASP to manage and maintain applications previously managed by in-house IT staff.

Problems with the Traditional ASP Model

Unfortunately, many ASP’s still maintain expensive elements of the software sales model, including face-to-face selling processes, dedicated account representatives, dedicated servers and manual application provisioning.  These ASP’s are engaging in something of a “shell game,” trading most of the costs involved in customer premise installations for essentially the same costs in an outsourced data center environment.  In some cases, this model can result in meaningful cost savings, but often the real value for customers of this model is the less tangible (but still meaningful) benefits of faster implementation and diminished need for internal IT complexity.  

However, this ASP model does not truly take advantage of the economies of scale for software application rental which are made possible by the internet.    Because an ASP implementation in the traditional model requires so much human intervention and customization, the price is prohibitive for all but a very few small businesses.  For this reason, ASP software implementations have traditionally focused on packages used in medium and large businesses (e.g. SAP, Baan, PeopleSoft, J.D. Edwards,), and less on small business software (e.g. Quickbooks and ACT).

Web Rentable Applications – A New Variant on the ASP Phenomenon

In order to sell effectively to the small business market, applications must be simple and affordable.  For a vendor to offer simple, affordable applications but still sustain a good business, the vendor must be able to deliver these applications in a mass-customized way, which would allow end users to customize applications in a limited way, within defined and automated parameters  Mass customization must allow reduced human intervention and capital outlays, since application pricing sensitivity puts pressure on ASP margins in this marketplace.  Consequently, large volumes of customers are required to make the business model attractive.  In a cyclical effect, this volume requirement further reinforces the need for low price points, since lower price points drive higher volume demand.

Effective mass customization of applications requires:

·        that users can sign up and desubscribe at will, without minimum time commitments or penalties for early cancellation

·        that rental and administration of the application is done by the end user, through a browser, with no need for human intervention in the sales or setup process;

·        that setup charges are minimal (if extant at all);

·        that applications function in a “shared server” environment (meaning that multiple, simultaneous users of multiple applications are supported on a single server);

·        that price points are low enough to obtain volumes which are sufficient to achieve acceptable business return; and 

·        that applications are maintained and upgraded automatically, without user intervention.

As ASP vendors begin to recognize the opportunity in the small business market, more of them are adopting similar mass customization models.  A new variant on the ASP model is emerging.  This variant embraces mass customization by making it possible for end users to rent applications in a few minutes on the internet, using their web browser and a credit card.   In this model, applications are also provisioned and administered by the end user, and typically require no minimum time commitment (i.e., they are cancelable at will).  These applications are excellent for small business in that they require little learning and customization, no IT staff, and are eminently affordable. Easy to use, short term applications are ideal for many, but a long term relationship would also be appealing to both customer and service provider. 

III. The Value Proposition Behind Web Rentable Applications

Web rentable applications are less expensive than conventionally purchased software, easier to use, require less commitment, and enhance business processes and competitiveness by using the internet.  These value propositions are particularly attractive for the small business segment.

The value propositions include:

1.       Worldwide 24x7 access to applications.

These applications are available anytime, from anywhere in the world, with an internet connection and a web browser. This can be especially important if a business and its partners are located in several cities. Remote users, traveling employees and partners can all get easy and fast access to the application.

2.      Reduced Capital and IT expenditures

These applications don’t require individual offices or locations in which to set up their own servers or networks.   Hosting comparable network-based applications requires a significant investment in IT infrastructure, people, and processes – things which are not at the core of most companies’ competencies.

3.      Enhanced Working Relationships and Productivity

These applications can create great gains in productivity for short-term projects, for working together with partners, customers or suppliers, and for keeping a geographically dispersed workforce in sync.  The distributed nature of the internet allows unique communication advantages, with outstanding results.

4.      Rapid Application Deployment

Web rentable applications can be rented and deployed within a few minutes, using a browser and a credit card.  

5.     Reduced Maintenance/Admin Costs

It only takes a few minutes to rent an application over the internet.  Application “instances” and secure databases are self-provisioned.   Application code is updated and enhanced frequently in the runtime environment.  Users can choose self-service administration options, authorized restriction levels, etc.  Small businesses, workgroups, and remote departments can rent and provision common business applications across the web and thereby substantially reduce local IT investments.

6.      Reliable 24x7 monitoring and self-support features

In this model, availability, billing and online customer support features are provided with high reliability, scalability and security. 

IV. The ASP Opportunity in Small Business

The Small Business Internet Adoption Curve

Small businesses have followed a distinct adoption curve over the past several years.  Those businesses that began to adopt the internet in the mid-90’s have generally progressed up the adoption curve in a distinguishable pattern.   In a recent comprehensive study of the small business market, Cognetics, Inc. recognized the following five distinct stages of internet adoption among small business in the United States:

Figure One: Small Business Internet Adoption Stages

Stage One: Access – The business is on the internet, and uses it for basic functions such as email and web-based research (browsing). 

Stage Two: Procurement – The business purchases items (e.g. travel services, office supplies) on the internet.

Stage Three: Presence – The business has a website. 

Stage Four: Commerce – The business sells products or services on the internet. 

Stage Five: Services – The business uses the internet in a sophisticated way to obtain services. 

It is important to note that these stages of internet adoption are progressive.  Although it is possible for businesses to “jump” a stage (for example, some services businesses may not have services which can be sold or delivered online, so those companies may skip the “Commerce” stage), businesses almost always progress through these stages, and rarely (if ever) revert backwards through these stages.  

Generally speaking, the same businesses that adopted internet access several years ago are the same ones which have progressed through to the Stage Five level of advanced application usage.  This pattern of progression is what leads industry analysts to project dramatic levels of growth in the stages of internet adoption in coming years as the millions of businesses at Stages One and Two today proceed through the adoption cycle.

The Small Business ASP Market Opportunity

Because small businesses are still progressing up the internet adoption curve, the market opportunity for rentable software applications to the small business market is poised for tremendous growth from today’s relatively modest base.  Forrester estimates the size of the market for rentable applications to companies under 100 employees to be about $650 million this year, and forecasts rapid growth, to almost $4 billion by 2003.  Hambrecht & Quist’s estimate is even higher:  “Dynamic Hosting — a bundling of e-business software and services based on a destination Web site that provides a community of users with focused software applications, content and service access — will easily become a $6.6-billion market by 2003.”  "And this preliminary estimate," says H&Q analyst James M. Pickrel, "is merely the tip of the iceberg in terms of the potential of this marketplace."   (Source: Hambrecht & Quist, October 8, 1999)

Figure Two: The Small Business (less than 100 employees) ASP Market Opportunity

V. Pursuing the Market: 

Roles of Various Participants in the Value Chain for Distributing Web Rentable Applications

1. Defining the players

Several companies are named here for comparison and illustration purposes.  These companies were selected because their model is similar enough to Encanto’s to make comparison useful.  Companies not included in this comparison include services vendors or community providers, who generally do not rent application software over the internet, instead choosing to provide business services such as community bidding, printing or direct mail.  Consequently, vendors of this type, such as DigitalWork.com, Allbusiness.com and Onvia, while approaching the same market, are less relevant when comparing specific elements of the ASP business model.

The players used for illustration purposes here all have one thing in common – they offer web rentable business applications to end users.  Many share other characteristics, but the variations on model are marked.  The companies selected for comparison are:

Agillion

Bigstep

Interliant

Netledger

Smartonline

2. Making the offer

In application delivery, Encanto recognizes the following components of the internet value chain (excluding distribution elements, which will be handled below).

·        Independent Software Vendors (ISV’s) create the applications to be offered.  

·        Aggregators create groups of application and service offers from multiple vendors and offer those groups to small business, usually through an internet property.  

·        Hosts maintain a production network application environment.  Most of these players do not have their own datacenters, but even if they choose to co-locate their networks, they are responsible for its operation.

·        Billing Agents make the offers and accept responsibility for collecting payments from the end user.

·        Support Agents provide primary customer care for their applications.

·        Integrators offer customers a single point of registration, contact and billing for any applications they use on a given platform, regardless of the application’s author.

 

The following table compares the roles in the value chain among the five selected vendors and Encanto as they address the small business ASP market.

Figure Three. Roles in the Small Business ASP Value Chain

Companies that aggregate applications distinguish themselves by providing broader solution sets than those who only offer their own applications.  Companies that unify customer care, billing, and registration systems across aggregated applications (integrators) position themselves effectively for unique distribution opportunities.

3. Maximizing the Content Portfolio

Offering applications with the highest value to small business requires constant market research and customer feedback, as well as constant cultivation of follow-up application offerings.  Those vendors who write their own applications inherently limit their ability to compete on the basis of their application portfolio, since aggregators and integrators will always have more software vendors from which to choose.  The chart below shows some of the various internet-enabled functions available on the web today, and whether or not that option is available from each of the companies chosen for comparison purposes.  Encanto’s content portfolio management strategy is to identify the best software packages from the best vendors to serve the segments of small business that are the most aggressive with respect to their use of the internet.

Figure Four: Sample Portfolio of Application Offerings

4. Distributing Applications to Market

Many companies pursuing this marketplace as ASP’s have adopted a strategy of reliance on larger brand name organizations to generate awareness and adoption of hosted applications by the mass market. Aggregators have difficulty playing in the distribution marketplace since margin pressures generally make a three-tier distribution structure (software vendor to aggregator to distributor) untenable, even with the efficiencies of the internet.  However, for integrators with platform ownership, resale of other content providers’ applications can still make sense.  The chart below shows the various internet distribution strategies and partners of the companies chosen for competitive analysis.

Figure Five: ASP Distributor Alignments

5. Making Money in the Marketplace
Combining ASP Roles to Create Business Models

There are two main combinations of the various roles identified above, and these combinations generally form the basis of two distinct business models in the approach to  this market. 

A. High Margin -- The business model that has the highest gross margin potential is one wherein a vendor both writes its own applications and is responsible for the hosting, billing, and support roles.   In this business model, selling directly to market means that there is little or no variable cost associated with its revenue.  Companies using this model, such as Agillion, Netledger, and Smartonline, pay no license fees for their software and, in the case of direct sales, do not pay distribution charges and so enjoy high gross margins.  However, these companies do not generally integrate other vendors onto their respective platforms, so they are not able to leverage a brokerage relationship to unify unlimited numbers of applications with unlimited numbers of distributors or end users.  Thus, the adoption of this business model sacrifices the brokerage relationship and its benefits in order to achieve higher gross margins.

B. High Revenue -- The business model which has the greatest revenue potential is the integrator business model, wherein a company such as Encanto or Interliant hosts applications on behalf of software vendors, and does not compete with these vendors by writing applications themselves.  In this model, the company becomes an application broker, providing integrated support and billing.  Here, the company generally pays royalty or license fees to the software vendor, and manages the distribution relationships on behalf of the vendor.  Companies adhering to this model set themselves up for easier long term revenue growth, since their platform can support a theoretically infinite number of software applications from a theoretically infinite number of software vendors, whereas companies in the non-broker model above must write applications themselves in order to sustain increasing revenue growth over time.

It should be noted that aggregation of applications is not a substitute for application integration and platform ownership.  Companies adhering to the first business model may in fact aggregate applications from other customers, but they generally are not hosting, billing, or supporting these applications; they are not integrated.  In this world, the industry standard commission for resale of an application or service can range from 5% (on affiliates programs) to 30% or more (for close partnerships), but is generally 15% - 20%.  Companies that promote applications in this way (on behalf of others) typically do not enjoy high enough margins on the resale of these applications to justify attempting to place them through another level of distribution.  Thus, “agency” relationships, where an aggregator sells its applications through a co-branded environment will generally not sustain enough commissions to satisfy both the aggregator and its distribution partners.

VI. The Encanto Networks Offer

Encanto Networks is the market leader in hosting web rentable software applications on the Domino Instant! Host platform from Lotus Development Corporation.  All of its offered software applications are rented, provisioned, and administered by the end user, using a browser and credit card. No human intervention is necessary.   Encanto will launch dozens of applications this year, and expects ultimately to offer hundreds of software applications using this hosting platform.

The Domino Instant!Host platform supports:

• Multiple applications on the same server;

• Multiple, simultaneous subscriptions to those multiple applications;

• Dynamic creation and deletion of server partitions;

• Hosting of websites created by rental of the applications (in some cases, this traffic is substantial);

• Uniform customer care, billing, and registration processes across applications;

• End user issued invitations through email (html link, user id and password are automatically mailed out);

• Authentication for application access (“private” applications);

• Intelligent agents, secure databases (individual databases provisioned with each application instance), forms and scripts (such as notification of events like auction closings);

The applications Encanto has chosen to host were selected for their simplicity and ease of use.  Encanto has also invested heavily in templates that quickly and simply describe what rentable applications are and how they are used.  Encanto also does not currently focus on applications which are not “mission critical” (vital a company’s operations hour to hour), choosing instead to offer applications which can help accomplish business taks which were previously unattainable to those organizations.   Finally, Encanto has also invested heavily in marketing templates that describe each of the applications and induce users to try them.  All of these applications can be rented, provisioned, and set up by the user in a matter of minutes.

Encanto expects to have dozens of applications available on this platform in the coming months.   The first eight eight applications were released  on July 24.

. . . for creating a secure, self-administered, templated extranet.  Key features include:

• Easy customization of a workspace on the internet containing folders and forms.  

• Threaded discussions and “drag and drop” file storage from the Windows desktop for uploading and downloading files.

• Easy and private invitations for people to participate (the administrator simply chooses an access level of “read only”, “author,” or “administrator”, then types in an email address and password.  Quick place sends email to that address with a hyperlink for the team room and the user name and password.)

...for creating a survey on the internet and viewing or downloading results at any time.  Key features include:

• Quick creation and posting of an internet survey  - live on the web in a few minutes.

• Customize of the survey with company logos or graphics.

• Easy and powerful setup - customers type in questions and choose from three answer formats: multiple choice, multiple answer (check boxes); multiple choice, single answer (radio buttons); and free form (open text field).

• 24/7 access to and download of survey results

. . . for creating a customer feedback site on the internet.  Key features include:

• Quick creation and posting of a customer comment site  - live on the web in a few minutes.

• Customization of the comment site with company logos or graphics.

• Easy and powerful setup - customers type in questions and choose from three answer formats: multiple choice, multiple answer (check boxes); multiple choice, single answer (radio buttons); and free form (open text field).

• 24/7 access to and download of customer comments

• Trouble ticketing capability for tracking unresolved customer issues

 . . . for creating a website where customers can complete product warranty information.  Key features include:

• Easy, fast creation of a warranty or product registration site - live on the web in a few minutes

• Customization of the warranty or product registration site with the company logo or graphics

• Easy and powerful setup - customers type in questions and choose from three answer formats: multiple choice, multiple answer (check boxes); multiple choice, single answer (radio buttons); and free form (open text field).

24/7 access to the database and downloadable registrant information

. . . for creating a website where customers can control the auction of their own products or services.  Key features include:

• Easy, fast creation of a hosted auction site on the world wide web

• Complete content control over auction parameters

• Intelligent agents for email alerts and bid/response functions

• Private auction invite functions – restricted access through authentication

VII. Strategic Value of the Brokerage Position

Web Rentable Applications without Brokers

Without an application platform for hosting multiple rentable software applications from multiple vendors on the same registration, customer care, and billing processes, the best a business can hope for is an aggregated environment where applications can be sourced from a single place on the web.  However, even in this world, customers must source web rentable applications from multiple vendors, resulting in multiple bills, relationships, and points of contact.  Finally, integrating data from application to application without an abstraction layer that unifies the applications is almost impossible for an aggregator.

When small businesses source applications from ASP vendors like Netledger or Agillion, they are renting one or more applications that each address a single element of their business processes. (See Figure 6.)  Sourcing additional applications requires going to other vendors to find the applications, and form contractual arrangements with multiple vendors.

Figure 6: Rentable Applications without Brokers

The Brokerage Role

Encanto’s role in the value chain for rentable software applications is that of host, aggregator, and integrator.  From this position, Encanto becomes a broker for web rentable applications (www.rentableapps.com).  The strategic value in Encanto’s position lies in its hosting and integration role.  These roles require several core competencies, which will be discussed in more detail below.

Encanto’s network infrastructure allows it to offer business customers a single location on the internet where they can access best-of-breed software applications for rental and self-administration..  Further, Encanto provides small businesses a single source of customer support and billing for these applications.  To the customer, Encanto looks like a solution provider, or a superstore acting as single point of contact for turnkey rentable applications from a number of software vendors.

Effective distribution of these applications through other internet properties requires the ability to manage a portfolio of applications, as well as to track results and issue commissions to distribution partners.  Unified customer support and billing must also be performed for each application hosted on the platform.  To distributors, then, Encanto looks like a master aggregator who can provide a partner with an immediate entry into the small business ASP market without the investment that would normally be required.

There are many steps involved in publishing web rentable applications, from application selection all the way to support and billing for an application once it’s boarded.  Encanto’s expertise in selecting, testing and boarding applications and performing their ongoing maintenance, billing, administration, and support creates value for distributors who are either unwilling or unable to invest in these processes themselves.  To software vendors, Encanto looks like a reliable, turnkey hosting partner with ready-made distribution relationships for their applications.

Encanto’s competencies and relationships with various participants in the value chain allow  it to enjoy a unique brokerage position for web rentable applications.

Figure 7: Rentable Applications with Brokers

VIII. Core Competencies Required for Brokerage

To sustain a competitive position as an application broker in this marketplace requires mastery of a unique set of core technologies and competencies, emphasis on which results in a source of defensible advantage for the company.

Network Infrastructure

Encanto has developed a large scale application hosting infrastructure for the Lotus Development Corporation’s software vendors, using Lotus’ Domino Instant!Host platform.  This platform is tied into a massively scalable architecture to support customer care and billing processes through industry-leading software packages from companies like Oracle, Portal, and Vantive (PeopleSoft).  Working with technology partner USInteractive, Encanto has connected these subcomponents into an XML data integration engine, which provides uniform registration, customer support and billing across the application environment.  This hosting platform enables Encanto to make offers, such as the ones above, at much lower price points and with much greater efficiencies and features than traditional ASP’s.    This infrastructure also gives Encanto inherent reliability, availability and security assurances across the applications.

This functionality, combined with Encanto’s role as an integrator, gives Encanto a unique ability to service this marketplace.  The chart below illustrates the power of the technology platform Encanto has assembled.

Figure 8: Encanto’s Hosting Infrastructure

Content Portfolio Management

Choosing applications of the highest value to the small business market requires a thorough understanding of the market’s wants and needs in specific industry, demographic, and psychographic segments.  Matching these applications to the most promising market segment is critical to accelerating adoption of Encanto’s RentableAppsÔ.

Encanto has many years of learning and expertise in the small business market, and contracts with some of the world’s finest market research organizations to track internet usage and adoption patterns for various segments of small business.  The company believes such factors as propensity to outsource business processes, internet penetration and usage, number of endpoints (both business and employee), and overall technology expenditure are examples of key drivers that make a segment attractive or unattractive.

Encanto also talks with customers in both formal and informal settings, to obtain qualitative input into the features and functions of applications that are of most value.   For example, Encanto is dedicated to obtaining learning from and interacting with customers in a formal, ongoing beta program.

Encanto also manages a portfolio of software vendor applications, choosing the applications that it believes will achieve the highest traction in the marketplace and, because adoption rates are the best indicator of application acceptance and value, Encanto’s platform provides a competitive advantage in that the company can affordably board multiple applications in trials which help determine the overall likelihood of general market acceptance.

Software Vendor Relationships

The ability to recruit and establish working relationships with software vendors is a critical competency for an application broker.  Understanding the market well enough to pick the right application vendors is an important prerequisite to doing this.

After selecting application opportunity areas, Encanto recruits software vendors for its hosted application platform.  During that process, Encanto educates the vendors about the value of hosted business applications, and stresses its other core competencies.  Encanto has developed a standard contract for business development purposes.  If a relationship makes sense, Encanto can move quickly to create a well defined, working contractual relationship.

Once a relationship is in place, Encanto can help the software vendor to bring an internet-enabled application to market very quickly.  Encanto has invested heavily in working relationships with software vendors such as Lotus and Iemagine;  as a result, Encanto has recognized key requirements for such vendors, and has put in place the requisite development and marketing resources to accommodate these needs.  In many cases, software vendors are still in the process of creating rentable versions of their applications, so Encanto has developed processes for testing applications for usability in its RentableAppsÔ environment.  

For example:

·        Encanto has set up online development environments and project management databases for real time application co-development.  

·        Encanto runs simulated stress testing on applications and shares that information with software vendors to ensure that the finished application will withstand use in a production environment.  

·        Encanto’s formal, ongoing beta program establishes a real time environment with end users to develop human factor and scalability testing in a near-production environment before putting the applications into production.

Encanto Networks believes these investments in the processes, people, and technologies needed to sustain multiple software vendor relationships constitute a core competency and defensible source of competitive advantage for the company.  Further, Encanto believes that this investment is critical for any company desirous of a brokerage position in the small business ASP market.

Application Hosting, Billing and Support

Encanto maintains a production network environment providing secure 24x7 access to our customers, as well as to their customers, partners and suppliers.  Encanto also maintains application monitoring tools designed to maximize application performance metrics, such as uptime and response time in the face of multiple simultaneous users.

Management of a platform on which multiple customers can simultaneously access multiple applications requires dedicated attention to the production environment around the clock. Encanto personnel understand not only the unique network architecture designed to serve this purpose (as illustrated above), but also the suite of applications which reside on the platform; they know how to monitor the key metrics for these applications on an app-by-app basis.  

Supporting billing and customer care for multiple applications also requires extensive knowledge and investment, and Encanto has made the requisite commitment.  To use massively scalable technology platforms from Lotus, Oracle, Portal, USInteractive and Vantive (PeopleSoft) is not enough.   These subsystems must be configured in order to support the requirements of any application that Encanto selects and approves for boarding.  This means, for example, that Encanto has designed billing, by application, according to factors such as:

·        Setup charges

·        Variable time periods

·        Bandwidth consumption

·        Application instance size

·        Authentications

·        Pageserves

along with the rules and processes for creating discounts and promotions, bundles, price changes, and other complex policies and procedures.

Customer support for a broker of hosted business applications is equally complex and daunting.  Different applications require different levels of support and training, and an organization has to be built which can accommodate various factors such as:

·        Realtime password reset

·        Questions about hosted applications themselves

·        Network performance issues

·        Browser compatibility questions

·        Application-specific questions, even as new applications are added

Entrenchment as a broker in this market requires mastery of the development, scaling, and operation of a production-level application hosting environment, including network monitoring, application monitoring, customer care, and billing.  Encanto has invested in developing the skills and competencies required to make this possible for multiple software applications from multiple software vendors.

Marketing through Education and Training

Of all the challenges to this business model, none is greater than selling the applications themselves.  Since a relatively small number of small businesses has advanced in the internet adoption cycle to the point that they are acquiring services or renting applications over the internet, the challenge is twofold.  First, those small businesses which have migrated to advanced internet usage are critical customers to obtain. Therefore the first challenge is to determine who these early adopters are and market to them effectively.  The second challenge is to accelerate the adoption curve for the mass of small businesses already on the internet.

Encanto believes education is critical to affecting adoption of its RentableAppsÔ.  The education process begins with communication of the value proposition behind web rentable applications, since most small businesses are already comfortable using retail, shrink-wrapped software on local PC’s.  Attempting to convert customers from these software packages will prove difficult, so Encanto has focused on the rental of applications that supplement, rather than displace, this software.  

Still, end users must be convinced of the value proposition behind the use of the applications themselves, not just the use of the applications over the internet.  For example, although a small business may have difficulty switching their mission-critical accounting processes from the $99 version of software they purchased at retail, they have much less of a problem adopting Encanto’s RentableAppsÔ which will help them find more customers, or communicate with existing customers more efficiently, especially where such applications do not conflict with their own in-house software.

Because Encanto believes communication of this value proposition is best achieved through educational activities, Encanto’s direct marketing strategy focuses on a grass-roots effort to demonstrate to and teach groups of users about the RentableAppsÔ available from Encanto.  Seminars, and other one-to-many educational activities, have proven to be Encanto’s most effective mechanism for customer acquisition.  Through these activities, Encanto has learned about the best formats and methods for communicating the value proposition behind RentableAppsÔ, as well as how to train end-users in setup and use of the applications themselves.  Encanto has planned a direct-to-market strategy that includes an expansion of these tactics.

Online Marketing Templates

Even with highly successful, event-driven marketing, Encanto cannot reach most candidates for use of its applications through education and training tactics.  Therefore, Encanto continues to invest in interactive direct marketing and public relations activities designed to drive traffic to the RentableApps.com website.

Once users visit the site, education and training becomes an endeavor designed to induce users to purchase online.  To communicate effectively the benefits of RentableAppsÔ to the online end user requires an understanding of the critical questions and business challenges of the prospective customer, as well as of the most effective format and content. Encanto has created and continuously refines marketing templates designed to present to end users, quickly and effectively, the value proposition behind RentableAppsÔ.  Encanto’s marketing templates, though extensive, are all focused on simple and straightforward communication about the applications themselves, including anticipating and answering common end-user questions.  Encanto also continuously refines its marketing messages and templates according to customer feedback.

For each application it chooses to board, Encanto creates specific online marketing material to communicate the value behind and the procedure for renting that application.    The company adds value to software vendors and end users alike by creating an application rental environment with a unified set of templated information about each application.  At Encanto’s RentableAppsÔ site, understanding and learning different applications is easy, since the format for information presentation is the same for each. 

Encanto is committed to extending its core competencies in critical marketing areas in support of RentableAppsÔ.  The company feels that developing easy-to-understand interfaces that can induce online purchasing is critical to success in the marketplace.  Consequently, Encanto will continue to invest in the people and processes necessary to create, update, and sustain user experiences that make online application rental attractive.

Distribution Models

Encanto cannot reach the vast small business market by itself, and the internet affords the opportunity to take advantage of relationships other companies have established with small business to distribute applications.  Encanto has created the infrastructures and business processes necessary to provide these other companies with the opportunity to participate in the small business ASP marketplace through various levels of partnership.

Encanto has created three levels of distribution partnership for its RentableAppsÔ.  The company’s Affiliates program allows any person or business to receive a commission on application rentals from Encanto’s RentableAppsÔ site.  Affiliates signup for and engage in the program on the internet using a three step process: 1) review and agree to Encanto’s affiliates agreement; 2) fill out a basic form which requires information for Encanto to process payment (address where check should be sent and social security or federal tax id number); and 3) promote a unique URL issued by Encanto through their website and/or email.

Encanto has developed the technology and processes necessary to support this program, including:

·        dynamic, realtime generation of a special url for each affiliate

·        mapping of that url to the Affiliate information provided to Encanto

·        tracking of customers generated by specific URL’s

·        tracking of repeat visits by customers (in case they don’t rent on the first visit)

·        measurement and reporting of results on a per-Affiliate basis

·        quarterly payment of commissions to Affiliates

Encanto has also developed a Resellers program for distribution of its RentableAppsÔ, whereby companies that desire a greater visibility in the ASP marketplace can have Encanto develop a co-branded website environment for their customers.  Resellers also have the ability to deselect applications that they deem competitive with their own offerings or those of their partners.  This model involves charges to pay for setup of the co-branded site, as well as ongoing maintenance charges, but it also provides a closer working relationship between the two companies and pays higher commissions on application rentals.

Finally, Encanto has developed a Partners program, in which companies that desire substantial branding and content control can contract with Encanto on a professional services basis.  In the Partners program, Encanto will develop a wholly customized website that includes Encanto’s RentableAppsÔ and additional Partner-specific content.  Partners also can request that Encanto develop special branding.  The Partners model requires substantial minimum setup charges and ongoing monthly maintenance/marketing commitments, but also provides partners with a generous commission structure.

Encanto’s dedication to extensive distribution of RentableAppsÔ has led the company to create the technology and business development processes required to support the three levels of distribution set out above.  The company believes that its investment in distribution processes and methodologies will substantially assist the company in RentableAppsÔ distribution, and that this distribution strategy will lead to extensive and global exposure to the vast small business marketplace.  Encanto also believes that the structure it has put in place to support these distribution models represents a compelling source of competitive advantage in the internet world.  

Future Sources of Defensible Competitive Advantage

A significant advantage of the application brokerage position is that it allows Encanto to develop technologies and processes that are extensible across the range of applications on its hosting platform, and that are immediately accessible to the company’s customers.

Encanto is currently investing in technologies and processes that will allow it to implement substantial new benefits to customers.  These efforts are in development, and are intentionally described in a general sense here.  More information on Encanto’s efforts and progress on these fronts is available directly from the company.  The competencies the company is currently building include: 

·        customization and personalization – the use of clickstream analysis, collaborative filtering, and profiling techniques, to create customized desktops with recommended and subscribed applications specific to a customer set (e.g. a vertical industry )

·        customer relationship management –   the use of interactive techniques to present additional targeted offers to customers and induce them to continued purchases

·        application integration – the use of Encanto’s infrastructure (especially the xml technology components currently being used to link subsystems with the existing infrastructure) to swap data between applications rented by Encanto customers, resulting in automation of manual processes and reduction of “double-entry”.

·        wireless/mobility platform support – the use of xml also positions Encanto well to take advantage of WAP protocols, and to make the applications it hosts compatible with wireless devices

Encanto believes the addition of these competencies will assure that it can strengthen its competitive position in the marketplace in the coming years.

IX. Conclusion

That the ASP market is poised for rapid and sustained growth is well established, but only now are there beginning to be significant numbers of small businesses acquiring applications or services over the internet.  Achieving effective traction in this marketplace will require what Encanto calls a RentableAppsÔ brokerage approach, allowing a small business to rent low-cost applications, using a browser and credit card, and subscribe or desubscribe at will.  In order to achieve effective economies of scale in the mass marketplace, ASP’s will have to manage multiple applications across a high-volume platform.

Succeeding with this approach requires an extensive set of the right technologies and methodologies.  Encanto has invested in building substantial competencies and processes to approach this marketplace as a broker, bringing together software vendors, distributors and end users in a secure, reliable, and scalable hosting environment.  Encanto also continues to build a team of dedicated and highly skilled professionals who are fully committed to executing on this vision.   The company believes that its people, technology, and processes form the basis of core competencies outlined here, and that those core competencies will entrench Encanto in the marketplace with long-term strategic competitive advantage.

About the author

Madison Laird is Vice President of Business Applications and Services at Encanto Networks, an internet appliance software vendor, ISP, and ASP serving the small business market.  Mr. Laird was previously a senior manager with IBM in White Plains, New York, where he helped transition IBM’s small business strategy toward the delivery of internet applications and services.  Prior to IBM, Mr. Laird was a Senior Vice President at American Institute for Financial Research (now Smartonline, Inc.) where he helped develop and launch Smart Business System software, a suite of shrink wrapped software applications now available for online rental.

Acknowledgements

The author wishes to thank Michael Blakely and Bob Frankenberg of Encanto Networks, Steven Milunovich’s team at Merrill Lynch (especially John Roy), Ray Boggs of I.D.C., and Tim Bajarin of Creative Strategies for their significant contributions.

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