ASPs versus MOTS Software Solutions

• Main Authors: MA, Dan, Seidmann, Abraham
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2004
• Subjects: Computer Sciences; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/1301
• Institution: Singapore Management University

Application Service Providers (ASPs) deliver on-demand information processing services to user firms via the Internet. Rapid technological developments in telecommunications in recent years have made ASPs an attractive alternative to purchasing, installing, and maintaining modifiable off-the-shelf (MOTS) software solutions. We study several critical aspects of a user firm’s choice between an ASP and MOTS software. The competitive model considers heterogeneous users that differ in terms of their expected transaction volumes and volatility, while ASPs and MOTS vendors differ in terms of their pricing structure, setup cost, system customization ability, integration and service level arrangement. Our results identify and characterize the equilibrium conditions under which ASPs and MOTS vendors can coexist in a competitive market, and they explain which firms could be the primary beneficiaries of each vendor type. Interestingly, we find that the ASP' entry to the market benefits not only its own clients but also the MOTS users, and we explain why despite that, the competitive advantage of the MOTS approach decreases significantly as users’ transaction volatility, or business uncertainty, increases. Hence, the value added by ASPs comes as much from the efficient pooling of transaction volatility risks as from the reduction in IT implementation costs. We also look at the competition between MOTS and ASO vendors in a longer time horizon with possible future changes in software quality, and we show when the ASP can take over the whole market, even if its quality is still lower than the MOTS software. Our findings suggest that to stay competitive, ASPs should invest in both improving software quality and in reducing service prices over time. Surprisingly, the opposite also holds, and along with any relative quality decreases, the ASP should raise its prices, providing a relatively an inferior service at a higher charge. This happens because at that case the ASP will serve mainly those firms who are priced out of the MOTS market, and can behave monopolistically at that segment. Finally, our model explains when MOTS software users could be better off despite an increase in transaction volatility in the market, and when they will be less likely to switch to an ASP even as the relative quality of the ASP’s applications increases over time. We prove that if they do switch, their rimary incentive is abating higher transaction or business volatility risks rather than reducing transactions’ costs per se.