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The market for applications service providers (ASPs) is not without its challenges, but don't tell that to the revenue projections, which call for numbers well into the billions within five years.

According to International Data Corp. (IDC), ASP revenues are increasing at a compound annual growth rate of 89 percent, which will propel them from $986 million in 2000 to almost $24 billion in 2005.

"Despite the well-publicized challenges facing the ASP market today, the ASP industry is moving beyond the days of hype and producing some real success stories," said Amy Mizoras, senior analyst for IDC's Applications and Application Service Providers research. "Our data clearly shows that ASPs are alive and kicking."

IDC credits the adoption of ASP services within large companies and the formation of supplier partnerships with contributing to the market's growth. The United States is and will remain the largest market for ASP services through 2005. But Western Europe represents an emerging opportunity. ASP revenues there will soar from $93 million in 2000 to more than $5.7 billion in 2005. The lack of skilled IT professionals and the sophistication of service-level agreements are contributing to Western Europe's ASP market growth.

ASP services for personal and collaborative applications will also present a growing opportunity throughout 2005. According to IDC, these applications accounted for just 30 percent of the market in 2000, but by 2005 their combined share will increase to 45%.

"It's generally accepted that software as a service concept will become the accepted delivery model for application functionality. However, what is yet to be determined is who will be the dominant suppliers of these ASP services," said Jessica Goepfert, senior analyst for IDC's ASP research program. "This means that even the ASPs who are the current market leaders cannot afford to rest on their laurels."

Enterprise ASP spending, which IDC defines as those that consist of managed or extended services around enterprise resource management, industry-specific, customer relationship management and e-commerce applications, accounted for $693.5 million worldwide in 2000, and by 2005 could reach more than $13 billion annually, according to IDC's report Worldwide Enterprise ASP Forecast and Analysis, 1999-2004.

"Despite a lot of negative publicity, 2000 was actually a good year for ASPs and for the enterprise segment specifically," Goepfert said. "Spending on enterprise applications in the United States exceeded expectations."

The Aberdeen Group expects worldwide ASP spending to increase from $3 billion in 2001 to roughly $16.1 billion by 2005.

"Growth in the ASP industry will remain robust through 2005," said David Wright, vice president of Aberdeen's Private Equity Services division. "Our data clearly shows that, both domestically and internationally, many ASPs are gaining sales traction via strong ROI sales messages."

Aberdeen expects ASP revenues to increase at a compound annual growth rate of 52.2 percent over the next five years. Total ASP market size is expected to increase from $3 billion in 2001 to roughly $16.1 billion by 2005. Like IDC, Aberdeen expects the United States to remain the largest market for ASP services through 2005, but also projects Western Europe to contribute $4 billion by 2005. Much of the opportunity in Western Europe will be driven by Germany whose aggressive adoption of the ASP model will support a $950 million dollar market by 2005, Aberdeen found.

One of the biggest hurdles ASPs have had to overcome is the awareness and recognition of what an ASP does and how potential customers from benefit from their services. According to a survey by the ASP Industry Consortium, customer adoption of the ASP computing model may still be low, but awareness of ASPs is high in nearly all regions of the world.

Among the findings of the ASP Industry Consortium study: Nearly 70 percent of respondents indicated unaided awareness of the ASP model

While only 8 percent of respondents indicated that they are currently purchasing or renting applications from an ASP, just over 23 percent expressed a likelihood of purchasing or renting applications from an ASP in the near future.

No huge differentiation existed between regions globally with regard to awareness and willingness to utilize the ASP model. Likewise, awareness and willingness appear consistent among both business types and business size.

Nearly one-quarter of businesses are already outsourcing applications in some fashion, creating fertile ground for the growth of ASP services

Finally, the leading reasons indicated for not using an ASP were "the wish to keep IT in-house," "no business case" and "not yet considered." But there remains plenty of work ahead for ASPs when it comes to educating. A study by the Information Technology Association of America (ITAA) found that federal IT managers are intrigued by but confused about the ASP business model and its potential to bring greater efficiencies to government information processing.

A Web-based survey of more than 300 readers of Government Computer News found 6.5 percent of respondents currently using an ASP for information services and another 20 percent indicating they were considering such an approach. Large customers, those with 1,000 to 10,000 users, appear most interested in pursuing ASP solutions.

internet.com's ASPNews.com contributed to this report.