As application service providers struggle to find new customers in a tougher Internet economy, some are finding fertile revenue streams by tapping business-to-business marketplaces. A number of marketplaces, including Covisint, Elemica and ForestExpress, have looked to application service providers (ASPs) to host applications, or whole marketplaces, in an effort to free them from the high costs and labour necessary to manage software internally, and add value to their sites beyond just procurement, analysts say. For business e-commerce exchanges, ASPs also offer a low-cost way for smaller participants with limited budgets to take part in the marketplaces, analysts say. In the past several months a number of deals have been signed, culminating when car industry giant Covisint signed a deal in October with NexPrise, which provides collaboration e-commerce software that companies can rent. Just this week, B2B marketplace provider FreeMarkets announced it is taking on the role of an ASP, renting new software for building marketplaces to companies on a subscription basis. "I think there is a real potential for growth here," said Bill Martorelli, an ASP analyst at Hurwitz Group. "A lot of the marketplaces are hosted because a lot of the players don't want to take it all on. This represents a great opportunity for ASPs to sell their services and tools." Analysts are seeing more ASPs and other Web-hosting companies sign deals with business-to-business marketplaces in an effort to find new pools of money and users for their products, new and old. Despite the cost savings and time-to-market advantages of their products, ASPs are still looking hard to move into the mainstream of business computing. Though far from being a silver bullet for struggling ASP companies, the B2B boom couldn't have come at a better time for the ASP sector. That's because ASPs are in the midst of a rapid consolidation. Hurt by the current economic downturn, several players, including Red Gorilla and HotOffice Technologies, have gone out of business. ASPs traditionally target small to midsize companies looking for a cheaper alternative than licensing software systems, but many ASP companies have struggled as business customers have been slow to adopt the new model, analysts say. ASPs are also being enticed by a relatively strong business-to-business market that appears to be weathering the industry downturn that is hurting many others. In fact, business-to-business players have been downright bullish about the future. Overall, analysts estimate the business-to-business market will grow from about $131bn in 1999 to between $2.7tn and $7.3tn by 2004. In comparison, Forrester Research projects that e-tailer spending will reach $184.5bn in 2004, up from $20.3bn last year. With that kind of fertile ground to sell in, AMR Research predicts the ASP market will reach $4.7bn by 2004, with a compound annual growth rate of 153 percent. Gartner is even more optimistic, pegging the 2004 market at $25.3bn. That's why traditional ASPs over the past several months have turned to the business-to-business sector to find new revenue streams. The problem: though ASP analysts are bullish, many companies in the ASP sector have not formulated strong business plans and are still struggling to increase customer adoption of the new model. Initially, ASPs gained popularity based on a simple idea: customers would prefer not to install or manage software -- a process that is time-consuming, expensive and complicated. ASPs would host the applications that customers could access from any desktop for a fee. "From an applications standpoint a lot of smaller businesses don't have the means to buy and maintain the software to ramp onto the marketplace," said Gail Daikoku, an analyst with Gartner. "This is where ASPs can help." In September, Redwood City, California-based BroadVision said it was partnering with Corio to host its MarketMaker software that helps companies build their own marketplaces on the Web. Corio, which also partnered with business-to-business software giant Commerce One, has found that its strong suit is in hosting large marketplaces. It currently hosts a small group of marketplaces, including Elemica, a marketplace in the chemical industry, and ForestExpress, which is an e-commerce exchange for the pulp and paper industry. "The leading marketplaces will grow really big in time, and our business will grow with them," said Mitch Kristofferson, vice president of marketing at Corio. "Not all of them will succeed, but we pick the ones we feel are leading their markets." Beyond the marketplaces, Corio has found that lending its services to marketplaces also opens up its traditional hosted business applications to the pool of supplier companies doing transactions on the site. "This gives us a relationship with an ecosystem of other companies to sell our other products too," like ERP, other e-commerce software, said Kristofferson. "We now have a group of companies to work with rather than just one." In addition, a new breed of ASP has popped up over the past year looking to exclusively target the business-to-business market. Some have stolen the spotlight by stealing deals from larger packaged business-to-business software makers Ariba and Commerce One. In October, for example, Idapta said it would build and host a marketplace for a group of major ocean shipping companies. LevelSeas.com uses the Atlanta-based software company's MarketExchange and Commerce OP products to provide Web-based freight-management tools and procurement software. Commerce One and Ariba both vied for this deal. Belmont, California-based Asera is a 350-employee, two-year-old upstart with financial backing from high-profile companies including Kleiner Perkins Caufield & Byers, Cisco Systems, Intel and General Electric. Its Web-based software functions on a pay-as-you-go basis, part of an online marketplace designed to help companies conduct transactions and improve communications among sales agents, partners and customers. Asera caught the eye of former Oracle executive Ray Lane, who joined the company's board of directors. More and more marketplaces are learning it's better to rent than to own. Some have chosen to build their marketplaces on proprietary software while renting software tools and applications to add further value to their sites, such as collaboration, sourcing and content management applications, while others have their whole system hosted. In October, auto industry marketplace Covisint decided to sign up NexPrise to provide its customers, which include auto manufacturers and suppliers, with hosted software that allows customers to collaborate on creating and modifying virtual project workspaces for procurement and product development. In fact, Covisint could become the ASP poster child. Its decision to outsource parts of its software and applications is sure to have an effect on the whole sector. The massive auto marketplace will have as many as 40,000 companies doing business with the automobile industry. The site, due to go live this year, is expected to handle up to $750bn in annual purchasing and, according to advisers at Morgan Stanley Dean Witter, could amass a market capitalization exceeding $10bn by 2005. Why are marketplaces signing up partners outside the boardroom to take responsibility for the security, reliability and functionality of the software running their systems? "It's a cost saver," said Laurie Orlove, a business-to-business analyst at Forrester Research. "It is a trend. Marketplaces, especially smaller start-ups, are looking to outsource applications and infrastructure software so if the marketplace folds it won't mean major layoffs [or getting rid of on-hand software]." SciQuest provides a marketplace for suppliers and buyers of laboratory chemicals and equipment and builds and hosts private marketplaces for companies in the pharmaceuticals industry. Executives from the company said in their industry it makes perfect sense for companies to outsource the whole system to an ASP. "This is a fragmented market," said Peytom Anderson, vice president of business development at SciQuest. "Do they really want to build and manage complex catalogues and procurement systems? Absolutely not. It's easier to host." But as more marketplaces look to rent some or all of their software from ASPs and Web hosting companies, not all observers are sure it is the best way to run a marketplace. Andrew Bartells, an analyst with Giga Information Group, said he thinks renting applications from third parties should be done in limited doses. "I see it emerging over time where companies rent applications that are sub-functions of the total offering, like auctions, verification or catalog normalisation. Specialty applications that won't get a lot of use makes sense." Bartells said he doesn't see the logic of a fairly large marketplace doing all of its business on rented software. "Buying applications and running them yourself makes more sense rather than leasing products." Take me to ZDNet Enterprise Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum. Let the editors know what you think in the Mailroom. And read what others have said.