The losses can be explained in part because ASPs spent a lot of money on infrastructure and marketing to gain their first customers—a building year, as they say in sports. But there’s more to the struggles of the leading ASPs than that.

Just a few years after its birth, the ASP industry’s original premise—that companies would be willing to rent big, complex software applications right off the shelf—is being criticized by the software analysts who describe the market and the venture capitalists who fund it. More significantly, businesses are resisting the core ASP sales pitch: A generic piece of software can work as well for a company that sells chemicals as it does for one that sells cars or com-puter chips, with no modifications or extra functionality built in to serve the particular quirks and needs of those industries. And with that resistance, the ASP business model, based on the economies of scale to be reaped by using the same basic software to serve many different customers at once, is showing significant leaks in logic and, most critically, money.

The predicted shakeout of the ASP market—which, according to Stamford, Conn., research company Gartner Group, will be a swift and brutal 60 percent of the current herd of about 500 by the end of next year—has begun. And one of the acknowledged pack leaders, Pandesic, was the first to go.

The Price Was Wrong

Pandesic in Sunnyvale, Calif., was established in 1997 by two of the three biggest, richest technology companies in the world: Germany’s ERP software maker SAP and Silicon Valley-based chip giant Intel. For the past three years, it has been renting e-commerce management software to online retailers. But on July 28, Pandesic’s customers received an abrupt e-mail: "We are winding down our business," it said, "because we don’t see a timely road to profitability due to slower than anticipated market acceptance of business-to-consumer electronic commerce solutions."

This was not a case of a couple of guys in a garage running out of borrowed money. This was a strategic decision made by a company whose six-member board was an even mix of SAP and Intel big shots. Pandesic exited a market, business-to-consumer retailing, that, three years ago, seemed ready to burst wide open.

It did. But it gushed red ink.

Although Pandesic blames its failure on the downturn in the Internet business-to-consumer retailing market this year, its demise contains more than a few warning signs for the rest of the ASP market.