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Application outsourcing refers to the emerging trend of deploying applications over the Internet, rather than installing them in the local environment. This shifts the burden of installing, maintaining, and upgrading an application from the application user to the remote Application Service Provider (ASP). The ASP takes over all server administration and application management tasks. This deployment model allows applications to be distributed on a highly differentiable basis. This is in contrast to the traditional license-based software distribution model, where a customer receives “all-or-nothing” of the product and must manage the application on its own. To better understand dependencies between these two distribution models we propose an economic model to study the effects of actions of an independent software vendor on the profitability of an application service provider.
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