Web Services and Service-Oriented Application Provisioning: An Analytical Study of Application Service Strategies

As a new network computing technology, Web services help reduce application integration cost and have become the foundation for the next generation of service-oriented architecture. While there is ample research on the technological issues of Web services, little has been done thus far on the business implications of this groundbreaking technology. In this paper, we attempt to close this research gap by comparing three application service strategies for providing Web services of complementary functionalities, i.e., independent service vendors (ISVs), joint venture (JV), and strategic alliance (SA). Although Web service integration is analogous to product bundling, the unique features of software integration, such as low integration cost and the possibility of creating an integrated Web service with new functionalities, have led to interesting analytical results not seen in the product bundling literature. We find that the optimal application service strategy is determined by several factors, including the integration cost, the valuations, and market potentials of the individual and integrated Web services. Our study shows that the application service strategy of ISVs is always dominated by the SA, implying that Web service providers benefit from the increased interoperability of Web services. In cases where the integrated Web service is highly valuated and the integration cost is small, JV becomes the optimal application service strategy. In other cases, the Web service providers are better off to form SAs.