Why not make computer power a utility, just like water, electricity and gas? Users should simply be able to plug their chosen hardware in to a wall socket to get applications "on tap", without having to worry about installing software or backing up their data.

Everything could be taken care of by an application service provider (ASP) on a pay-by-use system, or for a fixed monthly rental fee.

It is a seductive dream, and one that, thanks to the internet, could become a reality. But it is not yet, as anyone who has spent an hour trying to get email on Hotmail or Excite will testify.

The "apps on tap" idea is, however, luring thousands of companies into investing billions of dollars in software and infrastructure. Read the hype they put out, and practically every technology supplier is involved. The pack includes phone companies such as AT&T and Nortel, computer companies such as Hewlett-Packard, IBM and Sun, software suppliers such as IBM, Microsoft and Oracle, software services giants such as EDS and IBM, and dozens of start-up companies.

But the firms that are leading the way are the ones whose businesses are already based on the web. Some are ISPs (internet service providers) who see net access turning into a low-value commodity market. They want to become more profitable ASPs. Others are website operators who want to offer extra fea tures to keep users on their sites. If ISPs are already hosting email and e-commerce applications on their servers, it's easy to think about hosting other applications, such as word processing and payroll.

Meanwhile, website operators are expanding by adding new applications such as web-based email, calendars, address books, instant messaging, chat rooms, auctions and games. Netscape was the first company to make a play for this market when it upgraded its Netcenter portal in 1998. However, the major players now are Yahoo! and Microsoft, with its Microsoft Network, Hotmail and bCentral sites.

Last month Yahoo! announced its move into the corporate ASP market based on deals with leading suppliers of enabling software, Citrix and Tibco, and its first independent customer, the state of North Carolina. Corporate Yahoo! enables companies to integrate Yahoo's services with their own applications on in-house intranets.

But Microsoft made a bigger splash with the launch of its Microsoft.net (.net) on June 22. Bill Gates, chief software architect, and Steve Ballmer, chief executive officer, committed the company to supplying software online. Gates said .net would support many different devices, including mobile phones, "tablet" computers and TV sets, as well as PCs: the base level for access would be an HTML 3.2 browser. But naturally you will get a "far richer [experience] if you have a device that actually has the .net code down on it" - such as the forthcoming Windows.net operating system.

Later, Ballmer spelled it out: "We're open," he said. "We'll talk to people about making .net run on devices that aren't PCs that don't run Windows."

Microsoft's new system is intended to be a platform for the whole industry, and is based on open standards, mainly the World Wide Web Consortium's XML (extensible markup language). Microsoft will sell programming tools such as Visual Studio.net and BizTalk, and offer software and services online, but so can anybody else. Ballmer said: "So what is the .net bet? First, we're betting on our selves to do something well. Second, we're betting on the transformation of the software industry..."

The bet is that the industry will move from shipping programs in boxes to selling services online on a rental basis. Users will not have to worry about what goes on in what Gates called "the cloud" - the network infrastructure - they'll just plug into it. Gates's theme was endorsed by a .net supporter, Marc Andreessen. The co-founder of Netscape and former AOL technical guru is now chairman of Loudcloud, a start-up company with an ASP hosting service called Smart Cloud.

Although the .net strategy represents a dramatic change in direction, it is one that Microsoft has been preparing for some time. For example, Windows users have long been able to go to the Microsoft website to update their operating system, and this could be done automatically, in the background. Microsoft has also been offering Microsoft Office and MS Exchange, its mail server, online.

Software suppliers love this idea. At the moment, PC users can buy a program for a one-off payment and use it for as long as they like. Software houses usually have to offer noticeable improvements to get them to pay for an upgrade. Under a rental system, users pay a monthly fee for ever, or they lose the use of the application - and, perhaps, access to their data. And the longer they use a program, the greater the profits that flow to the software provider and to the ASP.

Sean O'Reilly, vice-president of marketing for NetStore, which claims its 16,000 users make it Europe's leading ASP, says: "It's quite a serious adjustment for software houses to move to a recurring revenue model, but they'll find it adds significantly to the valuation of their companies." In other words, the City doesn't like companies with lumpy revenues that depend on when they launch new programs, but it loves ones with regular, guaranteed income streams.

The idea is also attractive to ASPs such as NetStore, who buy and run the hardware to host applications. Individuals and companies have to buy enough computer power to cope with peak demand, which may be brief, so most of the time it's not used. ASPs save money when lots of users share the same hardware - just as long as they don't all use it at once.

O'Reilly says it sounds like splitting hairs, but it's important to distinguish between ASPs and companies that offer applications over the web. "The idea that someone can simply supply an application is naïve and dangerous," he says. "If you're providing a service, you can't leave users high and dry when things go wrong; people want support."

Users who take the ASP route need to know that their applications will always be available and will work at a usable speed, which means signing a service level agreement (SLA). Whether SLAs can easily be enforced is another matter, because of the problems of jurisdiction. As Francis Gurry, assistant director general of the World Intellectual Property Organisation (Wipo), says: "The market is global, the technology is global, but legal systems are national."

So Wipo is now working with Aspic, the ASP Industry Consortium, to "establish a globally recognised dispute avoidance and settlement mechanism specifically tailored to meet the needs of the ASP industry", according to Aspic's chairman, Traver Gruen-Kennedy. Aspic - which was formed a year ago and now has more than 500 members - is also promoting "best practices" in the new industry. In May, it launched the ASPire Awards to "discover, document and highlight" them.

Gruen-Kennedy is, as would be expected, enthusiastic about the ASP business. "This is simply a great idea whose time has come," he says. "Users are not only hungry, they are starving for information about what ASPs are offering."

Certainly US analysts are predicting rapid adoption. Late last month, for example, the Giga Information Group said it expected the application server market to grow from $585m in 1999 to $1.64bn this year and $9bn by 2003, although International Data Corporation (IDC) was more conservative, predicting ASP revenues would grow from $296m last year to $7.8bn by 2004. It's a lot of money, but because ASP definitions are loose and variable, it's not clear how much of it is new money.

Although the ASP industry is pushing a trendy new idea, it's not much different from some boring old ideas such as "time sharing" - a staple of the early computer industry - bureau services and "out-sourcing", which have been popular for decades. Companies have always paid other people to take in their dirty washing, or their dirty data processing.

Also, it's not clear how much ASP services will cost, and thus how wide a market they will reach. Global Managed Solutions Ltd, based in London, offers a fixed-price ASP service designed for small businesses, for £120 per month per PC. Freedom provides a wide range of services including Microsoft Office 2000, unlimited high-speed net access (without call charges), email, desktop faxing, virus scanning, data backups, disaster recovery and a help desk 24 hours a day, 365 days a year.

Paul Perry, president of GMS, says this is much cheaper than the typical cost of running a PC - £9,000 over three years, according to Gartner Group figures. But it's not likely to appeal to web users who pay £600 for a PC and expect applications and services to be free.

Finally, it's clear even from today's web-hosted applications and ISP services that the brave new world of Freedom-style computing simply isn't viable with dial-up modems and telephone call charges. It works only with permanent and reliable broadband connections where users don't have to wait for several minutes while their applications and data dribble down from the net, when they could be loaded in seconds from a PC's hard drive.

And for most people, affordable and reliable broadband internet access is still years away.