Lotus Development Corporation History

Address:

55 Cambridge Parkway
Cambridge, Massachusetts 02142
U.S.A.

Telephone: (617) 577-8500
Fax: (617) 693-1909

Subsidiary of IBM
Founded: 1982
Employees: 9,000
Sales: $1.15 billion (1995)
SICs:7372 Prepackaged Software; 7373 Computer Integrated Systems Design; 4822 Telegraph & Other Communications; 3600 Electronic & Other Electrical Equipment

Company History:

Lotus Development Corporation, a subsidiary of IBM, is the largest supplier of integrated messaging and groupware products in the world. Its Lotus Notes changed the world of business computing, making it possible for groups of people to share information and ideas through their personal computers at work, using local and wide area networks. As of March 1998, Notes had more than 20 million installed users. The company also produces desktop applications, including SmartSuite integrated software, Organizer time and contact manager, Lotus 1-2-3 spreadsheet, Freelance Graphics, Word Pro word processing, and Approach, a relational database.

Introducing Lotus 1-2-3: 1982-84

Lotus was founded in April 1982 by 32-year-old Mitchell D. Kapor, whose previous experience included writing two business programs for VisiCorp, an early personal computer software company: VisiTrend, which covered statistics, and VisiPlot, a program for creating business charts. Kapor made $500,000 on the spreadsheet before VisiCorp bought him out for $1.7 million. Setting his sights on a spreadsheet that translated numbers into graphs, Kapor joined forces with Jonathan Sachs, a programmer who had already envisioned a new spreadsheet and was looking for someone to help him market it. Sachs spent the next ten months writing Lotus 1-2-3 in assembly language for the IBM personal computer. Aside from the graphics, Kapor and Sachs concentrated on making 1-2-3 a fast recalculator. They took advantage of the new personal computers (PCs) with 256K of memory, which enabled the software to far exceed the spreadsheet capabilities of the similar VisiCalc.

Kapor convinced venture capitalist Ben Rosen to invest $600,000 in Lotus and, eventually, brought in other venture capitalists to raise a total of about $5 million, an incredible amount for a software company at that time. Kapor felt that substantial funding was essential to secure the early and abundant press coverage that he saw as necessary to 1-2-3's success. Lotus spent more than $1 million on advertising during a three-month period, and the national financial press extolled the software's virtues before it had even been released.

In the first few days after its official release in November 1982, 1-2-3 received more than $1 million in orders. By January 1983 the new program had surpassed VisiCalc to become the number one selling software package, and during its first nine months on the market nearly 110,000 copies of 1-2-3 were sold at a cost of $495 each. By the end of 1983, 1-2-3 was so popular that Lotus had become the second largest software company, just behind Microsoft, with sales of $53 million. It also had grown to about 250 employees, a figure that doubled to 520 employees by July 1984.

Kapor had started Lotus with an informal management structure, but he was forced to shift toward more traditional management practices by the company's explosive growth. To help him run the growing company, Kapor brought in Jim P. Manzi, a former management consultant, as marketing director. Manzi quickly assumed responsibility for Lotus's daily operations. He hired a team of managers from companies such as IBM to create a more disciplined work environment, displeasing some of the firm's original employees and causing the turnover rate to soar.

Another result of 1-2-3's rapid and widespread success was Lotus's decision to go public in October 1983; the company sold more than two million shares at $18 per share, raising a total of $41 million.

Beyond Lotus 1-2-3: 1984-85

In 1984, the same year that Kapor became chairman and Manzi was named president, sales reached $157 million and the company employed 700 people. Unfortunately, Lotus's well-being was tied closely to 1-2-3, and the firm had little success matching 1-2-3's sales with other products. Trying several different strategies to help it obtain a wider selection of programs, the company invested both in software start-ups begun by former employees and in the creation of completely new programs. One such product was Symphony, an integrated software package that added word processing, a more sophisticated data management system, and the ability to network with other computers, to 1-2-3's features. Although the company put enormous effort into promoting Symphony, sales were disappointing because some users felt the program was difficult to learn, while others preferred the greater power found in single-function applications.

The acquisition of programs through buyouts was also an option that Lotus pursued in diversifying its product base. For example, in early 1985 Lotus purchased a weakened Software Arts for $800,000 and paid its $2.2 million in debt. Software Arts had introduced the first popular spreadsheet, VisiCalc, which had lost its market share to 1-2-3. In addition to VisiCalc, the acquisition brought Lotus a number of other software programs.

The Macintosh Market: 1985-88

When the Macintosh--an Apple computer with a graphic interface--was created, Lotus decided to move into that market with an integrated program of its own called Jazz. Combining a spreadsheet, database, graphics, and word processor into a single program, Jazz was intended to attract the introductory level users at whom Lotus believed the Macintosh was aimed. The company invested in a large-scale advertising campaign introducing Jazz and got Apple to endorse the package. Although Apple executives spoke glowingly of the new software, Lotus's programmers had trouble writing Macintosh-compatible codes, and Jazz's initial introduction date of March 1985 was delayed two months because of programming bugs. Resolving these problems did not spell success for Jazz, however. Once on the market, the program was criticized both for being slow and for being difficult to learn, the same complaint that had been leveled at Symphony.

By this time, Kapor was becoming increasingly dissatisfied with the responsibilities of running a large company. Convinced that he was more of a developer than a manager, he left Lotus in July of 1986 to pursue new projects, with Manzi remaining in charge of the firm. Under Manzi's direction, Lotus continued to build on 1-2-3's success, selling 750,000 copies in 1986, approximately three times as many copies as its nearest competitor, Microsoft's Multiplan. Lotus 1-2-3 had sold more than two million copies since its release, accounting for 17.6 percent of all software sales in the business sector and 60 percent of Lotus's revenues. Manzi, however, recognized the need for the company to break into the market for larger computers and computer networks.

In the meantime, Microsoft was rushing a spreadsheet for the Macintosh to market. Called Excel, the program was more like the powerful 1-2-3 than the slow Jazz package. Excel captured the Macintosh spreadsheet market in much the same way that 1-2-3 had captured the IBM market, becoming a major embarrassment for Lotus. Both the Microsoft and Lotus programs sold for $495, but Excel had the user-friendly graphics-based commands used on the Macintosh and added some features 1-2-3 did not have. A few industry analysts felt that Microsoft had outmaneuvered Lotus, but 1-2-3 had inspired high brand-loyalty, allowing Lotus to hold on to its market share.

To compete better with Excel, Lotus announced improved versions of 1-2-3 that would include some of the advances Microsoft had incorporated into Excel, and it signed an agreement with IBM to develop 1-2-3 for mainframe computers. Lotus also launched a multimillion dollar advertising campaign in late 1986, pushing for a slice of the surging Japanese software market for 1-2-3. These efforts proved successful, and by mid-1987 1-2-3 was outselling Microsoft's Multiplan five to one in Japan.

Success for 1-2-3 was hampered when the upgrade of the program was repeatedly delayed, angering many customers. But despite three delays by late 1988, its share of the $500 million spreadsheet market stood at 70 percent because previous versions of 1-2-3 were powerful enough for most computer users, many of whom still preferred it to other choices. To keep other, less loyal spreadsheet customers from defecting, Lotus offered to give away a program designed by Funk Software Inc. that improved the appearance of 1-2-3's printed reports. The repeated delays hurt company morale, however, and the firm took a beating in the press, with much of the criticism focusing on Manzi. Former IBM manager W. Frank King III was brought on board, therefore, to get the development department back into shape. Lotus 1-2-3 Version 3 was shipped finally in June 1989, relieving the pressure that had depressed employee morale and Lotus's stock price.

Within a year Lotus had released 26 other programs, including the long-promised spreadsheets for mainframes, minicomputers, and workstations. These products were successful, and Lotus's income rose to $68 million in 1989. Lotus also invested in smaller companies like Sybase Inc., a database firm, and Rational Systems Inc., a manufacturer of programming software.

But the move that would have the greatest impact on Lotus in the long run occurred in December 1989, when Lotus shipped the first version of Notes. This was a new category of software called "groupware," designed to allow several computer users to collaborate on documents and other projects from distant locations across a network. Manzi was the exclusive marketer of the new software, developed by Iris Associates, Inc.

Running into Difficulties: 1990-91

Because of the firms' bitter rivalry, Lotus refused for years to develop products for Microsoft's Windows graphic interface program, keeping itself out of a rapidly growing market until early 1990, when it relented and announced Windows programs.

Another drag on Windows development was Lotus's decision to invest in a new operating system called OS/2, developed by IBM and Microsoft and pushed heavily by IBM. OS/2 was not nearly as popular as Windows, and, eventually, Microsoft virtually abandoned it. Unfortunately, Lotus had put effort into developing a version of 1-2-3 for OS/2, which did not sell. 1-2-3, already under pressure from Excel for Windows, faced further competition when Borland International introduced its Quattro Pro spreadsheet. Lotus filed suit against Borland in 1990, claiming Quattro Pro violated Lotus's 1-2-3 copyright. But in 1992 a federal judge rejected both firms' call for a summary judgment, clearing the way for a trial.

In March 1990 Lotus negotiated a merger agreement with Novell Inc., the largest computer networking firm. Lotus wanted access to Novell's networking technology and 1,500 service-oriented dealers, while Novell wanted to tap into Lotus's 1-2-3 customer base, which then stood at about five million. The deal would have created the largest personal computer software company in the world, giving Lotus a competitive advantage over Microsoft at a time when the networking market was growing quickly. The deal also would have gotten Lotus into the lucrative operating systems market, since Novell's Netware ran 65 percent of PC networks. The deal fell apart at the last minute, however, when Novell backed out, reportedly afraid of becoming Lotus's junior partner in the merged company.

Lotus was determined, nevertheless, to become a major player in networking, but it had important obstacles to overcome, including the lack of a service and consulting network similar to that possessed by Novell. Lotus decided, therefore, to join with other companies, including Apple, Novell, and arch-rival Microsoft, to devise a system to prevent tampering with electronic messages using sophisticated encryption techniques. The goal was to make computerized messages reliable enough to use as contracts and permanent records.

Lotus finally was able to take Microsoft on in the word processing arena with the purchase of Samna Corp. in late 1990. The $65 million deal brought Lotus Ami Pro, a program that had garnered much praise after its 1990 release. Lotus was still a distant third in word processing, however, trailing behind Microsoft and the WordPerfect Corp. As a result of the purchase, Lotus sustained its first quarterly loss in the fourth quarter of 1990, although it still made $23.3 million for the year on sales of $692.2 million.

Lotus faced more problems in 1991. After releasing a version of 1-2-3 for Windows in August, it had to replace it in September because of numerous bugs. By the end of the year, only about 250,000 copies of 1-2-3 for Windows had sold, giving Lotus about a 20 percent market share. With eight million copies of Windows sold, industry analysts had predicted 1-2-3's sales would be closer to one million. Lotus also had delayed repeatedly its release of 1-2-3 for the Macintosh, virtually ceding the Macintosh spreadsheet market to Microsoft. All together, Lotus's market share fell from 75 percent in 1988 to 55 percent. Mostly as a result of this declining share in the spreadsheet market, Lotus's first layoffs occurred in December 1991 when about 400 workers, ten percent of the work force, were cut from the payroll. The firm's stability and morale was shaken further by a management exodus in which ten vice-presidents either resigned or were forced out, including King, who was partially responsible for engineering Lotus's comeback.

Networking and Communications: 1991-94

Moving away from its near-total reliance on spreadsheets, the firm won praise for its continued efforts to diversify. Sales of Ami Pro were predicted at $50 million for 1992, and a graphics program called Freelance Graphics also was released in versions for Windows, OS/2, and DOS, taking Lotus into more new markets. In September 1991 Lotus moved into electronic mail--expected to become a major market--by releasing the mail forwarding software package called Open Messaging Interface. The program, which gave users the ability to send messages without leaving the program in which they were working, was accepted quickly by IBM and Apple.

Meanwhile, Notes was winning strong praise in the computer industry, though some critics felt that Manzi had tied the company's future too closely to its success. Manzi had built Lotus's product strategy around Notes, planning to offer a spectrum of software applications designed to work in a Notes environment. Although it was sold later individually, Notes initially was designed as a huge package, with buyers paying $62,500 for 200 copies of Notes, five days of consulting with Lotus technicians, and six months of free telephone support. Notes sold 112,000 copies in 1991, with major firms like General Motors and Metropolitan Life Insurance deciding to build their computer networks around it.

In March 1991 Lotus bought cc:Mail, Inc. for $32 million. The new subsidiary's product, cc:Mail, was used to send and receive electronic messages and by early 1992 had sold 1.5 million copies. Lotus's networking strategy received an important vote of confidence when IBM adopted Notes and cc:Mail as part of the networking system it recommended to customers. The two products had the largest installed base in their categories and moved Lotus ahead of competitors like Microsoft and Borland International in the networking market, which was expected to be one of the most quickly developing segments of the desktop computer market in the 1990s.

With computer hardware and software sales no longer growing at the explosive rates of the 1980s, Lotus could no longer count on automatic annual sales growth, and it fell far behind Microsoft, the number one software company with 1991 sales of $1.84 billion. With Notes, however, Lotus finally had succeeded in diversifying and seemed well positioned as the personal computer industry moved into an era of constantly shifting alliances.

On a Rollercoaster: 1992-94

In early 1992 Lotus teamed up with Borland, Novell, and Apple to develop electronic message standards for use by those firms and others. An extension of Lotus's Open Messaging Interface, the standards were designed to let different electronic mail systems talk to each other. The move was seen widely as an attempt to keep Microsoft from dominating that market.

That year Lotus bought the Organizer software, a time and contact manager, from Threadz, and in April Lotus introduced SmartSuite for Windows, a software package that integrated several separate Lotus applications, making it easy for a user to move between Ami Pro (word processing), Lotus 1-2-3 (spread sheet), and Freelance Graphics. With cc:Mail, a user could send mail electronically from any of the SmartSuite applications. But there still was skepticism about this integrated approach. "I don't think the market is ready to buy software this way," Goldman Sachs analyst Rick Sherlund told PC Week in 1993. This was seconded, in the same article, by David Watkins of Borland International, "I don't think customers want to sacrifice the capability of one product for the integration. There will always be demand for leading-edge products." Integrated software packages provided another area of competition for Lotus with Microsoft, whose Office suite accounted for more than 60 percent of its application sales in 1993.

By 1993 Lotus's fortunes had apparently turned around, and magazines from PC Week to Investor's Business Daily were heralding the change. "Lotus has essentially reinvented itself, shifting from being a declining one-product spreadsheet maker to a multi-product leader with highly rated offerings in word processing, electronic mail, graphics, and data base and spreadsheet applications," wrote Glenn Rifkin in the New York Times. Sales of Lotus Notes had taken off in the past 12 months, and no one else offered anything like it. In fact, Notes had become the de facto groupware industry standard, as both Microsoft and Borland International announced that their products would run on it.

A big factor in the company's financial health was that with Notes, Lotus had developed a recurring revenue stream from annual maintenance contracts. "It's always been a structural weakness of the packaged software companies that there were no recurring revenues in the business model," Lehman Brothers analyst David Readerman explained in a 1993 IBD article. "Notes gets Lotus into the model of a traditional mainframe or minicomputer software maker." That year, recurring sales accounted for 20 percent of the company's total revenue of $981 million, 50 percent from Notes maintenance contracts and 50 percent from upgrade sales.

But the shouting was premature as 1994 sales of the company's spreadsheet and suite software fell sharply. Its late entry into the Windows market continued to hurt sales, particularly in Europe, where Lotus was unable to break Microsoft's dominance in desktop applications. Lotus was in a bind. Analysts were insisting that it should concentrate on its communications software, but desktop applications were needed to push Notes to the level where it established the industry standard. And while posting losses, the company was not able to lower the price of Notes, a step analysts and potential customers thought necessary to get it out and in use.

The company continued to make acquisitions and create partnerships. It bought Iris Associates, whose technology had resulted in Notes; Soft*Switch, which made e-mail switches; and Edge Research, a maker of applications development tools. It also signed a deal with AT&T to use Notes servers on its public network. There were persistent rumors, however, about a possible merger.

Becoming Part of IBM: 1995-97

In June 1995 the acquisition rumors came true when IBM bought Lotus for $3.5 billion in cash in a hostile takeover. The price raised eyebrows and so did the vision of laid-back Lotus, the first company to support an AIDS walk (1986) and to grant benefits for same-sex partners (1992), with its daycare center and family-friendly policies, as part of white-shirt-and-tie, buttoned down IBM.

But the anticipated culture clash did not occur, although Jim Manzi left Lotus three months after the merger and Jeff Papows, who joined Lotus in 1993 as vice-president of the Notes division, became president and CEO. IBM made Lotus the heart of its personal computer software strategy and let it keep its independence and name brand. "Lotus is our desktop people and I don't want to hear any more about it," said IBM Chairman and CEO Lou Gerstner, according to the Boston Herald. With access to IBM's financial resources, Lotus dropped the price of Notes three weeks after the merger, and in October 1995 IBM announced an agreement with 11 communications companies, including British Telecom and Nippon Telegraph & Telephone, to carry Notes on their networks.

During 1996 Lotus introduced a Web server add-on for Notes called Domino, the first groupware and e-mail server for the Internet. It allowed developers to build, deploy, and manage applications within Notes, including Web site hosting and authoring. The following year Lotus opened the Soft-Switch Institute to provide hands-on training for companies using Internet-based and proprietary messaging integration systems. Following the merger with IBM, Lotus doubled its sales of Notes each year.

1998 to the Present

In mid-1998 Lotus rolled out the Smart Suite Millennium Edition, with IBM's voice-recognition technology and other improvements, but which, acknowledging reality, was designed so that users could easily exchange documents with Microsoft's Office 97. While Lotus kept its desktop applications current, it was concentrating primarily on products for corporate intranets and new Web technologies.

The company, named for the Hindu spirit of enlightenment, had a "killer app" in 1982 with Lotus 1-2-3, an application that established the business status of the standalone personal computer. PCs were seen as a means of helping people work faster alone. The introduction of Notes began to change that perception; computers and group software now made it easy for people to work faster, and more effectively, together, sharing information. With its acquisition of Data-Beam Corp. and Ubique Ltd in May, Lotus moved toward providing chat, instant messaging, and real-time communications capabilities to its software. These and other developments, including a new web streaming technology, continued to strengthen Lotus's leading position in the networking and communications industry.

Principal Subsidiaries: cc:Mail, Inc.; Iris Associates, Inc.; Soft Switch, Inc.; Samna Corp.

Lotus Development Corporation History

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