Lotus Development Corporation

55 Cambridge Parkway
Cambridge, Massachusetts 02142
U.S.A.
(617) 577-8500
Fax: (617) 693-1909
Web site: http://www.Iotus.com

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

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 Visi-Plot, 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 jaise 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 archrival 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 database 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 day care 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. Further Reading

Berst, Jesse, “Can Lotus Stay Hot as It Faces Future Heat?,” PC Week, December 20, 1993, p. 102.

Bicknell, David, “Lotus Looks to a Brighter Future,” Computer Weekly, October 7, 1993, p. 18.

Cole, Barb, “Groupware vs. The Web,” Network World, December 30, 1996, p. 62.

Córtese, Amy, “Lotus: One Step Forward, Two Back,” Business Week, October 24, 1994, p. 92K.

Doler, Kathleen, “Executive Update,” Investor’s Business Daily, December 29, 1993, p. 4.

Fisher, Lawrence M, “With a New Smart Suite, Lotus Chases Its Rivals’ Success,” New York Times, June 15, 1998, p. D6.

Green-Armytage, Jonathan, “Can Lotus Still Go It Alone?,” Computer Weekly, October 27, 1994, p. 18.

Hammonds, Keith H., “Software, It’s a New Game,” Business Week, June 4, 1990.

Hayes, Mary, and Stahl, Stephanie, “Lotus in a Desktop Dive,” Information Week, October 31, 1994, p. 14.

Ichbiah, Daniel, and Knepper, Susan L., The Making of Microsoft, Rocklin, Calif.: Prima Publishing, 1991.

Knell, Michael E., “Challenges Ahead for Lotus, IBM,” Boston Herald, August 11, 1995, p. 025.

Levering, Robert, Katz, Michael, and Moskowitz, Milton, The Computer Entrepreneurs, New York: New American Library, 1984.

Lorant, Richard, “Lotus Strong 2 ½ Years After IBM Takeover,” Austin American-Statesman, February 2, 1998, p. D1.

“Lotus Acquisition May Start Trend,” CTI News, June 16, 1998.

“Lotus All Stars,” http://www.lotus.com/lotus/about.nsf

“Lotus cc:Mail and Notes Installations Exceed 10 Million Seats,” PR Newswire, August 29, 1995.

Morrissey, Jane, “Shift to Suites Risky for Vendors,” PC Week, October 18, 1993, p. 147.

Musich, Paula, and LaPolla, Stephanie, “A Tale of Two Mergers,” PC Week, September 22, 1997, p. 20.

The Network Connection, Inc. Set To Deliver Higher Quality Training over the Internet,” PR Newswire, June 22, 1998.

Rifkin, Glenn, “Business Technology: From Downcast to Upbeat at Lotus,” New York Times, October 13, 1993, p. D1.

Sager, Ira, “The View from IBM,” Business Week, October 30, 1995, p. 142.

Teresko, John, “Electronic ‘Keiretsu,’ “Industry Week, December 19, 1994, p. 17.

“The Three Eras of Lotus History,” http://www.lotus.com/lotus/about.nsf

Wilke, John R., “Lotus Development Relies on Notes To Write Success,” Wall Street Journal, February 11, 1992.

—updated by Ellen D. Wernick

Lotus Development Corporation

55 Cambridge Parkway
Cambridge, Massachusetts 02142
U.S.A.
(617) 577-8500
Fax: (617) 693-3899

Public Company
Incorporated: 1982 as Lotus Development Corporation
Employees: 3,800
Sales: $828.9 million
Stock Exchanges: NASDAQ

Lotus is the second-largest maker of personal computer software and long the dominant firm in financial spreadsheets, although its position eroded in the late 1980s and early 1990s. It also sells word processing, networking, and electronic-mail software.

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. Besides 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 over a $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. 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 had also 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 Kapor run the growing company, Jim P. Manzi, a former management consultant, was brought in as marketing director and quickly assumed responsibility for Lotus’s daily operations. He hired a team of managers from companies like 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 a share, raising a total of $41 million. 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 very 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.

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 and word processor into a single program, Jazz was intented 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 and left Manzi 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. 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 speeding 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 Microsoft had out-maneuvered Lotus, but 1-2-3 had inspired high brand-loyalty, allowing Lotus to hold on to its market share. To better compete 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. However, the repeated delays hurt company morale 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 therefore brought on board to get the development department back into shape.

Lotus 1-2-3 Version 3 was finally shipped 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. However, 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 Microsoft eventually 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 nevertheless determined to become a major player in networking, but it had important obstacles to overcome, including the lack of a service and consulting network like that possessed by Novell. Lotus therefore decided 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 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 had also repeatedly delayed 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 further shaken 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.

Lotus was finally 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. However, Lotus was still a distant third in word processing, 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.

Prospects for the company began to look brighter by mid-1991, when the Macintosh version of 1-2-3 was finally released to positive reviews. But because of Microsoft’s long dominance in the field, Lotus faced an uphill battle, and in a rare move it sold the new software at a discount to try to win market share. 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 was also 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 to ability to send messages without leaving the program in which they were working, was quickly accepted by IBM and Apple.

Lotus followed up this success with Notes, a new category of software called “groupware,” designed to allow groups of computer users to collaborate from distant locations. Notes won 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 later sold individually, Notes was initially 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. Lotus’s networking strategy received an important vote of confidence when IBM adopted it and another Lotus product, cc:Mail, as part of the networking system it recommended to customers. cc:Mail, used to send electronic messages, had sold 1.5 million copies by early 1992. 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.

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 widely seen as an attempt to keep Microsoft from dominating that market.

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 had finally succeeded in diversifying, and seemed well positioned as the personal computer industry moved into an era of constantly shifting alliances.

Principal Subsidiaries

cc:Mail, Inc.; Lotus Desenvolvimento de Software Ltda. (Brazil); Lotus Development Benelux, B.V. (Netherlands); Lotus Development Canada Ltd.; Lotus Development Caribe Corp.; Lotus Development Co. Ltd. (Korea); Lotus Development Distribution Ltd. (Ireland); Lotus Development European Corp.; Lotus Development GmbH (Germany); Lotus Development Italia SpA (Italy); Lotus Development Japan Ltd.; Lotus Development Nordic A.B. (Sweden); Lotus Development Pty., Ltd. (Australia); Lotus Development Russia; Lotus Development S.A. (France); Lotus Development (Schweiz) A.G. (Switzerland); Lotus Development Singapore Pte. Ltd.; Lotus Development Software (Hong Kong) Ltd.; Lotus Development South Africa Pty., Ltd.; Lotus Development (U.K.) Ltd.; Lotus Sales & Service Sdn. Bhd. (Malaysia); PavoSoft Informationsmanagement GmbH (Germany); Samna Corp.

Further Reading

Levering, Robert, Michael Katz, and Milton Moskowitz, The Computer Entrepreneurs, New York, New American Library, 1984; Hammonds, Keith H., “Software, It’s a New Game,” Business Week, June 4, 1990; Ichbiah, Daniel, and Susan L. Knepper, The Making of Microsoft, Rocklin, California, Prima Publishing, 1991; Wilke, John R., “Lotus Development Relies on Notes to Write Success,” Wall Street Journal, February 11, 1992.

—Scott Lewis

Lotus Development Corporation

founded: 1982

Contact Information:

headquarters: 55 cambridge pky.
cambridge, ma 02142 phone: (617)577-8500 fax: (617)693-1909 toll free: (800)205-9933 url: http://www.lotus.com

OVERVIEW

Lotus Development Corporation is a pioneer spreadsheet developer and the world's number six software vendor. The core product line of Lotus Development Corporation is its spreadsheet program, known as Lotus 1-2-3. Spreadsheets assist in analyzing financial data by performing difficult calculations instantly, such as those involving interest rates. This detailed information is presented in a format easy to understand. The company also makes a graphics program, Freelance, as well as e-mail and word processing software, with several products available. In 1995, the most recent year for available independent financial data, Lotus's total revenue was $1.15 billion worldwide.

The company was founded in 1982 when Mitchell D. Kapor, a software programmer, won $500,000 dollars in royalties for a software program that combined charts, statistics, and other challenging calculations. Kapor founded Lotus Development with these royalties. The company's ground-breaking Lotus 1-2-3 spreadsheet program took the still young personal computer market by storm. He quickly earned back the initial investment in its development and promotion. Lotus controlled nearly 18 percent of the business software market four years after it began.

COMPANY FINANCES

As a subsidiary of IBM, Lotus Development does not report independently on its financial operations. In 1995 the company posted total revenue of $1.15 billion, compared with revenue in 1994 of $971 million. Lotus reported 1993 revenue of $981 million, compared with 1992, which was $900 million.

ANALYSTS' OPINIONS

The 1995 merger with IBM generated many views throughout the business world, from negative to positive. A June 3, 1996 article in PC Week said that the impact of the merger was still being scrutinized nine months later; but, for the time being, it appeared to be a success. A January 22, 1996 article in Industry Week, however, called IBM's decision to merge one of the most "Gutsy Decisions of 1995." Some called it a happy marriage; others, a marriage of convenience. A June 19, 1995 article in Newsweek referred to it as a hostile takeover. PC World questioned whether Lotus users would feel that they were being "IBMed to death." A July 10, 1995 article in Fortune said the move proved IBM could be taken seriously again. PC Week, however, on June 19, 1995, asked whether two companies with records of failure could make a successful merger.

HISTORY

Lotus Development Corporation was founded in 1982 by computer programmer Mitchell D. Kapor. As a psychology graduate student in 1978, Kapor had gained experience in the new field of software programming. Kapor designed a program he called Tiny Troll, that combined charts, statistics, and other difficult calculations in a single software package. This creation earned him $500,000 in royalties. It was with this seed capital that Kapor set up Lotus Development.

Kapor launched the Lotus 1-2-3 spreadsheet software in January 1983 with the help of additional investors and a $1-million advertising campaign. The response to the ad campaign was overwhelming. Within a few days Kapor and his investors had made back their money. Eighteen months after its founding, Lotus Development went public. The investors increased their commitment from $5 to $100 million.

By 1986 Lotus held 17.6 percent of the business software market. In July of that same year Kapor left the company, and Jim Manzi took the helm. It was during this time period that a series of failures and unsuccessful product introductions began. The company began to diversify in reaction to industry concerns that Lotus was focusing on a single product, the highly successful 1-2-3. However, Symphony, a database management software program unveiled in 1984, did not sell well. The same was true of Jazz, a database program for Macintosh computers. Competitor Microsoft began to develop a number of innovative competing products, including Excel spreadsheets.

Lotus experienced a return to better times during the latter part of the 1980s and the early 1990s. First came the adaptation of its spreadsheets and other programs for Windows. Then, in 1990, Lotus introduced AmiPro word-processing software. In 1992, responding to a growing consumer trend, the company introduced its own "office suite," a bundled program of various applications, including spreadsheets and word processing. Also in 1992, it launched Lotus Notes, its e-mail program. IBM chose to use this in its own office plan.

Lotus enjoyed a good relationship with this computer industry giant for several years. Then, in what was widely considered a "hostile takeover," IBM purchased Lotus for $3.3 billion in July of 1995. By February 1997, IBM and Lotus together led the worldwide e-mail market.

Lotus continued as a major competitor on the group-ware scene. By the spring of 1998 it boasted more than 22 million users worldwide for its Lotus Notes client software. Notes integrates messaging, calendaring, Web access, and personal task management functions into a single-user interface.

FAST FACTS: About Lotus Development Corporation

Ownership: Lotus is a subsidiary of IBM, a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: IBM

Officers: Jeff Papows, Pres. & CEO; Michael D. Zisman, Exec. VP, Strategy; J. Philip Dellasega, Sr. VP, Finance, & CFO

Employees: 6,400

Principal Subsidiary Companies: Lotus Development Corporation is a subsidiary of IBM.

Chief Competitors: Lotus Development's major competitors include: Adobe; Computer Associates; Corel; Hyperion Software; Microsoft; Novell; Oracle; Symantec; and Wang.

Lotus announced in late spring of 1998 that it had signed definitive purchase agreements with DataBeam Corp. of Kentucky, and Israel's Ubique Ltd., both privately owned companies specializing in real-time communications software. These companies will be acquired by IBM, Lotus's parent, under this agreement. They will become part of the Lotus Communications Products Division. Lotus plans to bring a real-time dimension to e-mail, and collaborations in business of all sizes by way of the Internet, as well as the company's individual intranets. Lotus will base this work on its Notes and Domino software, in addition to the gain made from technologies and expertise of DataBeam and Ubique.

STRATEGY

Lotus had a tendency to succeed or fail based on the adaptability of its programs to consumers' needs. This included its compatibility with other software programs, especially operating systems. Lotus started out as an IBM-compatible program. This was a wise move since the 1982 introduction of Lotus followed the 1981 unveiling of the IBM personal computer (PC). The PC became to computers what the Model T had been to automobiles.

Eventually, however, Lotus had to adapt to the Macintosh market as well. This was due to the fact that most software used on IBM machines cannot be accessed on an Apple, or vice-versa. Lotus also had to come to terms with industry giant Microsoft, a major competitor. Microsoft's Windows program was selling at a rate of 1 million copies a year by 1991. Lotus was forced to adapt to this market also—to stay competitive the company developed a program for Windows that same year.

Lotus hoped that with its acquisition of DataBeam Corp. and Ubique Ltd. in the spring of 1998, the company would achieve its goal of bringing a real-time dimension to its messaging and groupware programs. Both companies, which were privately held, were leaders in the field of real-time communications into the late 1990s.

INFLUENCES

The three biggest milestones in Lotus's development were its initial splashy entrance into the marketplace; its subsequent troubles in the mid-1980s; and its acquisition by IBM. Mitchell Kapor followed two crucial paths with his new company in 1982. First, he tied its product to another successful one, the IBM PC. Then, he launched it with what was considered at the time an almost excessive advertising budget for computer software. The campaign included full-page newspaper and magazine ads, and cost $1 million. However, in only nine months, Lotus sold 110,000 copies of its software at $495 a piece, for a total sales figure of close to $55 million.

Still, in the mid-1980s, as Wall Street observers started to note that 60 percent of the company's profits came from a single product, Lotus was in danger of being viewed as a "one-product company." The decision to diversify followed quickly. First came Symphony, introduced with a large ad campaign at the 1984 Los Angeles Olympics. The program combined word processing with data management and networking. Users found it cumbersome to use. In addition to this complication, the idea of combining software packages that would not take hold until the 1990s, was ahead of its time. Similar problems followed with Jazz for Macintosh. In 1986, however, Lotus began a comeback with a new version of 1-2-3, and a massive expansion into the Japanese market.

IBM's purchase of Lotus in July 1995 signaled a new era for the company. Industry observers in PC Week suggested that IBM intended to maintain a hands-off approach, and let Lotus, along with its highly popular Notes program, influence the mother company, rather than the other way around. Business Week also held that the success of the merger would be tied closely to the success of Lotus Notes in coming years, and Black Enterprise called the merger a sign that IBM was gearing up to enter a "groupware war" with office-suite competitor Microsoft. On the heels of the merger, long-time Lotus chief Jim Manzi stepped down. According to PC Week, it appeared that IBM and Lotus's existing managers could not see eye-to-eye. Some "house-cleaning" was necessary.

CHRONOLOGY: Key Dates for Lotus DevelopmentCorporation

1982:

Mitch Kapor and Jonathan Sachs found Lotus Development; Lotus launches the Lotus 1-2-3 spreadsheet software

1983:

Lotus goes public

1985:

Purchases Software Arts, the creator of the first spreadsheet software

1986:

Kapor resigns and Jim Manzu takes over

1989:

Lotus Notes is introduced

1990:

Novell backs out of a proposed merger that would have created the largest personal computer software firm

1995:

IBM purchases Lotus

1998:

IBM announces plans to purchase DataBeam Corp. and Ubique Ltd. to become part of the Lotus Communications Products Division

The growing consumer clamor for real-time communications was the key factor behind the 1998 acquisition of the two companies holding considerable expertise in the field. IBM acquired DataBeam and Ubique Ltd. for integration into Lotus' Communications Products Divsion.

CURRENT TRENDS

Two of the biggest trends in Lotus' business during the late 1990s were "office suites" and "the net"—both the Internet and the intranet. Suites are packages that combine several programs into one bundle. This makes it possible, for instance, for a user to import an object from a graphics program to a slide show; or, to include spreadsheet data alongside word processing. Lotus entered the office suite market with SmartSuite in 1991. The next year, it entered into an agreement with Digital Equipment, to include a copy of SmartSuite for Windows with every computer the company sold.

During this same time period, Lotus established a significant presence in the e-mail and Internet markets with its products Lotus Notes and cc:Mail. A review of computer trade and financial industry publications' articles about Lotus in 1996 and 1997 indicated that many industry analysts believed that Lotus Notes represented the future of the company. The program assists businesses in making the most of the "intranet," the internal network of each business.

Lotus' eSuite was yet another product developed to appeal to businesses increasingly involved in networking. The product represents a new line of business productivity software and technologies designed exclusively for the network computing environment. There are two eSuite product lines: eSuite Workplace and eSuite DevPack.

PRODUCTS

Lotus' product line includes desktop application products, such as SmartSuite; and an integrated applications suite that combines word processing, spreadsheets, and other types of programs. Another key focus for Lotus is communications, with Lotus Notes for workgroup computing, which gave it a foothold in the expanding "intranet" market; cc:Mail, an e-mail program; and, Soft*Switch electronic mail switching. Its most renowned product is its spreadsheet program, 1-2-3, which has versions for DOS, Windows, and Macintosh. In addition, Lotus has the word processing program, AmiPro, and the presentation graphics program, Free-lance Graphics.

In late 1996 Lotus announced the introduction of Domino, an Internet (in contrast to intranet) version of Notes. An aggressive marketing campaign followed the announcement. Earlier in 1996, it unveiled ACT! for Notes, which the company developed in cooperation with Symantec Corporation. The product created user access to Notes databases, and send e-mail. A product designed to appeal to the networking environment is Lotus's eSuite. Two versions are marketed: eSuite Workplace and eSuite DevPack.

In May of 1998, Lotus unveiled plans to offer client-and-server-based products that deliver the advantages of network-based, real-time communication and collaboration to businesses worldwide. This allows the company to utilize the document-based awareness, instant messaging, and real-time conferencing capabilities of Israel-based Ubique Ltd., and Kentucky-based DataBeam Corp., in order to expand the benefits of groupware into a comprehensive Sametime collaboration platform, all in conjunction with its own leading-edge collaboration of Notes and Domino.

CORPORATE CITIZENSHIP

Lotus has placed a high value on its relationships with the worldwide communities where it operates. The company has taken the lead in corporate citizenship through its strong, stated commitment to "socially responsible business practices, including efforts to enhance the quality of life, and level of opportunity afforded individuals within our communities throughout the world."

The company's community-minded initiatives find a focus in the Lotus Philanthropy Program. The program is based on the conviction that its employees should play a key role in identifying and implementing those initiatives. Many Lotus employees are active on policy and grant-making committees, offer technical assistance to nonprofit organizations, and participate in volunteer efforts in the United States and abroad.

GLOBAL PRESENCE

Prior to the merger with IBM, Lotus marketed its products in more than 80 countries worldwide, principally in North America, Europe, and the Pacific Rim. When Lotus became a part of the IBM team, its potential to become a more significant global player was increased. Slightly more than 25 percent of its total revenue is derived from sales outside the United States.

SOURCES OF INFORMATION

Bibliography

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zuckerman, lawrence. "lotus gears up to get a slice of internet pie." the new york times, 16 september 1996.

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. lotus' primary sics are:

4822 telegraph & other communications

7372 prepackaged software

7373 computer integrated systems design