hen IBM acquired the struggling Lotus Development Corp. two years ago, many experts thought the $3.5 billion price tag too high and the acquisition risky. But with IBM's backing, Lotus seems to have thrived. Its core Notes and Domino groupware is selling strongly, and Lotus is readying Java-based desktop applications and new Internet-based Notes client software that it hopes will drive further growth.
"We sought the merger with Lotus because we understood the strategic importance of groupware," Lou Gerstner, chairman and CEO of IBM, told InformationWeek. "Notes has more than half the groupware market, and overall desktop share has increased nearly 20 points since the merger. By virtually any measure you can think of, the merger is a
success."
Now, Lotus' and IBM's sales and product development efforts are moving closer together. IBM said this month that it will combine both companies' sales-channel support groups into a single organization that will be headed by Lotus VP Deb Besemer. Lotus' recently announced Go low-end Web server and BeanMachine authoring tools were originally developed by IBM. The next release of Lotus' SmartSuite desktop applications will include IBM-developed continuous speech recognition. Says Lotus president Jeff Papows: "We would never have engaged in that kind of leading-edge technology development by ourselves."
Adds Gerstner, "We're getting a lot of credit for our ability to work together, deliver cohesive software strategies and products, and do that in a way that's not disruptive to our mutual customers. That begins with development and extends through distribution."
But it's not IBM's technology that has helped Lotus most, analysts say -it's IBM's deep pockets. "Lotus could be profitable [if it
chose to be]. But the current strategy for IBM is less about today's profits than it is about market share and strategic position," says Bruce Smith, an analyst with Merrill Lynch & Co. in New York. "IBM generates about $4 in additional hardware and consulting revenue for every $1 in Notes sales," Smith adds. "It's not much different from Microsoft's approach-they [Microsoft] don't make money on browsers, but the area is so strategic, they're willing to live with it."
One big customer of IBM and Lotus sees other benefits. "Lotus has gotten more focused on the technology issues," says Michael Mandelbaum, VP for IS at The Prudential Insurance Co. of America in Newark, N.J. "In the past, they seemed heavily oriented to mere survival."
With help from aggressive price-cutting, Notes sales surged 57% last year to 4.3 million units, with revenue rising a more modest 24% to $356 million, according to International Data Corp., a market research firm in Framingham, Mass. IDC predicts sales will reach 6.8 mill
ion units next year.
It wasn't always assumed that the acquisition would work out well. Many analysts thought IBM paid too much for Lotus, particularly when the industry was seized by Internet fever soon after the acquisition. Pundits assumed that the proprietary Notes would be washed away by standardized, inexpensive IP-based groupware and E-mail. "Those were the dark days," says Eileen Rudden, an 11-year Lotus veteran who's now senior VP of the communications division.
But Lotus succeeded in channeling the Internet stampede-and the accompanying interest in collaborative software-to its own advantage by replacing its proprietary Notes server with Domino, a Web server that supports Notes features. "What has attracted the enterprise business of large companies is the way IBM and Lotus reacted so quickly to the Internet with Domino," says IDC research director David Floyer.
Autonomy Pays Off
Lotus' ability to get new products out quickly was due to IBM's providing much-needed resources w
ithout stifling Lotus' freewheeling culture, observers say. "Everybody was concerned IBM's cult would absorb Lotus, but it didn't happen," says Dave Vellante, a VP at IDC. "Instead, Lotus was given the autonomy to go out and Web-enable their products."
Says Don Bulens, a former Lotus executive who left last September to start Radnet Inc., a groupware company in Cambridge, Mass., "IBM did Lotus two favors: It recognized that it had to protect the unique culture [at Lotus], and it shielded Lotus from the dramatic opinion shifts public companies must endure while aggressively funding development and brand identity."
But IBM didn't exactly leave Lotus alone. "Sometimes it seemed like they hugged us to death," Bulens says. Meetings to discuss synergy with different IBM units caused distracting and time-consuming "white noise," he adds. Acknowledges Papows: "It takes some discipline to manage our collaboration-the biggest challenge is saying no."
Nor is Lotus completely insulated from performance pres
sures. "We have to keep earning our stripes each quarter," says Rudden. "We still have quarterly performance anxiety, but it's just not as public.
"During the first year, we really looked-from a product standpoint-at what were the overlaps and what we should no longer invest in," Rudden adds. "This year, we started to really exploit what we've got."
One result is a series of initiatives that combines IBM and Lotus technology. In April, IBM announced the Network Computing Framework, a set of development tools and software infrastructure for Internet and intranet applications that includes Domino and Go, along with IBM's VisualAge (IW, April 21, p. 30). Lotus Go and Domino now use a Web-site creation tool from another IBM acquisition, NetObjects. "It took IBM shareholder wealth to pull off" the acquisition, Papows says.
SmartSuite 98, a Windows desktop suite due in the first half of next year, will also incorporate IBM-developed software, including management technology from Tivoli Systems, and Vi
aVoice,
a forthcoming IBM speech-recognition technology.
Unlike Notes, which dominates the groupware market, SmartSuite lags way behind Microsoft's Office in suite sales. Even so, IBM's muscle has helped SmartSuite, Lotus officials say. At the time of the merger, Papows says, Lotus' SmartSuite business "was only marginally sustainable." Last year, IBM began bundling the software with its PCs, helping shipments quadruple to 7.9 million in 1996 and Lotus' market share, in units, more than double to 27%, according to IDC.
In revenue terms, though, Microsoft still owns close to 90% of the market; Lotus had just a 5.9% share in 1996, IDC says. "We are not going to eat away at Microsoft's market share," Papows acknowledges, "but we have a very sustainable business and a loyal customer base."
At least Lotus can now fund desktop application development. Before its acquisition by IBM, Lotus lacked the resources to aggressively develop all products, says Bob Norton, director of product management for Sma
rtSuite. "Choices were made on spending it on Notes, at the expense of desktop applications," he says. "Now that IBM is on the scene, spending's in balance."
One key development is a set of Java desktop productivity applets, code-named Kona, that's due in September. "Kona is a big bet for us," says Papows. "We're changing the ground rules. If we compete on Microsoft's terms, we will never do better than second-best."
Initially, Lotus hopes Kona will take off as a standard desktop environment for network computers-including those from IBM, which will bundle the software with its NCs. Later, it says, Kona applets will work with SmartSuite to provide a highly customizable desktop suite that combines power applications and light Java applets. "If you have one user who basically lives in a spreadsheet but occasionally needs to write a memo, that user can have the full 1-2-3 with a Java applet to handle the editing tasks," says Lotus marketing manager Penny Scharfman. Adds Norton, "The combination of Kona
with SmartSuite will differentiate us from Microsoft."
But many experts think the future of IBM, not just Lotus, rests largely on whether it wrests a controlling interest of the fragmented Internet market. Domino bought a solid chunk of Internet mindshare. The challenge for Lotus is to compete head-to-head with Netscape Communications and Microsoft.
To do that, Lotus is beefing up Domino-and, ambitiously, recasting Notes as an Internet client that it hopes will rival Netscape's Communicator and Microsoft's Explorer. Domino 4.6, now in beta test, supports major Internet mail and news protocols, the LDAP directory protocol, and Secure Sockets Layer encryption. Domino 5.0, due by year's end, will add support for more protocols, most notably the Internet Inter-ORB Protocol (IIOP).
Another key feature of Domino 5.0: Users will be able to access all the features in Domino 5.0 applications not just through the Notes 5.0 release, code-named Maui and due to ship in January, but also through any browser
that supports Java and IIOP. That openness could cost Lotus revenue, says Harry Fenik, an analyst at Zona Research Inc. in Redwood City, Calif. "Lotus has solved the server problem by allowing access to the server through a browser," Fenik says. "But that takes them out of the client business. Unfortunately, most of the money they've made over the years has been on the client."
Lotus' next big effort will be directed at ensuring the Notes client stays attractive enough to generate revenue. With Maui, Lotus will add support for a full set of Internet protocols. Like Domino 5.0, it will support IIOP, which means that many Notes features will be available as Java applets. Further, Lotus says Maui will offer integrated browsing, mail, calendaring, and discussion through a consistent interface-unlike Communicator and Internet Explorer, which are made up of several discrete applications. Lotus even plans to market Maui as a client independent of Domino that can be used with any Web server.
But analysts are
skeptical about Maui's prospects outside the installed base of Notes users. "It will take Notes shops by storm, but the Lotus Notes brand doesn't play very well outside the Lotus environment," says Rob Enderle, an analyst at Giga Information Group Inc. in Santa Clara, Calif.
Domino's Pizza Inc. in Ann Arbor, Mich., has 600 users who access Lotus Domino through Netscape's Navigator browser. The company will evaluate Maui as well as Communicator if it decides to upgrade its clients, says Paul Messink, manager for desktop systems at Domino's. But Netscape would have an advantage. "We already have a site license with Netscape, so the economics would be in their favor," Messink says.
The apparent success of the acquisition of Lotus by IBM has also generated some problems. One is support. "Our support offerings have not kept pace with the rate of deployment," Papows admits. Lotus hired an additional 1,000 support people last year to fix the problem, but that alone won't solve it. "We know we've got work t
o do," say Gerstner. "There's no secret that it's a priority for IBM and Lotus."
Driving Up Mindshare
For IBM, one benefit of Lotus' highly visible products has been to drive up mindshare for IBM's other software, says Mark Elliott, IBM's general manager for worldwide software sales and marketing. "We were looking for a way to get our software business front and center in the minds of users."
Unfortunately, Lotus and Tivoli aren't enough to drive growth in IBM's entire software business. Dragged down by poor sales of OS/2 and mainframe software, IBM's software revenue actually declined 3% in the quarter ended June 30. Acquiring Lotus "really helped IBM solve the `Where are you going' question," says Microsoft VP Rich Tong. "But at what cost?" he asks, comparing the $3.5 billion IBM paid with Notes' contribution to IBM's revenue.
Still, Gerstner thinks most naysayers think IBM made a smart move: "Now that they've had the chance to watch two years of dramatic growth and gain a fuller u
nderstanding of the strategic nature of the merger-the technology leverage between IBM and Lotus, the marketing advantages, and the power of joint development in areas like Java-we've seen a 180-degree turn in the opinions of virtually all the doubters."
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hen IBM acquired the struggling Lotus Development Corp. two years ago, many experts thought the $3.5 billion price tag too high and the acquisition risky. But with IBM's backing, Lotus seems to have thrived. Its core Notes and Domino groupware is selling strongly, and Lotus is readying Java-based desktop applications and new Internet-based Notes client software that it hopes will drive further growth.
