Lotus Development Corporation

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