It's Not As Easy As 1 2 3 Anymore

Business used to be a cinch for Lotus Development Corp. The Cambridge (Mass.) software purveyor cranked out millions of shrink-wrapped boxes with list prices of $495 each, shipped them off to distributors, and walked away with 25% pretax profit margins. It owned the lucrative personal-computer spreadsheet market, back when that meant 40% annual growth.

Gigs that good don't often last. Growth in spreadsheet sales has slowed to 10%, and strong rivals have emerged. Those competitors have slashed prices and cut Lotus' market share to 60%, from 75% three years ago. And they're not done: Microsoft Corp.'s popular Windows graphics environment has spawned a new market for programs controlled by clicking a mousea market in which Lotus' 1-2-3 just arrived. To lure Windows customers, Lotus, Microsoft, and others are cutting prices to grab market share.

The marketing wars have already proved costly for Lotus. Although revenues for 1991 are expected to reach nearly $800 millionabout double what they were four years agoearnings are expected to come in near 1987's $72 million.

Lotus has been searching all that time for a future beyond the spreadsheet business. Now, company executives think they have the answer: "suites" of software that bundle spreadsheets, word processing, graphics, and, most important, electronic-mail and "groupware" programs for networks of PCs. These packages represent "the best opportunity ever to expand and reinforce the Lotus franchise," says Peter Rogers, an analyst at brokerage Robertson Stephens & Co. They also represent the best defense against rival spreadsheet suppliers Microsoft and Borland International Inc., which are trying to unlock Lotus' hold on big corporate accounts.

The impending scrap could be a turning point for the PC-software industry. Rather than relying on individual products, Lotus and its biggest rivals are trying to monopolize large customers by becoming one-stop supermarkets for applications programs. They're developing or buying new products outside their established bases (table) and modifying programs to work well together. And they're pricing the packages aggressively, offering customers discounts of up to 65% off the price if each program was bought separately. Lotus has even restructured commissions to reward sales reps who sell "suites."

NETWORK STRIKE. The stragegy, with its built-in price cuts is risky, but Lotus figures it can come out ahead by building a better bundle. The key elements are two programs that help organize the work of people using PC networks. The first is Notes, groupware for helping teams collaborate on projects. Notes also gathers various kinds of information from around the world such as news articles, graphics, and voice messages. The second package is cc:Mail, the top-selling electronic-mail program, which Lotus acquired in February. Together, they're intended to give Lotus a leg up in the burgeoning market for network software. Says Lotus Chief Executive Officer Jim P. Manzi: "Notes and cc:Mail have the opportunity to be on every com-puter, which 1-2-3 never had."

Manzi's choice for executing this new software strategy is June L. Rokoff. An engineer by training and a former information chief at economic forecaster Data Resources Inc., Rokoff earned her wings at Lotus by imposing order on its troops of programmers to rescue the painfully late 1-2-3 Release 3.0. Her new mandate: Get Notes and cc:Mail on as many computers as possible before Microsoft and Borland introduce their own groupware in the next 18 months.

Rokoff's biggest coup so far has been helping to land a Notes distribution pact with IBM, inked in June. Lotus won't make much on Notes sales through Big Blue, but IBM's sales force should help move Notes into large accounts quickly. "It was the best way to get the product distributed as widely as we wanted in the time we wanted," she says. Soon, IBM may even get behind Lotus' entire suite of software. Forrester Research Inc. analyst Stuart D. Woodring has speculated that IBM is negotiating to buy a 15% stake in Lotus or expand their marketing alliance. Lotus denies that an equity deal is in the works.

With or without IBM, Lotus is betting on software bundles to lock up big customers. The assumption is that a customer who buys an entire range of products from Lotus is more likely to order future products and upgrades from itas well as high-margin consulting services, another new Lotus business Rokoff runs.

PRICE POINTS. For Lotus, the risk is that it will settle for lower prices without establishing brand loyalty. Retailers and distributors already worry that the new suite marketing strategy is just a big price cut. Even now, Microsoft sells a quarter of its spreadsheets and word-processing packages as part of the bargain-priced Microsoft Office, a $750 bundle that, it says, delivers $2,190 worth of software. "They could be setting price points that will be difficult to change," says Susan L. Salay, senior director of marketing at Ingram Micro Inc., a software wholesaler in Santa Ana, Calif.

And Lotus is poorly equipped to fight a market-share battle on price. Thanks to its cash cow, the MS-DOS operating system, Microsoft spends just 46~ of every revenue dollar on overhead; Lotus spends 64~. Moreover, some of the large companies are reluctant to commit to a single software supplier. "We're not going to adopt an application just because it's part of a package," says Hank Kee, assistant vice-president at Equitable Life Assurance Society of the U. S.

That's why some critics dismiss Lotus' plan as just the latest Lotus craze. "Every year, they have a new strategy," sneers Borland CEO Philippe Kahn. "It's five years, and they've had five strategies." There's some truth to that, analysts agree. And Lotus still depends on 1-2-3 for 70% of its sales and profits. But with growth slowing and margins evaporating in spreadsheets, Lotus probably won't have the luxury of trying five more scenarios.