Can Lotus Outrun You Know Who?

The latest release of Notes is designed to foil Microsoft

Old-timers at Lotus Development Corp. remember vividly how Microsoft Corp. systematically demolished their once dominant 1-2-3 spreadsheet-software business. Many, like Lotus President Jeffrey Papows, carry those wounds like battle scars, vowing never to let it happen again. But Lotus is once more under attack from its nemesis. Microsoft's target this time: Notes, Lotus' market-leading communications software. "We're locked in a war with Microsoft we can't afford not to win," says Papows.

Indeed, Lotus has been on the defensive in this cutthroat competition for the past three years. But on Mar. 30, the IBM subsidiary hopes to reverse that when it delivers Release 5, the first major overhaul of Notes in two years. It boasts new workgroup collaboration features and a navigation screen that works like a Web browser. Lotus is bolstering the product launch with a $100 million marketing blitz, say sources close to the company.

PRICE PUNCH. All those marketing dollars can't assure success for Notes, however. Lotus is in a bind. Its strategy for staying ahead of Microsoft is to offer an array of collaboration features. By contrast, Microsoft's Exchange focuses primarily on E-mail and is still chasing Lotus' lead in collaboration. Problem is, many customers don't seem to care as much about collaboration as they do about basic E-mail. And they won't pay extra for it. At the same time, Lotus is facing an uprising from some of its distributors who resent its handoff of lucrative Notes consulting contracts to IBM. If Lotus can't solve these problems, it risks being overtaken by Microsoft.

So far, Lotus has been holding its own in the battle for market share--but only by sacrificing profits. Price cuts of 57% offered to users of competing E-mail systems if they switched to Notes helped Lotus finish 1998 with 13.4 million new users, compared with 11.8 million for Microsoft. Notes ranks as the leading communications and collaboration program, with approximately 36% of the market for new users last year, vs. 26% for Microsoft Exchange, according to preliminary estimates by International Data Group.

But Microsoft has pulled within striking distance in just three years by creating a low-price product that delivers easy-to-use E-mail. Sometimes Microsoft practically gives Exchange away as part of larger deals that include other corporate -software programs. That frustrates IBM's top executives. "Exchange is an inferior product," snaps Chief Financial Officer Douglas Maine.

As for the notion that corporations are not clamoring for collaboration features, Lotus executives say that's poppycock. They not only expect Release 5 to take back momentum from Microsoft, they're even upping the price by 56% on one key piece of the package--one of the Lotus Notes servers. And, with Big Blue's backing, Lotus thinks it can hang on to its lead in collaboration features, which it believes will become increasingly important in the Internet world. "E-mail will be viewed as yesterday's newspaper in two or three years," predicts Steve Sayre, Lotus' vice-president for marketing.

The new Notes does extend Lotus' collaboration lead--particularly a new add-on product that allows Notes users to hold online chat sessions. Still, most analysts don't expect Release 5 to give Lotus much of a bump in market share. Most of what's new is "enhancements" rather than breakthrough innovations, says IDC analyst Mark Levitt. "It's a fine product," he says. "But it's not compelling enough to persuade a Microsoft customer to move to Lotus, or to keep a Lotus user from moving to Microsoft."

Take a new software program called Sametime that Lotus developed for Release 5. The program allows Notes users to figure out when their colleagues are online and exchange messages in real time. It's a neat feature. But some customers are giving Sametime the cold shoulder--and not just because Lotus plans to charge $5,000 extra for it, plus $20 per user. Says Michael Mandelbaum, vice-president for information systems at Prudential Insurance Co. of America: "We don't see the business value yet of real-time online chat."

That could spell trouble for Lotus and IBM. Notes accounts for nearly 60% of Lotus' $1.1 billion in revenues last year, according to industry analysts--so where Notes goes, Lotus follows. Moreover, the groundbreaking groupware program was key to Big Blue's $3.5 billion acquisition of the company in 1995. IBM CEO Louis V. Gerstner calls Notes "the crown jewel" of IBM's software portfolio. Last year, though, price wars with Microsoft wiped out Lotus' profits and revenue growth, say analysts. Still, Notes remains a strategic business for IBM. That's because for each dollar customers spend on Notes, they spend an additional $6 on IBM computers, software, and services required to run Notes, according to IBM executives.

But that strategy is putting Lotus on a collision course with its own distribution partners. Several of them say they're fed up with IBM's practice of skimming off the most lucrative deals to service Notes. "Lotus goes in with them, not us," says John Finegan, a vice-president at Semcor Inc. in Warminster, Pa., a midsize reseller that now works more closely with Microsoft than Lotus.

Microsoft has been quick to exploit the friction. Sixteen months ago, it flew 67 top Lotus resellers to its Redmond (Wash.) headquarters to hear a three-day pitch for Exchange. While the resellers nervously cracked jokes about going over to the "dark side," Microsoft promised them first dibs on lucrative Exchange consulting services. The charm offensive worked. All of the resellers who made the trip are now working with Microsoft in addition to Lotus. More broadly, the number of resellers writing applications based on Exchange tripled last year to 1,000, vs. 3,000 for Notes.

While Microsoft gains ground with resellers, its focus on delivering basic E-mail features has taken a chunk from one of Lotus' key assets: the 14 million users of its older cc:Mail software. Lotus has tried to get those customers to swap their E-mail programs for Notes. But that's a complicated step, says Howard Jones, chief information officer at Snapper Inc., which makes mowers. "It was cheaper and quicker to deploy Exchange," he says.

It adds up to a lost opportunity for Lotus. Lotus had hoped to convert 80% of its cc:Mail users to Notes, but resellers say it's closer to 50%. Lotus appears to have slowed defections by cutting the price for an upgrade to $19 per user, from $45. That gave it some major victories to celebrate, including DaimlerChrysler, which opted last fall to upgrade 30,000 users from cc:Mail to Notes. Says Susan J. Unger, CIO at DaimlerChrysler: "I need the groupware capabilities they have in Notes today."

That deal offers a glimpse of the lengths IBM and Lotus will go to in order to win this battle. IBM Chairman Gerstner met twice last fall with his counterpart at DaimlerChrysler, Co-Chairman Jurgen E. Schrempp. Gerstner's pitch: Look at what Notes did for IBM, where the program streamlined business procedures, cutting $9 billion from IBM's costs.

FALL OFFENSIVE. And Lotus doesn't limit itself to globe-trotting. Last fall, Lotus pulled out all the stops to keep the account after Microsoft tried to win Gillette Co.'s E-mail business by rolling in Exchange for an extremely low price when the company's annual contract for its Office suite came up for renewal. Patrick J. Zilvitis, Gillette's CIO, stuck with Lotus after Papows made a personal appeal. "I went back to Pat and told him it was bad for the industry" for Microsoft to control too many markets, recalls Lotus' CEO. Zilvitis declined to comment.

Papows can't count on this tactic winning him much business, though. And, unless he can convince customers that his new product is truly compelling, Microsoft will catch up with Notes just like it did Lotus' 1-2-3.

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