Microcomputer Software Field Is Narrowing to Three

Lotus, Microsoft, Ashton-Tate, Once Niche Players, Go Head to Head

By David Wessel, Staff Reporter
The Wall Street Journal

February 12, 1987

Sometime in the next few months, Microsoft Corp. will challenge rival Lotus Development Corp. on its home turf.

Lotus sells the biggest hit in the personal-computer software business, a spreadsheet, or number-crunching program, called 1-2-3. But Microsoft vows its new spreadsheet will dethrone 1-2-3 on new generations of personal computers. "We're going to be the dominant spreadsheet," promises Jeff Raikes, director of applications marketing.

Jim P. Manzi, chairman of Cambridge, Mass.-based Lotus, isn't lying awake nights worrying. "If there's a Rock of Gibraltar in this marketplace, it's 1-2-3," he replies.

This coming clash of the spreadsheets is just one battle in the approaching war among Microsoft, Lotus and Ashton-Tate for supremacy in the personal-computer software business.

It's too soon to tell which of the Big Three will win -- or even if a single winner will emerge. But the competition is certain to shake up an industry that Edward Esber, chairman and chief executive officer of Ashton-Tate, calls "an orderly oligopoly," with each player prospering in a separate market segment. "In the next few years," Mr. Esber predicts, "it probably will get less orderly."

To keep growing rapidly, these three companies must step on each others' toes. Already, Ashton-Tate and Microsoft are scrambling for a bigger share of the market for word-processing programs. Lotus and Ashton-Tate are going head-to-head with graphics software that draws charts, maps and diagrams. And Lotus and Microsoft are working on products to challenge Ashton-Tate's mainstay, dBase, a database manager, or electronic librarian that stores and organizes records.

The competition means higher marketing costs and possible price cutting, threatening the fat profit margins to which the Big Three have grown accustomed. For smaller companies, the extra competition will make it even harder for their products to get noticed. And for software buyers, the battles will ensure a steady flow of improved products from the Big Three -- along with a lot of confusing claims.

More than a contest of products, this is a struggle of contrasting corporate strategies. It's also a test of the three babyboomers who are at the very top of an industry that is changing the American office as much as the telephone did.

From Redmond, Wash., Microsoft is run by its boyish founder, William Gates, a 31-year-old computer nerd who is trying to bend the world to his vision of how technology ought to be used. Microsoft, and Mr. Gates, grew rich by selling a copy of its operating system software -- without which a personal computer is useless -- with almost every IBM PC, the dominant machine made by International Business Machines Corp., and the PC clones. Now it's using that annuity and its highly regarded programmers to push into applications software such as word processing and spreadsheets.

From Cambridge, Lotus is headed by Mr. Manzi, 35, a calculating ex-management consultant who inherited his current post last year when Lotus's founder, Mitchell Kapor, grew tired of management. Now that 1-2-3 is the spreadsheet standard, Lotus wants to widen its franchise to be the premier supplier of software to corporate America.

And from Torrance, Calif., Ashton-Tate has been propelled into the Big Three by plump, affable Edward Esber, 34, a veteran industry marketing manager who became chief executive after the company's founder died and his successor lasted one month. Ashton-Tate seeks to be the biggest supplier of all kinds of software and computer services through acquisitions. For example, in 1985 it acquired Multimate International Corp., whose word-processing program is near the top of the charts.

The Big Three have emerged as the preeminent players in an industry that's barely a decade old. Since 1980, according to Dataquest Inc., U.S. sales of personal-computer software (including sales by hardware makers such as IBM and Apple Computer Inc.) went from next to nothing to more than $6 billion. Growth has slowed recently, but sales still are rising at an 18% annual rate.

Although dozens of U.S. companies have revenues larger than this entire market, personal-computer software is where the action is: young celebrities, storybook successes and fast fortunes. Since New Year's Day, Mr. Gates's holdings have appreciated by $263 million to $799 million.

The gap between the Big Three and the rest of the personal-computer software industry is widening. Among retailers, who handle about 40% of sales, the three companies' products accounted for 41% of the volume last November, versus 22% in 1984, according to Infocorp, a market researcher.

To be sure, other companies may yet muscle into the top tier. "The barriers are up, but they're not so astronomically high as (to) make us comfortable," says James W. Harris, a Microsoft vice president. Although the rising cost of marketing makes success more elusive for small companies, this remains a business where a smash new product can be built by a couple of clever programmers.

The dozens of smaller software companies aren't about to concede to the Big Three and they may not have to. Last year, for instance, WordPerfect Corp., a little-noticed Orem, Utah-based company, surprised the industry by grabbing a sizable piece of the word-processing market.

What's more, the software business changes when the hardware changes -- and a new generation of computer chips is altering the guts of the machines on which the software runs. "I see a lot of changes (in technology) in the next 12 to 18 months. Whenever you have that shift, you have an opportunity to see a shift in the players," says Ronald Posner, president of Ansa Software, one of several small companies hoping to loosen Ashton-Tate's hold on the market for data-base managers.

But like incumbent politicians, the Big Three have great advantages: legions of contented users, growing sophistication in cultivating customer loyalty, research budgets bigger than many rival companies' revenues and the means to eliminate competitors early by acquiring them. At the same time, big corporate customers are limiting the variety of software packages they'll buy, reinforcing the position of established vendors.

So that leaves the Big Three to worry more about each other. Consider Lotus's current position: Spreadsheets from small software firms haven't touched Lotus's lead -- and the company's recent lawsuits against two of them for alleged infringement of Lotus's copyrights are likely to discourage some. But Microsoft remains one of the few companies with the programmers, cash and credibility to mount an assault on Lotus.

"What keeps Lotus innovating with 1-2-3? The fact that we might do something," says Microsoft's Mr. Gates.

Indeed, Lotus is methodically fortifying its 1-2-3 spreadsheet to discourage its customers from switching to Microsoft's new product, called Excel, when it hits the critical IBM PC market. A version of Excel already is sold for the Apple Macintosh personal computer. That version, for instance, has a feature that speeds recalculation of a spreadsheet when one or more of the scores of individual figures in it is changed. By the end of March, Lotus will bring that improvement to 1-2-3.

Back in 1985, Microsoft was the beneficiary of errors that Lotus made in designing a spreadsheet called Jazz for the Macintosh. Lotus hit the market five months earlier than Microsoft and spent about $7.5 million on advertising that played off the Jazz name. ("Those guys know how to spend money," says Mr. Gates, who spent only $1 million to advertise Excel.)

Yet today, Microsoft says, Excel outsells Jazz 10 to 1 and Lotus is walking away from the Macintosh market, which is entirely separate from the IBM PC compatible market because of differences in hardware. Excel simply was a better-conceived product.

"People wanted 1-2-3 for the Mac. That's not what we gave them," says Edward Belove, Lotus's vice president for research and development. Jazz didn't include some of the most popular features of 1-2-3, he concedes.

Microsoft's Mr. Raikes is still gloating. "They thought all Mac owners are yuppies who drive BMWs,"he says, "They said: 'Let's boogie with Jazz.' But we gave the market a product that proved you could do more with a Mac than with an IBM PC."

Rivalry among the companies is spirited. Mr. Kapor was furious when Time magazine put Mr. Gates on its cover for a 1984 story, even though Lotus was the bigger company.

Mr. Esber says Lotus has yet to prove that "it can be more than 1-2-3 company." Mr. Manzi of Lotus -- in a thinly veiled reference to Ashton-Tate -- said some competitors are stuck with "15-year-old technology."

But so far, the competition has been gentlemanly: no hiring of the other's employees, almost no price competition and lots of technical cooperation. At a Christmas party last year, some Microsoft people began calling 1987 the year the company goes to war with Lotus -- but Mr. Gates objected. "He didn't like the implication," says Vern Raburn, an ex-Microsoft employee who was there.

Already, the three companies' behavior suggests that their relationship may be changing. When Lotus and Ashton-Tate entered the business, Microsoft's systems software was the standard for the IBM PC. The two rivals never questioned supporting the product, called MS-DOS. Now, Microsoft is trying to win support for another standard, Windows, a software utility that makes it easy for personal-computer users to simultaneously use a variety of programs. Ashton-Tate and Lotus will embrace Windows if IBM does -- to do otherwise would be suicide -- but neither is helping Microsoft win industrywide support.

Competition, of course, raises anew the prospect of a price war, a tactic the Big Three have resisted despite plenty of room for cutting into their healthy margins. Microsoft would have the least to lose in such a fight because it makes most of its money from its operating system software. Applications software, such as word processing and spreadsheets, accounts for almost all of the revenue at Ashton-Tate and Lotus. Already, Microsoft prices a European version of one database product 20% below the U.S. price to grab market share from Ashton-Tate.

Although midlevel Microsoft executives play down the possibility of price cutting, Mr. Gates differs. "There will be some price competition," he says.

Narrower margins quickly could cool investor enthusiasm for the Big Three's stocks. "I just hope that these companies don't (squander) away a lot of money competing against each other," says William Shattuck, a software analyst at Montgomery Securities in San Francisco.

           The Big Three in Microcomputer Software
    Sales                                   $282.9 million
    Net income                               $43.3 million
    Profit margin                                      17%
    Market capitalization                    $1.02 billion
    Percent stock publicly held                        80%
    Major Products                         1-2-3, Symphony
    Sales                                   $260.2 million
    Net income                               $57.7 million
    Profit margin                                      22%
    Market capitalization                    $1.83 billion
    Percent stock publicly held                        13%
    Major Products                     MS-Dos, Excel, Word
    Sales                                 $210-215 million
    Net income                              $28-29 million
    Profit margin                                   13-14%
    Market capitalization                   $663.4 million
    Percent stock publicly held                        95%
    Major Products                        dBase, Multimate
   *Year ended Dec. 31, 1986

**12 months ended Dec. 31, 1986

#Analyst estimates for fiscal year ending Jan. 31, 1987

Sources: Lotus, Microsoft, Ashton-Tate

Copyright Dow Jones & Company Inc