How a Software Winner Went Sour

How a Software Winner Went Sour

By Andrew Pollack
The New York Times

February 26, 1984

Once upon a time, when the personal computer industry was new, two young men met in a Cambridge, Mass., greasy spoon restaurant at 3 or 4 A.M. to choose a name for a new computer program they were about to bring to market. Comparing the program with a visible calculator, one of the participants recalls writing a possible name on a napkin - Visicalc.

The name became one of the best known and the product one of the best selling in the industry. It is frequently credited as having done more than any other product to create the personal computer boom. Fame and fortune descended upon the young men and their companies - one company that developed the product and one that marketed it.

But they have not lived happily ever after. Instead, the two companies - Visicorp and Software Arts - are locked in the most bitter lawsuit the young personal computer software industry has ever seen. The fight is over which company should control the rights to the program and which is responsible for its steep slip in sales over the last year.

And as the companies fight, Visicalc sales continue to plummet. Fewer than 5,700 units were sold last December, down from a peak of more than 39,000 just 11 months before. With a software shakeout expected in the coming year, the two companies, once so dominant, are in danger of becoming also-rans in the fast-growing, innovative industry.

On the surface, their lawsuit is merely a contract dispute. But the rise and fall of Visicalc involves more than that. It is the story of how software has changed from a clubby, cottage industry to a high-stakes, combative business.

For the software industry, there is a practical lesson in the failure of the two companies to get along. It points to the dangers inherent in having one company create a program and the other ''publish'' it. Yet much of the software industry is still based upon this very model of publisher and author.

And, of course, it is also a personal story of how the rapid success of three young men carried the seeds of its own collapse. Personality conflicts and huge egos contributed to the inability of the two companies to do business in both their interests, according to associates.

''It's like Solomon in the Bible telling the two women to split the baby in half,'' said Richard Melmon, a marketing consultant who once served as product marketing director for Visicorp. ''Except in this case the two actually did it.''

''I think what happened is that success overcame them,'' said another software industry executive familiar with the case, who asked not to be identified. ''They got bogged down in who would take credit for it. What's kind of ironic is that by arguing over the golden goose, in essence it's gone away.''

The story of Visicalc, by now almost an industry legend, begins in 1978, with Daniel Bricklin sitting in classes at the Harvard Business School watching professors manipulate rows and columns of figures to do financial analyses and forecasts. Mr. Bricklin noticed that if one number was changed, many other numbers had to be recalculated, with much wasted effort.

''During a lot of daydreaming, I wished I had this electronic blackboard,'' Mr. Bricklin recalled. Such an electronic blackboard would do all the recalculations automatically when a number was changed. If one decided to assume an interest rate of 10 percent instead of 11 percent, the computer would recalculate all the values for expenses, revenues, profits and so on in the financial analysis.

That is the idea behind Visicalc, which became the first so-called spreadsheet program, a reference to the green ledger worksheets used by accountants. Mr. Bricklin was directed to a former Harvard Business School student, Daniel H. Fylstra, who was selling computer game programs out of his apartment in nearby Allston. Mr. Fylstra thought the program could be marketed.

Robert M. Frankston, a friend of Mr. Bricklin's, came in to help develop the program with Mr. Bricklin. It was Mr. Frankston and Mr. Fylstra who met in the restaurant that morning and came up with the name Visicalc.

In April 1979 the parties signed a contract. Mr. Bricklin and Mr. Frankston, incorporated as Software Arts, would develop the program and would be responsible for developing future enhancements. Mr. Fylstra's company, then known as Personal Software, would undertake its best efforts to market the program and would pay Software Arts a royalty on each copy sold. The royalty was 35.7 percent of Personal Software's Visicalc revenues in most cases and 50 percent on certain bulk contracts.

Visicalc, introduced later that year, became a quick hit and changed the nature of the personal computer industry. Businessmen for the first time could see what to do with the computers, and the machines moved out of hobbyists' workshops and into offices. A sub-industry grew up around Visicalc as smaller software companies and users of the product devised ways to make Visicalc easier to use and more useful. And since Visicalc initially ran only on the Apple II computer, Apple surged to the lead in the computer industry.

More than 700,000 copies of Visicalc have been sold, making it the most popular program in history with the possible exception of Micropro's Wordstar word-processing program. Software Arts, the developer, has received more than $22 million in royalty payments. Mr. Fylstra, the marketer, changed the name of his company to Visicorp and started marketing an entire family of Visi products. Even his Mazda RX-7 sportscar bears the license ''Visicar.''

Such success, of course, lured competition. More than 50 spreadsheet programs - dubbed Visiclones and Calcalikes - came to market, threatening Visicalc's position.

One person watching the changes was a Visicorp employee named Mitchell Kapor, who had written two programs for the company - Visiplot and Visitrend. In late 1981, Mr. Kapor recalled, he arranged to have Visicorp buy him out for $1.2 million. Part of the agreement was that he could not compete with Visicorp in the future, with one exception - a product he described in a one-page document attached to the buyout agreement.

It is not clear whether Visicorp paid much attention to that document, but perhaps it should have. Mr. Kapor used his $1.2 million to form the Lotus Development Corporation and develop the product - 1-2-3 - that has done more than any product to knock out Visicalc.

Looking back, it is clear that strains between Visicorp and Software Arts existed from the start.

Mr. Fylstra very quickly moved his company to California's Silicon Valley, which he considered the center of the personal computer industry. He removed himself from day-to-day operations, brought in more experienced managers, dressed in three- piece suits and sought venture capital investors to expand the company.

Mr. Bricklin and Mr. Frankston, by contrast, stayed in the Boston area, dressed in flannel shirts and kept their company closely held.

Bigger than the clash of cultures, however, was the clash of egos. Mr. Fylstra's company became closely associated in the public mind with Visicalc, especially after changing its name to Visicorp early in 1982. Software Arts complained that its name was not prominently displayed on the product. ''We wanted credit,'' Mr. Frankston said recently.

Visicorp, for its part, began complaining that Software Arts was not improving Visicalc to keep the product competitive. Software Arts complained that Visicorp was trying to reduce its royalties. Various solutions were suggested, including a merger. But nothing came to pass. Positions hardened and negotiations became more difficult. Edward Esber, a former Visicorp marketing vice president, recalled that in order to get anything accomplished, negotiators tried to keep both sets of founders from face-to-face confrontations.

Mr. Kapor's Lotus 1-2-3 was announced late in 1982. In addition to manipulating rows and columns of numbers, 1-2-3 could store data and draw graphs, things Visicalc could not do.

In September, Visicorp sued Software Arts for $60 million in damages, claiming that Software Arts was in some cases more than a year late in delivering advanced versions of Visicalc, particularly the version for the popular I.B.M. personal computer, the market in which 1-2-3 was strongest. The version for the Digital Equipment Corporation Professional 350 was so late that Digital canceled its agreement to market the product.

Visicorp said that instead of updating Visicalc, Software Arts had diverted its resources to developing a new product, TK!Solver, which Software Arts is marketing on its own.

Software Arts countersued, arguing that Visicorp had not marketed Visicalc using its best efforts and was instead putting its attention on Visi- on Calc, a new program that Visicorp developed itself. Software Arts claimed that Visi-on Calc was an extension of Visicalc and that it should receive royalties on its sale and on the sale of Visi-on, a related program.

Earlier this month, Software Arts got more aggressive. According to papers filed by Visicorp, Software Arts called the other company to a meeting in Chicago, ostensibly to discuss a settlement. Instead, Software Arts announced it was terminating the contract and would market Visicalc on its own.

Visicorp tried but failed to get a temporary restraining order, and last week, Software Arts announced that it would start selling an advanced version of Visicalc for the I.B.M. computer at $100, far below the existing Visicalc price of $250. Visicorp says it will continue selling Visicalc, so consumers may find very similar versions of the same program as they shop for software. The suit is still pending in United States District Court in Boston.

Both companies are respected as pioneers in the industry, and their competitors are reluctant to take sides publicly. Many say merely that the original contract was written when there were no signposts as to how the industry would develop and that it has since become obsolete.

For example, the high royalty that was to be paid to Software Arts crimped Visicorp's ability to bear the high marketing expenses, some say. Nowadays, software writers get royalties of only 5 to 20 percent, not 37.5 percent as Software Arts gets.

With Visicalc sales declining, both companies face serious challenges. Despite efforts to diversify, Visicorp, now based in San Jose, Calif., still depended on Visicalc for 58 percent of its revenues in 1983, according to court documents.

Pressure has mounted on the California company. One source said the privately held company lost $2 million to $3 million in 1983 on sales of $42 million to $43 million because of declining Visicalc sales and heavy expenses to develop Visi-on. That compares with a profit of $2.4 million on sales of $33.7 million in 1982.

Visicorp's future now rests mainly on its new Visi-on system, a program that breaks the computer screen into windows with a different task appearing in each window. Visicorp is also selling a set of programs to run in the windows, including Visi-oncalc, a spreadsheet program, as well as a graph-drawing program and a word- processing program.

So far, Visi-on is off to a slow start. After announcing it late in 1982, Visicorp was several months late in getting it to market. It recently cut the price of the Visi-on applications manager sharply to stimulate sales. Some 5,000 Visi-on Calc programs were shipped by the end of January, according to a Visicorp affidavit.

Software Arts faces equally great challenges. It has much less marketing experience than Visicorp. It is also far smaller, with only about $12 million in 1983 revenues.

Software Arts has moved to change what it concedes is its image as a bunch of ivory tower programmers. Mr. Bricklin and Mr. Frankston have removed themselves from many executive responsibilities. They have recruited Julian Lange, a former Harvard Business School assistant professor, as chief executive.

But industry analysts are skeptical, pointing to the fate of the first product the company marketed on its own. That was TK!Solver, a program that does for engineers what Visicalc does for financial analysts. TK!Solver was highly praised as a product that carved new ground. But it has done only moderately well.

Meanwhile, as the fighting goes on, Visicalc becomes less and less worth fighting over as it becomes less and less competitive. With an upgrade and powerful marketing, it could be salvaged, analysts say, but only if the fighting stops. But with both Visicorp and Software Arts trying to market Visicalc, dealers and distributors might shy away from the product, afraid to get involved in litigation.

Said John McMullen, a computer consultant: ''The worst thing that can happen to any of them is that distributors back off and Visicalc as a product dies.''

GRAPHIC: photo of Daniel Fyistra of Visicorp; photo of Daniel Bricklin and Robert Frankston of Software; graph of estimated sales of Visiac and Lotus programs