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Will Lotus Ever Learn To Count Past 1-2-3?

Barbara Buell in Cambridge
With Anne R. Field in New York
Business Week

February 10, 1986

When Lotus Development Corp.'s revenues tripled to $157 million last year, most Wall Street analysts knew that the software industry's highflier couldn't maintain that pace. After all, the company is no longer an adolescent startup but a corporation with five divisions and 1,100 employees. But the slowdown turned out to be worse than anyone expected. When Lotus finally tallied the books for the year ended Dec. 31, it showed profits of $38.1 million, up barely 6% from a year earlier, on revenues of $225 million. The results largely reflected lackluster sales of Lotus' new Jazz software for Apple Computer Inc.'s Macintosh.

The challenge confronting the Cambridge (Mass.) company is clear: to expand beyond its hit spreadsheet program 1-2-3, which still accounts for more than 60% of revenues three years after its debut. Lotus is developing sophisticated products for advanced hardware. But they probably won't be ready until next year. While it waits, the company faces a dilemma. Should it introduce derivative products and services that capitalize on 1-2-3's popularity? Or should it use its $90 million in cash to buy other software makers and expand into different areas of the market?

Some analysts prescribe the latter. They contend that the spreadsheet segment of the market is saturated. And, they say, Lotus' plan to use 1-2-3 to crack open the market for information services is far from a sure bet. If Lotus doesn't snap up other software makers in the key areas of word processing and data-base management, they believe, it will pass up a chance to entrench itself as the No. 1 seller of personal computer programs. ''They're missing an opportunity to become the IBM of software,'' says Harvey H. Bundy III, a partner with William Blair & Co. in Chicago.

Mitchell D. Kapor, Lotus' ebullient 35-year-old chairman, and Jim Manzi, its no-nonsense president, have other plans: leveraging off a base of 1.4 million copies of 1-2-3 to sell new products that can work in conjunction with 1-2-3. Thanks to a planned software acquisition announced in December, they are expected to introduce versions of 1-2-3 that incorporate natural language, a form ofartificial intelligence that lets users manipulate programs in plain-English commands. They will also introduce new programs for scientists and engineers, who account for 17% of 1-2-3 users by Lotus' estimate. And Lotus will unveil a version of 1-2-3 for personal computers linked by a local-area network.

Lotus' biggest strategic push is to sell products that can be used to tap into information stored elsewhere. On Jan. 27, the company announced its intention to buy part of InfoCenter Software Inc., which owns a software link that lets users manipulate data stored in an in-house mainframe with a 1-2-3 program.

That announcement followed two earlier acquisition moves. Last summer, Lotus spent $6 million to acquire Dataspeed Inc., which sells an FM receiver that plugs into a personal computer and receives stock quotes transmitted electronically. Now called Signal, the $595 product can pull stock market data into a 1-2-3 spreadsheet for a monthly fee of $140. And in December, Lotus signed a letter of intent to buy ISYS Corp., which will give it the software to tie its spreadsheets to complex data bases. ME-TOO PROGRAMS. But the market for information services is risky. Analysts estimate that not more than 5,000 subscribers have signed up for Signal. Worse, the field is crowded with competitors. And the services are expensive. The ISYS Corp. software, for example, costs an average of $17,000 a year.

Kapor roundly defends his decision not to buy a data-base or word processing program and to wait perhaps a year before unveiling his most advanced products. ''We're not giving up any ground,'' says Kapor, who believes it would be useless for Lotus to market me-too programs, especially in the data-base area, where rival Ashton-Tate Inc. has a wide lead (page 89). He insists that this year's new crop of 1-2-3-related products will help drive 1986 revenues to analysts' projections of $248 million.

Many analysts agree that, for now, Lotus may grow by relying on 1-2-3 add-ons. The critical test will come next year, they say, when its most advanced products come out. But if the programs don't sell, Lotus may find that it has lost its status as software wunderkind.

Photograph: CHAIRMAN KAPOR: ROLLING OUT ADD-ONS FOR LOTUS' HIT SPREADSHEET PROGRAM

Copyright 1986 McGraw-Hill, Inc.