LOTUS DEVELOPMENT CORP.

One of the world's largest software developers, Lotus Development Corp. operates as a subsidiary of computing giant IBM Corp. The firm is best known for its Lotus 1-2-3 spreadsheet program and its Lotus Notes messaging system, which holds a 51 percent share of the e-mail software market, compared to the 27.7 percent held by Microsoft Corp.'s Exchange program. In 2001, after Lotus cut 183 jobs, analysts began to speculate that IBM would take greater control of the Cambridge, Massachusetts-based company.

Mitchell D. Kapor created Lotus in 1982 to develop software applications for the fledgling personal computer (PC) industry. Operations launched with eight employees. Kapor took his firm public in 1983, raising roughly $41 million in fresh capital via the sale of more than 2 million shares at $18 apiece. That year, Jonathan Sachs worked with Kapor to create the first version of Lotus 1-2-3, a spreadsheet application for PCs that converted numerical data into graphs. Within a year of its launch, Lotus 1-2-3 boosted Lotus to the number two spot among software makers. Sales grew to $53 million, and employees totaled 300.

The firm's intense pace of growth prompted Kapor to bring in outside management; he hired James P. Manzi as president in 1984, taking on the role of chairman for himself. Wanting to reduce its reliance on 1-2-3, Lotus began to invest in software startups and new programs, such as Symphony, which added word processing and database management applications to 1-2-3. These integrated programs, which allowed for networking between computers, formed one of the first software application "suites." Because customers found Symphony difficult to use, sales of the suite fell short of management expectations. Total year revenues reached $157 million, and the firm's workforce more than doubled to 700.

Lotus continued its efforts to diversify via acquisition of firms and of software programs in 1985. For example, the company paid $800,000 for Software Arts. A strategic alliance with Apple Computer resulted in the creation of Jazz, a spreadsheet program targeting new computer users. The product was the first Macintosh-compatible application developed by Lotus programmers, who struggled with the new code. Although they eventually resolved several glitches, consumer response to Jazz remained cool. Kapor resigned from Lotus in 1986, leaving Manzi at the helm. That year, Lotus sold 750,000 copies of 1-2-3. To compete with Microsoft's Excel, a spreadsheet program created for the Macintosh market, Lotus began working on an upgraded version of 1-2-3. The firm also began marketing its products in Japan and agreed to develop a version of 1-2-3 for IBM Corp.'s mainframe computers.

Lotus's early move into Japan paid off as 1-2-3 outperformed competitors there by five-to-one in 1987. Although the newest version of 1-2-3 was delayed several times, Lotus maintained a 70 percent share of the spreadsheet market, which was valued at $500 million in 1988. However, the holdups eventually undermined the firm's public image. As a result, W. Frank King III, a former IBM executive, was hired to improve the software-development department's performance. The third version of 1-2-3 was finally shipped in 1989, as were 26 other applications, such as the long-awaited spreadsheet programs for mainframes, as well as those for minicomputers and workstations. Increasingly hostile relations with Microsoft prompted Lotus to decline invitations to develop products compatible with Microsoft's new Windows platform; this decision was later viewed as a poor one as the firm fell behind competitors in making its products compatible with what became the leading PC operating system. That year, Lotus also purchased a stake in database software maker Sybase Inc.

In 1990, a blockbuster merger agreement with Novell Inc., the leading U.S. computer networking firm, fell through when Lotus failed to ease Novell's fear that the deal was not a merger of equals. Lotus worked with Apple, Novell, Microsoft and other leading software makers to create an electronic message tampering encryption program that would allow messages transferred over PCs dependable enough to serve as legal contracts, records, etc. That year, finally acknowledging the success of Microsoft's Windows platform, Lotus began developing products for use with the graphical system. However, these efforts were delayed after Lotus invested in the new OS/2 operating system, which failed to emerge as a major contender to Windows. When Borland International launched its Quattro Pro spreadsheet, Lotus filed suit against Borland for copyright infringement of the 1-2-3 program. Lotus also paid $65 million for Samna Corp. Earnings grew to $23 million on revenues of $692 million.

Several small glitches with the first version of 1-2-3 for Windows forced Lotus to begin tweaking its new release in 1991. Less than 250,000 copies of the program sold that year. As a result, the firm cut its workforce by 10 percent, or roughly 400 employees. Lotus diversified into the e-mail market in 1991 with the release of a mail forwarding application known as Open Messaging Interface, which allowed users to send messages without exiting other programs first. Both IBM and Apple began using the program on their machines. Lotus then developed Notes, part of a new category of messaging software called Groupware, which enabled computer users to communicate from distant locations. Within several months of its release, more than 112,000 copies of notes were sold to General Motors Corp., Metropolitan Life Insurance, and other large firms. IBM began using another new Lotus program, cc:Mail, as part of the networking system it recommended to clients. Lotus also finally released a version of 1-2-3 for Macintosh machines. Other new products included Windows, OS/2, and DOS versions of Freelance Graphics, a new graphics program.

Sales reached $900 million in 1992. More than 1.5 million copies of cc:Mail were sold that year, and Lotus pulled ahead of its rivals in the networking industry. Lotus, Borland, Novell, and Apple began drafting a set of electronic messaging standards for both businesses and individuals. Despite the success of its networking software, the firm's inability to capture more than 30 percent of the Windows market for its other programs undercut earnings. In 1994, Lotus paid $84 million in stock for software maker Iris Associates. The firm decided to halt its Macintosh software development efforts. A major reorganization took place in 1995 as Lotus reduced expenses, eliminated employees, and reshuffled products. The firm's word processing program, which remained in third place behind Microsoft Word and WordPerfect, changed its name from Ami Pro to Word Pro. That year, Lotus agreed to be acquired by IBM for roughly $3.5 billion. According to the terms of the deal, IBM would allow Lotus to operate fairly autonomously. Manzi resigned, and Michael D. Zisman and Jeffrey Papows were named co-presidents. Papows eventually took over as CEO.

When the friendly takeover was completed, Lotus made its new focus the Internet, a key component of which was the Notes messaging system. The firm's SmartSuite program, which included Word Pro and 1-2-3, was adopted by IBM, replacing the computer-industry giant's own StarOffice suite. In 1996, Lotus unveiled the Component Starter Pack, a program that granted Notes users access to spreadsheet, client, data-query, drawing, and project-scheduling applications. The firm also started developing its Web Information Manager program and Domino, a Web page design program with the application development capabilities of Notes. Along with restructuring itself around Internet-based software, Lotus spent its first few years as an IBM subsidiary undergoing several reorganizations as IBM struggled with how to best manage its new unit from afar.

Late in 1997, Lotus released business application package eSuite, one of the first products on the market to offer Java-based applications, including email, word processing, presentations, and spreadsheets. Notes 5.0 and Domino 5.0, both released in 1998, were designed to allow for "easier access to information on the Internet," wrote PC Week . The new Notes application looked more like a World Wide Web browser, while the latest version of Domino departed from its traditional "database-centric model" to offer upgraded searching abilities that allowed users to comb through several databases, including the Web.

Papows was succeeded in 2000 by Al Zollar, a long-time executive at IBM. In 2001, Lotus announced its intent to include wireless access capabilities with its next release of the Domino software, dubbed Lotus Domino Everyplace. According to a June 2001 article in eWeek, Lotus was also working on transforming its software into Web-based services. "The Cambridge, Mass. IBM subsidiary is creating tools that will make it easier to extend its Domino-based messaging and collaboration applications to the Web, a move that follows Microsoft Corp.'s similar efforts around Exchange and.Net."