10/30/95 CAN IBM KEEP LOTUS BLOOMING?

CAN IBM KEEP LOTUS BLOOMING?

When IBM bought Lotus Development Corp., it placed a fat bet on networking. The computer maker spent $3.5 billion and is expected to pay hundreds of millions more for the cost of goodwill over the next three years. This big pile of chips is mainly riding on Notes, a $300 million-a-year business and the leader in ``groupware,'' because it's the future. It can become, says IBM Chief Executive Louis V. Gerstner Jr., the glue to link workers, partners, and customers in virtual corporations--perhaps making it more important than any underlying Microsoft Corp. operating system. Says Morgan Stanley & Co. analyst Steven M. Milunovich: ``Losing to Windows 95 isn't so important if Notes wins.''
Will IBM be able to fulfill the Notes promise? All eyes are on Gerstner. His first crisis came on Oct. 11, with the surprise resignation of Lotus CEO Jim P. Manzi, who had asked to be put in charge of big chunks of IBM's software empire. Gerstner let Manzi go but was quick to reassure Lotus employees that the subsidiary, based in Cambridge, Mass., would not be forced into an IBM mold. He named two respected Lotus execs to a new Office of the President and secured the services of Notes developer Raymond Ozzie. IBM will also send many of its software salespeople to work for Lotus.
Gerstner can't risk letting organizational or morale problems slow the momentum Notes has built up. Already, corporations are asking whether they might not get the same capabilities Notes gives them for a lot less by using the Internet's World Wide Web. ``It's probably the single largest issue looming over Notes' future,'' says Eric C. Dean, a partner at Arthur Andersen Worldwide Organization, which uses Notes to connect 50,000 consultants and auditors around the world. Netscape Communications Corp., the hot Web startup, took aim at Lotus with its Sept. 21 purchase of Collabra Software Inc., a low-end Notes competitor.
IBM recognizes that the Notes lead is perishable. ``Increasing the number of Notes seats is our No.1 priority,'' says John M. Thompson, IBM's software chief. He hopes to have Notes running on 20 million desktops by the end of 1997, from just 2 million today. That's ambitious, but in the latest quarter, Notes sales jumped 300%, to 1.1 million copies.
Another thrust is to make Notes available over public data networks, so corporations can use Notes without building and operating their own networks. Phone giant AT&T launched its Network Notes service in September. On Oct. 3, seven more companies--including Japan's Nippon Telegraph & Telephone Corp. and Deutsche Telekom--announced Notes networks. IBM figures such networks could make up 30% of Notes ``seats'' in two years.
WEB CONVERSIONS. The job of building an IBM software strategy around Notes is just beginning. IBM has started to adapt some of its workhorse programs, such as the DB2 mainframe database and MQ messaging software, to work smoothly with Notes. Notes 4.0, due around yearend, will expand the number of workers a Notes setup can accommodate, from around 50 to as many as 1,000.
There are efforts to reach Internet fans, too. A new package, InterNotes, lets companies convert Notes documents into the Web's HTML format. It also lets companies pull Web material into Notes. Version 4.0 will include ``agents'' for going out on the Net and automatically fetching information. Gerstner has given John Landry, Lotus's chief technologist, the job of forging a unified Internet strategy from the two companies' various efforts. That may be key to making the Lotus gamble pay off.
By Amy Cortese in New York