Lotus Deal Gives Ibm More Clout Big Blue Makes More Software Than Microsoft

Although people like to think of Microsoft Corp. as the world’s largest software maker, it’s not.

IBM is.

Big Blue sold $11 billion worth of software last year - almost double Microsoft’s sales.

While Microsoft’s sales target personal computers, IBM has been slower to penetrate that market with most of its sales coming from software programs running on mainframes and minicomputers.

But International Business Machines Corp.’s recent $3.5 billion buyout of Cambridge, Mass.-based Lotus Development Corp. has helped give the company the lead in the new era of network computing.

The merger gives IBM Lotus’ Notes software program, considered a major challenge to Microsoft. It allows groups of people to work together electronically and store their work in central computers where others can view and work on it within the organization. IBM also gets Lotus cc:Mail, the top-selling package for electronic mail, and Lotus 1-2-3 spreadsheet program.

Just what IBM’s merger with Lotus means to its software development labs in Boca Raton, Fla., and Austin, Texas, is unclear. Almost all of the site’s 2,700 employees develop software programs, including IBM’s PC DOS 7 and OS/2 Warp operating systems that run PCs and determine how other programs perform.

Some analysts say the merger will increase the clout of IBM’s software division and OS/2, which competes with Microsoft’s Windows. Others say IBM might cut back on its investment in OS/2 within a year and divert most of the money spent on OS/2 to Lotus’ programs.

The future of computing has been going the way of the PC for years and, historically, IBM has floundered when it comes to personal computer software, according to a report by Karl Wong, a computer industry analyst with Dataquest, a San Jose, Calif.-based market research firm.

Originally, OS/2 was a joint project with Bill Gates and Microsoft in the early 1980s, but the relationship soured in 1991 and Gates went on to develop Microsoft’s Windows, capturing about 90 percent of the market for operating systems with 70 million copies in use.

Since then, IBM has been trying to get back into the software operating systems game by spending millions to develop versions of OS/2. It has shipped about 9 million copies of OS/2, mostly marketed to its large corporate customers

It wasn’t until last October that most consumers started hearing of OS/2 when IBM rolled out its latest version called Warp, a Star Trek reference to its fast speed. Since then, OS/2 Warp has been IBM’s most successful version, shipping 2.5 million copies. A glitzy $50 million ad campaign featuring computer-savvy nuns and sheep herders portrays OS/2 as being popular worldwide.

Wong with Dataquest thinks IBM’s Personal Software Products group might disrupt Lotus with unnecessary requests to aid its struggling OS/2 operating system. To make the merger work, IBM should transfer all of its software marketing and product management to Lotus because Lotus has superior marketing skills in PC software, he said.

“With IBM’s track record in the software business, Lotus may be just another doomed company caught up in the bureaucracy of IBM,” Wong said.

John Schwarz, vice president and director of the IBM programming center in Boca Raton, said Lotus and IBM will continue to operate separately.

“I don’t expect the merger to have a material impact on our operations. We build operating systems and they build applications,” Schwarz said.

Jim Norman, an industry analyst in Alexandria, Va., said both companies should benefit from their recent marriage.

“IBM is not going to close the Boca site and shift workers around. It just doesn’t make sense,” Norman said. “There is tremendous value in having the Lotus skills in the IBM camp. The two companies complement each other very well.”

However, Tom Kucharvy, president of Summit Strategies, a market research firm, says he is skeptical whether Lotus and IBM can make the merger work and maintain their separate identities. But Kucharvy does see room for cooperation between the two companies working to create packages of business applications that will be built into OS/2. Lotus Development is one of the only large software companies that writes applications - spreadsheets, word-processing programs and the like - for OS/2.

Schwarz also downplays the effect that Microsoft’s latest Windows version - expected to be released to consumers on Aug. 24 - will have on OS/2 sales.

In fact, Schwarz expects Microsoft’s Windows 95 could strengthen OS/2 sales as more software developers make applications for 32-bit operating systems. OS/2 is a 32-bit operating system as is Microsoft’s latest version, which has been delayed in its release for about two years.