Lotus Development's `1-2-3' software proves hard act to follow

The problem with success is that everyone starts asking, ``What will you do for an encore?'' And if you don't have an answer, things can get very hot very fast. That's what has happened to Lotus Development Corporation, known as the IBM of software because its key product, the accounting spreadsheet ``1-2-3,'' dominates the industry. After revenues tripled in 1984 to $157 million from $53 million the year before, and earnings more than doubled, Lotus's breathless pace screeched to a halt. Last week it announced that profits last quarter were 30 percent below the same quarter last year.

Lotus's problems come back to the old encore question. ``They're working hard to find new ways to grow, and have had some disappointments,'' says William Zachmann, vice-president of research at International Data Corporation. ``They don't have a really killer second product.''

After 1-2-3 topped the best-seller charts 21/2 years ago, (a position it still holds), everyone began asking what Lotus would come up with next. It soon introduced Symphony, a variation on the 1-2-3 theme with word processing and communications thrown in. That met with fair success, but investors and customers were looking for something radically different, something revolutionary.

So it released Jazz last spring, the equivalent of Symphony, to run on Apple's Macintosh personal computer. When the Mac didn't ``boogie,'' neither did Jazz. The discontent from Wall Street grew louder.

Lotus's newest offering, first shipped earlier this month, is something different. ``Signal'' allows a personal computer user to get stock market information via FM radio signals. But some analysts are concerned that Signal is aimed at too narrow a market (mainly small brokerage firms and financial advisers). It certainly does not have the breadth of a 1-2-3.

On top of these rather tepidly received products, Lotus stumbled into a glitch for the first time. The company, known for its care in getting out ``bugs'' in programs before releasing them, had to recall its new version of Symphony last month because it wipes out data. Lotus was counting on the sales of Symphony 1.1 to prop up earnings. The only other major offering this year is a new version of 1-2-3.

By now, stockholders and Wall Street have grown impatient. Lotus's stock has plunged to $17, down from $30 in July. Many stockbrokers caution against investing in the company, and even the company's top brass, including chairman Mitchell Kapor, has sold stock. (This has gotten Mr. Kapor into some hot water. On Oct. 2, a suit was filed against several top executives in behalf of all people who bought stock between July 29 and Sept. 16. The suit charges that Lotus issued exaggerated statements about the c ompany's finances and financial future. The company says the stock sale was not based on insider information; rather, that the executives' personal wealth was tied up in Lotus stock, and they have been advised to diversify.)

Competitors are asking aloud whether the company is just too big to be supported by essentially one product (1-2-3) which is already old by software standards, and whether it can react quickly to the fast-changing market.

And when one sees all the employees hurrying around the new, nine-story building overlooking the Charles River, one does wonder how Lotus's limited array of offerings can keep all these people busy.

Not all of Lotus's problems are its own fault. Wall Street has come to expect Lotus to have steady, stellar performance. After all, this is the company that went in 31/2 years from from eight people with $1 million in venture capital to nearly 1,000 people with an expected $220 million in sales. It's unrealistic to expect that kind of growth to continue in such a volatile industry, but Wall Street does anyway, says Mr. Zachmann at IDC. ``The investment community is like a novice sailor with his hand

on the tiller,'' he says. ``It's naive, it zigzags, and right now it's overreacting on the downside.''

Some outside events, however, may soon be working in Lotus's favor. The slowdown in the microcomputer industry, along with the consequent softening of software sales, is expected to reverse itself in early 1986.

Even the problems with the Macintosh (therefore with Jazz) may not be permanent, says a spokewoman at First Software, one of Lotus's main distributors. She and others say the Mac may be the only machine than can move into the next tier of buyers -- those who haven't bought personal computers because they think they are too hard to use. If so, Jazz is well positioned for growth.

But even if that happens, Lotus has some serious questions and competitors to face. It is doing that, company officials say, but the fruits of its new strategy won't be seen right away.

``Major developments like 1-2-3 and Jazz take about two years to produce,'' says Mead Wyman, Lotus's vice-president for financial operations. ``A number of major products will be launched next year.''

Some of the seeds of those new products were planted this year, when Lotus joined forces with two spinoff companies, bought two software firms, recruited a top expert in ``artificial intelligence,'' and reorganized the company to manage its growth.

All this takes money. But Lotus has plenty of cash, even after buying Dataspeed, which pioneered the technology for Signal, for $6 million earlier this year, and Software Arts, which made the spreadsheet VisiCalc, for $2.5 million. Lotus has not ruled out future acquisitions.

Dataspeed has already propelled Lotus toward one goal: ``vertical specialization,'' that is, making software for a specific industry (in this case, small brokerage firms). Zachmann at IDC thinks that may be a good direction: Although Mr. Kapor, Lotus's chairman, ``shouldn't put all his marbles on vertical markets,'' Zachmann says, he should pay attention to them, since there will probably never be another product that cuts across the business world like 1-2-3.

Next year, says Mr. Wyman, Lotus will bring out another product that uses the same FM distribution network as Signal. One possibility, an analyst speculates, is to transmit information other than stock quotations.

Lotus's joint-marketing agreements with three companies that make accounting software are also specializing: aiming at smaller businesses that need better accounting, as well as accounting firms themselves. Finally, a big deal on next year's agenda will be a new program for engineers and scientists.

One step away from buying companies outright is sponsoring spinoffs, and Lotus is doing that, too. One of these, Arity, is one of Lotus's many forays into artificial intelligence (AI). While such technology is still a decade away, Lotus wants to use AI-related research now to make its current products easier to handle and to develop new products.

``Lotus sees [AI] as strategic to keeping its edge and market share,'' says Jerry Kaplan, a top artificial-intelligence expert whom Lotus hired as a consultant last spring. ``Mitch [Kapor] has more commitment to AI than his competitors. He's making a strategic move, not looking for short-term results.''

Lotus's marketing strategy involves diversifying not only its products, but its customers. Growth overseas is faster than in the US, says Jack Plimpton, assistant manager of the international division, and Lotus is expanding its operations abroad.

The next main push is in Japan, says Mr. Plimpton, who expects the first shipment of 1-2-3 in Japanese translation to land in the second quarter of 1986. Lotus expects sales to Japan to grow by 40 to 50 percent a year.

If funkiness were the key criterion for success in this business, Lotus would have no problem. Its annual report, complete with Matisse-looking pastel watercolors and a somewhat off-the-wall essay called ``Who's on First, or, if software drives hardware, who drives software?,'' has won two awards. Its leaping Jazz ads were the ultimate in soft sell.

But when you enter the big league, it takes more than creativity. As Lotus grows up, and the software business with it, it is finding that Wall Street demands stability as well as new ideas and risk.