Office Wars 4 – Microsoft’s Assault on Lotus and IBM
September 19th, 2007
Daniel Eran Dilger
IBM’s announcement of the new Lotus Symphony suite is an interesting turn of events because it signals a revenge strike against Microsoft’s Office hegemony. It is particularly interesting that it is based on OpenOffice, allowing IBM to pair the support of the industry and community backing the open source suite with its own position in the Enterprise with Lotus Notes.
Previous articles in the Office Wars series looked at how Microsoft earns fantastical profits from its Office applications, and how Apple handed its early lead in graphical application software to Microsoft. How was it that Microsoft was then able to entrench Office as a monopoly on the PC? Here’s a look at the history of Office related to Lotus and IBM, and how an old war is dialing up into a new battle for the billions of dollars in desktop application revenues Microsoft sits upon.
Office Wars 1 – Claris and the Origins of Apple’s iWork
Office Wars 2 – Microsoft’s Outrageous Office Profits
Office Wars 3 – How Microsoft Got Its Office Monopoly
Office Wars 4 – Microsoft’s Assault on Lotus and IBM
In the Beginning, There Was VisiCalc.
The market for personal computers exploded in 1979 after the introduction of the VisiCalc spreadsheet for the Apple II; Apple’s hardware sales rose ten fold. After that success, both VisiCorp and Apple raced to develop even more sophisticated computing environments. They were joined in their efforts by IBM and Microsoft.
The entire industry was aware of the developments in graphical computing at Xerox PARC, although the resources required to deliver that level of technology remained prohibitively expensive. VisiCorp tried to develop a graphical system for desktop machines starting with the ill-fated Apple III in 1981.
After the success of its VisiCalc spreadsheet caught the attention of IBM, resulting in the launch of the IBM PC in 1981, VisiCorp targeted its graphical VisiOn system toward the new PC. The expense of developing the software combined with competitive pressure from new rivals helped to destroy VisiCorp before it could ever deliver a viable product. Shortly before it crashed, a star product manager named Mitch Kapor escaped to form Lotus Development.
Lotus Springs from VisiCalc.
Founded in 1982, Kapor’s Lotus began selling Lotus 1-2-3 as an integrated spreadsheet, database and graphics program for the PC. It quickly overtook sales of the simpler VisiCalc to become the top spreadsheet product for the PC. Microsoft had created its own clone of VisiCalc called Multiplan, but it could not compete with Lotus 1-2-3.
Microsoft’s frustrated efforts to make any headway in PC applications caught the attention of Steve Jobs, who was working to set up third party developers for the new Macintosh. Microsoft agreed to work on a graphical version of Multiplan later renamed Excel for the Mac as a way to enter the difficult applications business.
In 1985, Lotus also entered the Mac market with an integrated spreadsheet called Jazz. It flopped badly. Derided as buggy, un-Mac-like, incompatible with existing documents, and too expensive, the $595 program helped to entrench Microsoft’s Excel on the Mac.
Microsoft Gains Entry to the PC Applications Market Via the Macintosh.
Simply porting 1-2-3 to the Mac would have expanded Lotus’ brand and reputation. Instead, the weak introduction of Lotus Jazz as a unique but unfamiliar product allowed Microsoft to develop strong sales of Excel on the Mac without any real competition.
Lotus eventually delivered 1-2-3 for the Mac in 1991, but by then Microsoft had already moved its Mac apps to the PC. In 1988, Microsoft ported Excel to the PC, where it would rival Lotus’ sales of 1-2-3 in spreadsheets as a graphical application.
This was a major threat to Lotus, because Microsoft had developed a reputation for using its control of MS-DOS to push users toward its own applications. With Microsoft in control of the DOS PC platform and desiring to expand its application business, Lotus found itself in the position of a hapless tenant facing eviction at the whim of its landlord.
A common phrase at the time was “DOS ain’t done till Lotus won’t run,” suggesting that Microsoft had the power to pull the plug on its DOS application partners at any time. Even worse, Microsoft had an intimate position with IBM in developing a future, more sophisticated replacement for DOS called OS/2, which planned to supply a graphical environment for the PC much like Apple’s Macintosh.
Microsoft was developing the basis of the desktop environment for OS/2, and was already selling a DOS program called Windows that demonstrated the potential for porting its popular Mac applications to the PC. By expanding its control over the PC environment, Microsoft’s position as a platform landlord to DOS application vendors would only get stronger.
Lotus Sprouts Improv: 1988 – 1991.
Inspired by an innovative new concept in spreadsheet design released under the name Javelin by a small DOS developer, Lotus began work on a new kind of number crunching apps called Improv. It used variables and smart data modeling rather than just presenting a simple matrix of spreadsheet cells like VisiCalc, 1-2-3, or Excel.
After being unable to deliver Improv as planned for IBM’s OS/2, Lotus was approached by Jobs at NeXT to develop Improv for NeXTSTEP. It turned out the innovative Improv did for NeXT what VisiCalc had done for the Apple II; it delivered a unique new way to model data that was obvious and practical, and introduced NeXT into financial markets that could immediately see the value of NeXT over DOS PCs, the slow progress of IBM’s OS/2, and the struggling mess of Microsoft’s Windows.
Lotus had trouble transitioning Improv to OS/2, Windows, or the Mac because other platforms lacked the development sophistication of NeXTSTEP. On Windows, Improv competed against Lotus’ more conventional 1-2-3 spreadsheet, which acted as a barrier to innovation because many users didn’t want to have to learn how to use something new and different.
While Lotus was struggling to deliver Improv as an improvement over 1-2-3, it was also fighting off rival Borland, which had introduced a 1-2-3 spreadsheet clone cleverly called Quattro Pro.
Lotus sued Borland over copying 1-2-3’s menus and commands in a 1990 lawsuit that went all the way to the US Supreme Court. The courts determined that the arrangement of menus in software was not protected by copyright, but again took half a decade to determine that.
Microsoft’s Unlikely Windows: 1990.
By 1990, Microsoft had released Excel 3.0, Windows 3.0, and the first version of Word for Windows. The vendors of popular DOS software applications–including WordPerfect, Borland, and Lotus–failed to anticipate how rapidly Windows would catch on, giving Microsoft a home field advantage to replace their apps with its own. There were two main reasons why the industry as a whole failed to anticipate the rise of Windows.
First, Windows was a laughable product. This factor was the main reason why Apple failed to take it seriously as a competitive threat. It was clumsy and ugly compared to the Macintosh, and technically inferior to both OS/2 and NeXTSTEP.
However, everyone missed the important detail that while Windows couldn’t compare to other real products, it was a marginal improvement over DOS. Microsoft’s stranglehold over the DOS PC market allowed it to sell Windows despite its flaws, particularly since Microsoft gave it away for free with copies of the Excel software it ported from the Mac, and distributed it at low cost to PC OEM manufacturers. Microsoft’s contracts prevented other OS vendors from doing the same.
Second, Microsoft lied to its DOS application partners about the future of OS/2. While Windows Enthusiasts like to say that all of the DOS developers missed out because they simply didn’t get on the Windows bus, the reality was that Microsoft pointed its own DOS developers to OS/2 long after the company had plotted out plans to abandon them along with IBM.
This is similar to the strategy Microsoft more recently used to jettison its PlaysForSure parters when it introduced the Zune. While it continued to insist that PlaysForSure was fully supported and that the Zune–and its slightly tweaked, incompatible version of Windows Media content–would somehow only compete against Apple’s iPod, Microsoft really planned to steal away the entire WMA market for its own. In the case of the Zune however, there was really nothing to steal.
Hijacking the Applications Market for Windows: 1990.
Back in the late 80s, there was a lot to steal. Lotus, Borland, WordPerfect, and other DOS vendors were making sustainable profits selling DOS application software. They all trusted IBM and Microsoft to deliver ongoing development in PC operating systems. In 1988, the pair introduced OS/2 2.1, which introduced a graphical environment called the Presentation Manager.
In the forward of the OS/2 Programers Guide Bill Gates wrote, “I believe OS/2 is destined to be the most important operating system, and possibly program, of all time. As the successor to DOS, which has over 10,000,000 systems in use, it creates incredible opportunities for everyone involved with PCs.”
Even in 1990, Steve Ballmer was describing OS/2 as “Windows Plus,” suggesting that Windows was simply a way for it to deliver its Mac applications to PC users, and downplaying it as a temporary product that ostensibly only existed to compete with the Macintosh until the arrival of OS/2 3.0, which Microsoft billed as “OS/2 NT” for New Technology.
However, the reality was that Microsoft had brought in a development team from Digital to start its own operating system back in 1988, and had worked for years on a strategy to dump its partnership with IBM and migrate DOS PC users to a Windows machine running Microsoft’s own Windows applications.
The release of Windows 3.0 made it clear that Microsoft was not going to deliver its end of OS/2 3.0. It left its own developers stranded in a dead-end alley for supporting OS/2 as Microsoft had encouraged them for years to do. Microsoft had no problem delivering a version of Word and Excel for both OS/2 and Windows, built using internal development tools. It didn’t share those tools with its partners because it wasn’t worried about getting 1-2-3 and WordPerfect running on Windows.
After leaving its own software application partners high centered atop the a strangled corpse of OS/2, Microsoft then dropped its own OS/2 applications, leaving Word and Excel for Windows as the default applications for PC users.
Lotus Assembles an Office Suite and Notes: 1994.
As Microsoft’s power increased, Lotus worked to assemble a suite of applications to sell against Office, just as Ray Noorda had worked to do at Novell by combining WordPerfect with Borland’s Quattro Pro spreadsheet.
Lotus paired 1-2-3 with its Approach database and the acquired Freelance Graphics, Ami Pro word processor, and Organizer calendar to form Lotus SmartSuite, which became popular on the PC because of its low cost of $130 and its interoperability with Office. Lotus sold its SmartSuite application suite for both Microsoft Windows and IBM’s OS/2.
In 1994, Lotus also acquired the Notes groupware developed by Ray Ozzie–who had left Lotus ten years earlier to develop the system with investment from Lotus; ten years later in 2005, Ozzie would end up at Microsoft, where he now leads software development.
In 1995, IBM bought Lotus to acquire Notes as messaging product. That move gave Microsoft a new reason to attack IBM; not only was it was still trying to sell OS/2, but it was now an application suite vendor, selling a low cost product that prevented Microsoft from being able to raise the price of Office dramatically and monetize its monopoly.
Hijacking the Applications Market for Windows Again: 1994 – 1995.
By 1994, Microsoft had established a large enough base of Office and Windows users on the PC that it decided it could suspend development for the Mac to focus all attention on its promised new Windows 95 and Office 95. It hoped to syphon users away from the Mac while also taking a second opportunity to shipwreck its own PC developers such as Lotus, which had struggled to catch up after being delayed for years by Microsoft’s fake play with OS/2.
In the end of 1995, Microsoft finally released its new versions of Windows and Office, increasing integration and erecting new barriers for third party application developers. Microsoft made major changes to the Windows user interface guidelines that relegated earlier Windows 3.x apps to an inferior position as oddball software that didn’t look correct on the new system.
Microsoft–admitting that it was much better at copying than in delivering original ideas–based the new Windows 95 user interface almost entirely upon the Mac OS and NeXTSTEP. It had proven there was little chance of it being stopped by the courts; it could simply drag a lawsuit on for a half decade and delay any resolution until it had pushed its rivals out of business. It would similarly operate above the law in shutting out markets for PC operating systems and applications.
Unsurprisingly, the only applications available and optimized for the new Windows 95 were Microsoft’s own Office 95 apps: Word, Excel, and a port of the Powerpoint application it had acquired from a Mac developer. Microsoft also used its OEM licensing agreements to dump Office 95 on the market at a bundled price designed to starve out competitors. Once they were gone, Microsoft would be free to charge whatever it wanted for Office and Windows.
Microsoft’s use of its market power to stop IBM’s OS/2 and its Lotus SmartSuite applications was documented in the DoJ monopoly case against Microsoft, where the findings of fact noted that Microsoft “punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support.”
The court also noted that Microsoft demanded IBM make no mention of other operating systems in its PC advertising and that it move all its employees to Windows 95–or face paying tens of millions of dollars in extra licensing fees to obtain Windows.
Microsoft Betrays Partnerships for Profit.
Microsoft’s systematic betrayal of its partners, including Apple, IBM, its MS-DOS developers, and then its Windows developers, resulted in monopoly ownership of the PC desktop market and the market for office productivity applications.
It now makes fantastical profits automatically selling copies of software with every PC sold. It also licenses its applications in bulk to companies, but makes much of its money selling “client access licenses,” which charge fees per user to allow a connection with a server.
The lack of competition in both the PC operating system and desktop productivity software markets have stifled any hope for the lower prices and fresh innovation. Microsoft has been found guilty of overcharging customers in states across the US and in other countries. It pays out regular settlements in the hundreds of millions, but its billions in profits from its monopoly position makes those huge payouts a minor business expense.
Will there ever be any competition to Office? Office Wars 5, the next installment, will look at the attempts to deliver application suites on other platforms and recent developments to challenge Microsoft’s position on the PC using free and open software, including IBM’s recent move to leverage its Notes business using a version of OpenOffice rebranded under the Lotus name.
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