IBM Lotus Software - Of seats, spin and solutions, by Mike Zisman, Nov 9 1998

By Mike Zisman
Lotus Executive Vice President of Strategy

The Electronic Mail & Messaging Systems (EMMS) newsletter has just published its third-quarter statistics on mail shipments. According to this data, Lotus added 3.4 million new Notes users in the quarter ended September 30, compared to Microsoft's 3.2 million new Exchange users. Given the way that the quarter-to-quarter seat race has been discussed throughout this year, you might have expected us to put a glowing spin on this new information. Actually, I'd like to take this opportunity to call into question the over-interpretation of the kinds of seat differentials that we've seen each quarter this year, including Q3 in which we "outshipped" Microsoft. Rather than gloating and telling you that this information means something it doesn't, I'd like to ask you to read on and consider the facts.

Fact #1: Reports of Exchange gaining momentum at the expense of Lotus Domino and Notes are unfounded. Microsoft has reported sequential shipments of 3.1, 3.6, and now 3.2 million seats for the first three calendar quarters of this year. From Q1 to Q3 their shipments increased by 0.1 million, or 3%. Microsoft would have you believe that this level of growth represents the ascendancy of Exchange in the marketplace. Fact is, 3% might be great growth in the steel industry, but not in the software business. Why the big up-tick in Q2 and fall-off in Q3? Because the second calendar quarter is the last quarter of Microsoft's fiscal year, traditionally a company's strongest quarter in our industry.

Fact #2: Lotus set aggressive growth targets for 1998 and is achieving them. At Lotusphere in January of this year, I publicly stated that our 1998 goal was 12 million new Notes users, which would bring the worldwide Notes user population to 32 million. Throughout 1998, we have been on track to achieve that goal. Here we are, three-quarters of the way through the year, with 9.2 million new users -- three-quarters of this annual goal. At Lotus, we have a simple definition of success: doing what we said we were going to do. We set a goal, we made it public, and we're on our way to achieving it. How is Microsoft doing against its publicly stated goal? I don't know and you don't know, because Microsoft never revealed its goal.

Fact #3: Seat counts aren't hard science. Both Microsoft's numbers and our own require estimates in addition to simple license-counting. In Microsoft's case, they must estimate the number of people who licensed BackOffice, for example, and are actually using Exchange. Of the 3.6 million licenses that Microsoft reported in Q2, fully 1.5 million came from this estimation. Is that a good estimate? Who knows?

So what's the point? The point is that a competitive "momentum" story built on the back of these seat counts is pretty lame. Likewise, Lotus also needs to estimate the number of OEM licenses shipped that are being used. The point, and it's a pretty obvious point, is that the inherent error in these estimates is likely to be greater than the differences in our reported license shipments. All this makes Microsoft's pronouncements of comparative momentum ridiculous. Call it spin, or even aggressive marketing, but obfuscating the facts is ultimately a disservice to the customer.

Fact #4: Credible research organizations have questioned Microsoft's representations of its seat growth. IDC (International Data Corp.) does independent market research on the deployment rate for mail clients. According to IDC's recent report (Network/Web Integrated Collaborative Environments Software Market Midyear Update, 1998), Microsoft added 5.67 million new users in the first half of 1998 -- 15% less than Microsoft's own estimate of 6.7 million users -- while Lotus added 5.31 million new users, just 9% less than our own estimate of 5.8 million new users. The difference between the two IDC estimates is minuscule. When you factor in the new Q3 data, the only rational conclusion is that Lotus is shipping at approximately the same rate. A group product manager for Microsoft Exchange stated last week that "customers are overwhelmingly choosing Exchange Server over Lotus Notes." This is only overwhelming if you live in Redmond and have had Notes envy for a very long time.

I guess I can accept the "momentum" hype from product managers -- it's part of the job. But what has really gotten my attention is that this fast-and-loose hyperbole flows directly from the executive offices of Microsoft. Consider the following quote from an article in the October 21 issue of The Wall Street Journal regarding Microsoft's third-quarter results: "In the competition with Lotus, Mr. Maffei said Microsoft's Exchange product, for e-mail and messaging, continued to outsell Notes, gaining more than three million new users for the third consecutive quarter." Hmmm.... Mr. Maffei is the Chief Financial Officer of Microsoft. Let's take a closer look at what is troubling about his statement. First, it's not true, as we now all know. Second, and far more troubling, Mr. Maffei could not possibly have known whether his assertion was true because we had not yet released our results.
And yes, I must admit my disappointment that such "Redmondisms" go unchallenged far too often.

Fact #5: Much of the Exchange growth has resulted from migration from Microsoft Mail. Microsoft would have the market forget that much of the growth of Exchange has come as a result of forced migration from the Microsoft Mail platform. Meanwhile, the growth of Lotus Notes has almost entirely been organic, with little effect on a generally stable installed base of Lotus cc:Mail customers. In recent years, the Microsoft Mail installed base has fallen more than 40% from its high of 10 million users, while cc:Mail has increased 40% to 14 million before we finally saw some net migration earlier this year. Today, according to EMMS, there are 13.5 million cc:Mail users and only 5.7 million Microsoft Mail users.

This translates altogether into about 42 million mail users for Lotus and 25.2 million mail users for Microsoft. We have 65% more mail users than Microsoft after almost a decade of intense competition. That's a fact. Here is my opinion as to why that's the case:

1. Notes is truly the best platform available for messaging and collaboration.
2. That's because it's our core business.
3. We've done a far better job supporting our customers than Microsoft has done for their customers.

We led in the earlier generation of mail systems; we led the evolution to client/server messaging systems; we're leading in the deployment of current generation messaging systems; we're defining the way and leading in the deployment of collaborative systems; and now we're leading in the definition and deployment of knowledge management solutions.

The good news here is that customers really do have a choice, which is not the case in other software categories. It's not just a choice of our messaging vs. their messaging. It's a choice about visions of how messaging fits into the larger fabric. To Microsoft, mail is the top layer of the operating system stack. To us, mail is the bottom layer of a collaborative applications stack. Microsoft knows that we have the right vision; they're just not there yet. Part of Microsoft's "momentum story" is telling press and analysts that "customers really only want mail and that's why they're choosing Exchange." I hear this every day when I speak to analysts. My response is always the same: "www.microsoft.com/exchange." Exchange is described in their own 48-point red letters as "the fastest growing messaging and collaboration server in the industry today." It doesn't say "messaging;" it says "messaging and collaboration." So which is it? Do customers want "just messaging" or do they want "messaging and collaboration"?

And by the way, according to EMMS, Exchange is not the fastest growing messaging and collaboration server in the industry today. But I won't hold my breath waiting for Microsoft to update their Web site. And I won't engage in silly hyperbole about this quarter or that quarter's numbers. I trust you agree that it's time to end the focus on which of us reported 300,000 or 400,000 more or fewer seats. The differences are just not significant, and I mean that from both a statistical standpoint and a customer standpoint. Microsoft has tried to assign significance to these differentials, as if they will determine which of Exchange or Notes will disappear under the blazing market success of the other product.

Indeed, much of the future has already been determined. Two years ago Novell and Netscape were viewed as formidable players in this market along with Lotus and Microsoft. Today, Lotus and Microsoft, with 28.5 million and 19.8 million users respectively, have achieved the critical mass that puts each in the position of long-term player. The facts are clear: Lotus Notes is the market leader, and hence the one to beat.

Further, "momentum" isn't just an installed base numbers game. It covers a range of areas, including growth in numbers and quality of developers, applications, business partners and strategic alliances. It has to do with innovation and understanding customer problems. It has to do, most of all, with solutions. The strategic, high-return solutions that customers are deploying and benefiting from once they implement our products. On all those fronts, the market imprint of Lotus Notes and Domino continues to expand.

We believe that Lotus Notes and Domino provide superior value. Now, that's a delta worth contemplating.

More on these topics in my next column.

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