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The ‘Intranet’: Internet Software Poses Big Threat to Notes, IBM’s Stake in Lotus

November 7, 1995

What’s going on at Levi Strauss & Co. sounds just like what IBM has in mind for its Notes software program.

Using personal computers, employees of the jeans maker can join an electronic discussion group with colleagues around the world, watch the latest Levi’s commercials or comment on marketing pitches. This setup will be available to 10,000 Levi’s workers by the end of next year, revolutionizing communications at the San Francisco company.

But the Levi’s setup has nothing to do with Notes, the ``groupware″ program at the heart of International Business Machines Corp.’s pricey purchase of Lotus Development Corp. It is based on cheap, ubiquitous technology on the Internet. Instead of paying IBM to install Notes software on thousands of desktops at $150 a pop, it uses the Internet’s World Wide Web arena, a virtually free-of-charge communications system, and software that costs $20 per employee.

``We wanted virtually every employee to get this,″ says Steve Levandowski, a Levi’s computer specialist. And at that scale, he says, Notes costs too much and is too difficult to use.

IBM and other high-tech titans, including Microsoft Corp. and Novell Inc., are targeting groupware as the next big thing. Trouble is, hundreds of firms are achieving similar linkups with simpler, cheaper systems on the World Wide Web.

Dubbed ``Intranets,″ these private networks combine text, graphics and even video to distribute news, answer employee questions, update personnel records and connect far-flung workers.

While admittedly less secure, companies say these setups are easier to install and expand to serve thousands of users, and require far less training. Building a Notes database isn’t a job for amateurs, yet on the Web users can learn to create their own ``home pages″ to display information for others.

The unexpected blossoming of these Intranets, barely evident six months ago, poses a serious challenge, for IBM in particular. After floundering in personal-computer software for years and losing the war for a desktop operating system to Microsoft’s Windows, Big Blue hopes to win the next one, for groupware.

IBM acquired Lotus in July, betting that Notes can supersede Windows as the dashboard of the personal computer and expand sixfold to 20 million desktops in two years. IBM wants to make Notes the platform for corporate customers who want to tie together their hodgepodge of computer systems.

But while IBM pushes Notes, a proprietary technology created in the 1980s, a raft of new and much smaller rivals is plying the ``open″ technology of the 1990s: software on the World Wide Web, the fastest growing part of the Internet. They make up a cast of unknowns _ Wollongong Group Inc. of Palo Alto, Calif.; Hummingbird Communications Ltd. of Ontario; Edify Corp. of Santa Clara, Calif., and others.

IBM paid dearly to get Lotus: $3.52 billion in cash, a $1.84 billion charge just taken, plus earnings hits of $1.4 billion over the next five years. The upstarts’ thriving new market could undercut IBM’s lofty goals and make it tough to ever earn a profit on the Lotus deal.

IBM and Lotus executives admit the Internet threat looms, but they say the Lotus deal will pay off. IBM says Notes complements the Internet instead of competing with it. ``The acquisition of Notes made good business sense when we announced it last summer, and it makes even better business sense now as the Internet continues to grow in size and complexity,″ IBM spokesman Rob Wilson says.

Michael Zisman, Lotus’s newly named chief executive, says the Internet ``is the fundamental strategic question I’m dealing with right now. We don’t view (the Web) as a threat. We view it as an enormous opportunity.″ He adds that Lotus’s strategy is to integrate Internet capabilities into Notes.

Despite the Internet challenge, hundreds of companies, from General Motors Corp. to West Publishing Co., rely on Notes for strategic internal business systems and say they plan to augment their Notes setups. The White House and Central Intelligence Agency both are big Notes users, too.

But the market for Intranets is growing quickly. Sales of Intranet software will hit $142 million this year, $488 million next year and $1.2 billion in 1997, says forecaster Zona Research Inc. That could outstrip sales of Notes, which could grow from $330 million in sales this year to $800 million in sales in 1997, International Data Corp. predicts.

And while Notes has about three million users, the Intranets link a total of about 15 million workers, Zona estimates. Roughly half of the 250,000 ``server″ computers on the World Wide Web are devoted to Intranets, says Netscape Communications Corp., the Web software leader.

Their ranks are rapidly growing: A recent survey of 170 medium and large companies found that 23 percent are pursuing Web systems and another 20 percent are studying the idea, says Business Research Group of Newton, Mass.

These private networks are far different from what most Internet fans see _ the public ``home pages″ filled with turgid corporate profiles and chat boards about the TV series ``E.R.″ These setups reside on company-controlled servers shielded from the public Web by a security ``firewall.″

To be sure, Notes has a broader range of powerful features than the Web systems, and it offers far better security. But many customers need less and like a low-cost alternative. ``Notes is an all-or-nothing solution,″ says Matthew Cutler, co-founder of NetGenesis Corp., Cambridge, Mass., which makes discussion-group software for Intranets.

Lockheed Martin Corp., for one, didn’t even consider Notes to link its 170,000 employees. It created a network using Web-browser software from Netscape. Today more than 40,000 employees can read the latest company news and ask questions about corporate policies. Soon they will be able to update personnel records, sign up for training classes and check government procurement regulations.

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