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INSIGHT
The Domino Effect: Lotus Drives IBM's Strong Software
Performance in 2Q05
Robert P. Mahowald
Evan Quinn
Mark Levitt
Brian McDonough
IN THIS INSIGHT
IBM's second-quarter earnings announcement on July 18, 2005, underscored
renewed strength in its software business, particularly from products in its Lotus
division. This IDC Insight examines the earnings announcement and analyzes the
likely impact on various Lotus software products and the markets they serve.
SITUATION OVERVIEW
IBM's news that it earned $22.3 billion in 2Q05, an improvement of 6% (without the
impact of its PC business divestiture) over the same quarter in 2004, is a strong
signal from a vendor as large and diverse as IBM. But the real news is buried in the
details about which of its core businesses led the growth versus those that held it
back. While zSeries mainframe revenue declined 24% as part of an overall hardware
decline of 25%, IBM's software products — and software license maintenance earned
from IBM Global Services (IBM GS) and the Business Process Transformation
Services (BPTS) unit — drove quarterly revenue to increase by 10% to $3.8 billion.
Within software, IBM's "middleware" brands (WebSphere, DB2, Tivoli, Lotus, and
Rational) were up 11% to $3.0 billion. The shining star was Lotus software, whose
revenue jumped 17% as part of the overall IBM software mix.
Lotus, whose products IBM describes as "allowing collaboration and messaging by
customers in real-time communication and knowledge management," is itself a
roughly $1 billion business unit, and its crown jewel is Notes/Domino, the integrated
collaborative environment (ICE) suite of email, calendaring, and directory software.
But while the ICE (sometimes known as "groupware") market neared $2 billion in
2004, it is mature, and the trajectory of mature markets is that they come to depend
on a lifeline of maintenance, incremental upgrades, and cherry-picking among the
market leaders (Microsoft, IBM, and Novell).
IDC predicted in 2001 that the ICE market would experience a gradual decline
because most firms that want and can afford ICE products have them, and the cost to
switch products and suppliers increases in direct proportion to the number of users,
custom applications, developers, and related products (e.g., security, management)
involved.
But there's been a reversal of fortune in the ICE market, and both Microsoft and IBM
have found creative ways to prolong their customers' paying life cycles. This is partly
due to aggressive targeting of both existing and new customers looking to stay
current with new releases, plus added functionality and lower costs per user to
Filing Information: July 2005, IDC #33813, Volume: 1, Tab: Vendors
Collaborative Computing: Insight
generate demand for new server and client access licenses (CALs) to support users
in smaller organizations and remote offices. After initially confusing customers about
the relationship between Domino/Notes and IBM Workplace, during the past year IBM
has succeeded at clarifying the relationship between the two, resulting in double-digit
growth for each of Lotus' last three quarters (see Figure 1):
! IBM has aggressively tinkered with the Lotus lineup and with the product
development and shared code between its brands, particularly Lotus and
WebSphere, and as a result has been able to position its Workplace products,
which include collaborative functionality to leverage and extend its installed base
of WebSphere customers, while providing functionality that complements but
does not yet replace Notes/Domino.
! IBM has solidified the formerly loose ties between business units, enabling it to
sell combinations of Domino/Notes, Workplace, WebSphere, Tivoli (system
management and storage), and DB2 (database and content management), along
with its hardware and professional services. This enables IBM to act as a onestop shop for complex computing environments in which collaboration adds a key
element — the human element.
! IBM GS expertise was used to develop a first batch of what it calls networkdelivered Workplace environments, which are role-based productivity
environments tailored to 30 job types within vertical segments, all built on
WebSphere portal. IBM GS will be a lead partner on these long-term
engagements, furthering the bond between these sister units.
! IBM has reinvigorated its reseller, partner, and developer recruitment efforts to
build a stronger base from which to create third-party products, expand sales to
its large base of WebSphere and DB2 developers (as opposed to the shrinking
base of Domino developers), and sell more aggressively outside of its comfort
zone (the very large company segment of 10,000+ users).
! IBM's emphatic commitment to both support and merge Lotus Domino/Notes and
the IBM Workplace products has enabled the company to reassure customers
that they have the choice of keeping collaboration and application development
on ICE or transitioning to WebSphere over the next several years.
! With the forthcoming Lotus Domino/Notes 7, IBM plans to replace its databaseoriented Notes interface with an innovative, flexible, contextual user experience
that integrates collaboration with other business content and processes with a
goal of helping users get work done.
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FIGURE 1
Worldwide IBM Revenue Growth, 3Q04–2Q05: Software Overall
Versus Lotus
20
17.3
15
10
(%)
10.8
9.6
4.6
5
3.4
10.5
2.4
0
-5
-10
-5.8
3Q04
4Q04
1Q05
2Q05
Lotus
s
IBM software
Source: IDC, 2005
IBM's Lotus Division has clearly enjoyed the financial results of melding collaboration,
portal, and prepackaged business processes (often through ISV partnerships) into its
"workplace" offerings. From all indications, the IBM Workplace offerings have
effectively lured customers with more of a "buy" than "build" bent into the IBM fold.
IDC sees this as the bearing of fruit of what IDC calls the "enterprise workplace,"
which joins service-oriented business processes with enhanced and flexible user
experiences. Just as SAP has exhibited market leadership with its xApps in the arena
of packaged composite applications, IBM Workplace stands out as a market-leading
composite solution offering with particular appeal in the areas of user experience and
collaboration.
FUTURE OUTLOOK
IBM's 2Q05 performance gives credence to its contention that it is bullish about
"gaining market share in the collaborative software … category," according to CEO
Palmisano, and helps build a foundation for success in subsequent quarters. Further,
its insistence on following a unique path that leads to a portal-oriented workplace is
finally bearing fruit among its customers.
IBM's initiatives have given it notable visibility as providing choice (among operating
systems and among a broad portfolio of collaboration products), role and verticalspecific solution sets (Workplace environments), as well as the ability to access a
wide array of other packaged software products marketed under other IBM brands.
©2005 IDC
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Related Research
! Worldwide Integrated Collaborative Environments 2004 Vendor Shares: Warm
Spots Found on the Expanse of ICE (IDC #33604, June 2005)
! Collaboration in the Enterprise Workplace: Will It Change the Way We Work
Together? (IDC #33093, March 2005)
! The Enterprise Workplace: How It Will Change the Way We Work (IDC #32919,
February 2005)
! Microsoft Exchange Votes to Expand Server Roles After Voting to Reduce
Server Numbers: A Positive Flip for Customers but a Potential Flop for Partners
(IDC #32830, January 2005)
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Published Under Services: Collaborative Computing; Enterprise Portals and
Packaged Composite Applications; Messaging Applications
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