During its infancy, the software industry existed in innocence and harmony reminiscent of a William Blake poem: Lions lived with lambs. But software is growing rapidly now, and there are signs that the idyll is coming to an end.
Consider the example of ITM, a Lafayette, Calif., retailer of some 3,500 microcomputer software programs, which opened for business this past January. At the same time, Lotus Development Corp. of Cambridge, Mass., released 1-2-3's, an integrated spreadsheet/dataprocessing program (see INC., June, page 103). Recognizing 1-2-3's potential, ITM geared up to market the program aggressively in the business community. Within a month, the company was selling about 300 copies of 1-2-3 per month -- a pace so brisk, claims president and founder Stevan Cloudtree, that ITM was the leading dealer of what was soon to become the hot-test-selling program in the country.
Then, quite suddenly, Lotus shut off the company's supply of 1-2-3. The reason: ITM is a mail-order house. It does not have even a single retail outlet. Because "after-sale support is just as important as sales," a phone-in operation is anathema to Lotus, says Lotus's director of corporate marketing, Jim Manzi, "Mail order does not square with our corporate philosophy on service to end users." So Lotus instructed its exclusive distributor, Softsel Products Inc. of Inglewood, Calif ., not to sell to ITM.
Cloudtree immediately informed Lotus that he had definite orders for 1,700 1-2-3s and was willing to make a commitment for 10,000 all told. At a gross margin of $100 each, that figure represented $1 million in profits to ITM -- not to mention some $2 million in revenues to Lotus. But Lotus remained firm.
For ITM, the move was a disaster. A stake was the company's credibility Explains Cloudtree, "1-2-3 was the key to our national accounts. We were using it to leverage in a lot of different sales. Our customers would assume that, if we couldn't get 1-2-3, we couldn't get others. So I asked [Lotus], 'Don't you ever use the phone? Every time you do business with Softsel, do you get on a plane? What gives you the right to prevent me from using thc primary tools of business?' "
As it happens, that right may have been granted by ITM itself, which -- like all of Lotus's dealers -- signed a standard agreement with the software maker Paragraph 8 of the agreement reads' in part: "Dealer has represented . . . that dealer is engaged in the market for the products only at the function level of the dealer selling to end users through direct face to face contact between dealer's customers and dealer's personnel . . Lotus may exercise its termination right if such representation is found to be untrue." Declares Manzi, "We're going to exercise our rightful capacity . . . to stop mail-order business wherever we find it."
Indeed, many mail-order operations do tend to leave end-users in the lurch, but Cloudtree counters that ITM is not just another low-rent operation with glitzy back-of-the-magazine ads. Rather it is developing an extensive on-line database and has a staff of in-house experts providing support for all of its products, especially 1-2-3. "If it's your best-seller, you give it your number one attention," he says "Softsel acknowledged that the quality of [our] support was better than 95% of the dealers they deal with.
Cloudtree believes that Lotus's action has more to do with competition than inadequate support. "We have been singled out because we have a national accounts program that went head-to-head with Lotus, and beat them. People would say, 'We're thinking of signing a deal with Lotus, but we'll buy from you because you can provide the service, you've got better prices, and your offer a whole range of products."
Manzi denies the charge. "Direct sales are not an issue. We're in no position to tell anyone whait they can or cannot sell, [but]. . . we do have the capacity to determine the channels of distribution by which our products reach end users."
That is a delicate distinction that may some day come before a court for resolution. Meanwhile, Lotus will remain steadfastly opposed to mail order in any guise. "The dealers who are conforming to the agreement are expecting us to enforce it," Manzi declares. ". . . That's our position and will remain so, there's not even a thought of changing it."
As for ITM, Cloudtree says that the company is too involved with new financing to mount a formal challenge. But when he is ready, he intends to go after middleman Softsel first. "If you're going to shut us off, then shut everyone off," he says. WOtherwise we'll slap a discrimination suit on you."