Verity makes a statement with Lotus lawsuit

On Wednesday of last week, Verity (Sunnyvale, CA) filed suit in federal District Court in Delaware against Lotus Development (Cambridge, MA), charging Lotus with breach of contract and other violations of a 1992 licensing agreement. Verity claims that Lotus inappropriately used Verity's Notes-embedded search-and-retrieve technology. In a broader market context, however, Verity is making a point: it no longer wants its technology to be viewed as a down-priced commodity for low-level search functions within Lotus Notes or Netscape Navigator, but rather as a high-value proposition product for large enterprise-scale knowledge finding and transferring. Verity is now looking for its products to bring in profits, not just market share. Verity is repositioning itself in the marketplace, and has stamped this message square on the nose of Lotus.

The change in focus has come with the usual aches and pains. Last summer, Verity was faced with drooping revenues (down 39% from Q1 '97) and rocketing losses (from $1.3 million in Q1 '96 to $9.8 million). Software sales, which comprised more than half of Verity's revenue, were off by a startling 57% from Q1 '97, and by more than 65% from just three months prior. Between the end of May and the end of August, Verity's cash and investments had dipped from $25.2 million to $19.4 million. In a sweeping reform, most of the senior executives were history by the end of the summer, including CEO Philippe Courtot. Courtot had once held an executive position at Lotus, after it bought his previous company, cc:Mail; this history resulted in the sweetheart bundling deal between Verity and Lotus.

With a new team in place, led by turnaround expert and new CEO Gary Sbona, Verity looked long and hard at its business model. "It was clear that the company was out of focus," said Ron Weissman, VP of Worldwide Marketing. The company's technology was no longer being used to target specific high-value business problems for customers, but was instead being bundled as a ride-along component with other applications. This strategy was clearly a great marketshare move, commented Bruce Taylor, CKO of Knowledge Asset Media, "but it didn't play to either the long-term health of the company or its core technology competencies." Verity's technology had, in effect, become a low-perceived-value piece of other brand-name products like Lotus Notes and Netscape Navigator, and wasn't getting the credit (or margins) Verity wanted. "It was everywhere," said Weissman, "but it was nowhere."

In the months since the reorganization, Verity has been going back to its roots of "solving tough, large-scale knowledge-retrieval problems for corporations," said Weissman. While they don't view themselves as contributing to the collaborative side of knowledge management, "we are and want to be seen as the retrieval piece of the KM market." A recent IDC (Framingham, MA) report giving them marketshare nods and a Delphi Group (Boston) Mindshare Award reflect the success of their new positioning. Verity is also developing new technology that Weissman says will move Verity's message up the value chain from departmental to enterprise, which will offer vastly improved scalability and features to simplify "knowledge navigation."

Verity's new attitude is paying off. Q2 '98 figures show increased revenues (up 73% from the year before) and significantly reduced losses. Weissman said that Q3 figures will be even better. We can also expect to see a fair amount of news from Verity in the coming months, including some OEM partnerships that reflect Verity's commitment to solving problems in the corporate marketplace, not the consumer marketplace. Verity's search and retrieval technology is "a corporate tool, not a commercial tool," said Weissman. To that end, you won't see Verity in the popular Internet search engines like Lycos, Excite and others. But you will see them link arms in larger-scale OEM deals with the likes of Netscape (Mountain View, CA) and most recently BackWeb Technologies (San Jose). Verity also has strong relationships with Informix (Menlo Park, CA) and Sybase (Emeryville, CA).

Toward this end, Verity has been retooling its OEM agreements in an effort to retreat from its "ubiquitous" presence in other systems and applications, and freeing itself to promote this new technology separately. Enter Lotus, which presumably wanted to include elements of this new technology in future versions of Notes, per the 1992 "sweetheart" licensing agreement negotiated by Courtot. (Lotus had said that one of the major improvements in Notes Version 5.0 ­ due in Q2 '98 ­ would be improved search features.) "We've been working with Lotus for the last two months to negotiate a new licensing agreement," according to Nancy Tatum, Verity's Director of Marketing, "but that effort has not gone forward in good faith." Hence, the lawsuit and the termination of the licensing agreement.

So what does this lawsuit mean for Verity? It depends on how you look at it. "Losing a major customer like Lotus is anything but good news for Verity ­ at least in the near term," said KMWorld executive editor Bruce Hoard. Doculabs' (Chicago) Jeetu Patel agrees. "Lotus was one of the stronger partners of Verity, and any damage to that relationship could seriously hamper the competitive stance that Verity has against vendors such as Microsoft or Oracle (Redwood Shores, CA)." Without a text/information retrieval engine behind the Domino/Notes server, Patel adds, Lotus now finds itself with some product disadvantages of its own against Microsoft. There is, however, a silver lining in this cloud, according to Hoard, if Verity "is able to reposition the product as a critical knowledge management component rather than a low-value commodity." Hoard notes that Verity does have many supporters, even in places where you wouldn't expect to find them. While PC Docs (Burlington, MA), for instance, is adding newly-acquired Fulcrum's (Ottawa, Ontario) search and retrieval engine to its Docs product line, many PC Docs users have said they prefer the current Docs engine, which uses Verity technology.

According to Delphi Group's Hadley Reynolds, the lawsuit means more than just an attempt to back out of an unprofitable "sweetheart" bundling agreement. "The confrontation with Lotus clearly draws a line in the sand," he said. Lotus Notes users have always got Verity's search and retrieval technology for pennies as part of a commodity pricing approach. Now, Reynolds said, Verity's next-generation knowledge supporting technology won't leave the door without a price tag befitting the role of knowledge management utilities in the KM marketplace. "With the suit," he said, "Sbona puts Verity in the unfamiliar position of re-establishing the value statement for knowledge management software", where he must forge agreements "that will create revenue streams, not brand recognition alone." Instead of hitching up with other products, Verity must now re-create a name for itself.

With its new business focus, alliances and attitude, Verity looks to be staking its claim in the knowledge management marketplace as a true knowledge retrieval/knowledge mining provider. And with this legal move, accordi