Did AOL shoot the messenger?

By Jim Hu
Staff Writer, CNET News.com
April 5, 2001, 4:00 a.m. PT

To many, it seemed the height of arrogance: In a bid to dominate the growing popularity of instant messaging nearly two years ago, America Online blocked communication between its subscribers and those using competing software.

Microsoft likely to put IM everywhere Avner Ronen, Odigo founder

Despite much criticism, the brazen strategy appeared to be working--until now. A little-publicized but startling study released last month showed that one of AOL's chief rivals in this market, Microsoft's MSN Messenger, tallied more subscribers worldwide.

Although the study was commissioned by Microsoft, thereby making it vulnerable to immediate challenge, its findings have raised questions about AOL's controversial move to cut off the rest of the IM world. The decision may have backfired by effectively limiting the potential growth of AOL Instant Messenger (AIM) and by forcing the media giant into a protracted war with the powerful software company--just as AOL Time Warner faces other problems, ranging from merger integration to government regulation.

Adding insult to potential injury, the newly combined AOL Time Warner must mind its actions under court-appointed antitrust supervision even though its chief antagonist in instant messaging is a global empire that has become virtually synonymous with high-tech monopoly.

"You see a next-generation parallel to what Microsoft was trying to do in 1997 with the browser," said one AOL employee who requested anonymity. "From our perspective and the perspective of other folks who are looking at this very carefully right now, there is very much a return precisely to the scene of the crime that brought them to the judge's chambers."

Unfortunately for AOL, the regulatory spotlight is trained on its own actions in instant messaging, not on that of its rivals. Aggravating the situation is Microsoft's unabashed push into the market in recent months, appropriately named "HailStorm," which would put MSN Messenger at the heart of all the software giant's Web products.

AOL has made no public comment about how it plans to compete from its increasingly precarious position. But the media conglomerate maintains some powerful weapons in its arsenal, as long as it can employ them without overstepping any regulatory boundaries.

Through its Time Warner properties, AOL has acquired valuable advertising space in print outlets and air time on television. On the Web, the company has begun offering AIM through several Time Warner sites, including Time.com, People.com and Entertainment Weekly's EW.com.

In addition, AOL has agreements with IBM, RealNetworks, Apple Computer, EarthLink, Juno Online Services and Novell to offer a co-branded version of AIM through their services. AIM also is going into mobile devices, such as cell phones using AT&T or Sprint, Research In Motion pagers, and Palm handhelds.

"Is this something that is a priority for the company to deal with? Absolutely," the AOL source said. "It's something that is being viewed in a multifaceted way, both as a business and as a political challenge, and we will be able to deal with it effectively."

Yet these deals may not be enough for AOL to weather HailStorm.

The company is fully aware that the rivalry over instant messaging is reminiscent of some of Microsoft's most notorious conflicts, such as the operating systems war against Apple and the Web browser battle against Netscape Communications--now a subsidiary of AOL.

Not long ago, MSN Messenger was thought to be woefully late to the market, playing an unenviable game of catch-up to AOL's service. But the way it has closed the gap has been textbook Microsoft: Target the software that potentially threatens the Windows franchise, create your own version, tie it closely to Windows, push your product as a standard, solicit developers and vendors to build and sell it, and then watch market share tilt in your favor.

"When you're facing Microsoft and a product that's good, it's a tough war to have," said Avner Ronen, founder of IM company Odigo. "Look at Microsoft's tactics in pushing (its Internet Explorer browser), and you can see that they're doing the same thing with IM."

The Microsoft-commissioned report, conducted by Jupiter Media Metrix, showed MSN Messenger had edged out AIM in worldwide usage in February. Although AIM continued to hold the lead in the United States, a separate market study found that MSN Messenger had closed that gap as well since September 1999.

Already, MSN Messenger is embedded in Windows Millennium Edition, the latest version of Microsoft's consumer operating system, and in MSN Explorer, a service that combines Web browsing with integrated buttons that link to other MSN sites. The HailStorm concept presents an even greater threat to AOL, providing access to Internet features--such as calendars, phone books and address lists--from any device.

HailStorm will rely heavily on MSN Messenger and free e-mail service Hotmail as the connective tissue that links Web sites and services to its consumers. For example, if someone makes an online travel reservation, HailStorm can send an instant message to the person if changes occur in the itinerary and then automatically update his or her calendar. Microsoft will introduce HailStorm technology into its next-generation operating system, Windows XP.

From Microsoft's perspective, HailStorm provides a convenience to consumers by linking all of the company's software products to a unified login service. From AOL Time Warner's view, HailStorm raises red flags and questions of unfair business practices not unlike past misdeeds.

"We, along with others in the industry and regulators, need to watch Microsoft's actions and react accordingly," Kenneth Lerer, executive vice president of AOL Time Warner, said in a statement. "With Microsoft integrating MSN Messenger into the operating system, the landscape may well have fundamentally changed."

It is in the realm of anti-competitive behavior, however, that a decision in 1999 to close AIM to interoperability may return to haunt AOL.

Showing that it, too, is willing to play the antitrust card, Microsoft has been a vocal critic of AOL ever since the online service's engineers blocked MSN Messenger and Yahoo Messenger from communicating with AIM. Late last year, Microsoft Chairman Bill Gates called William Kennard, then chairman of the Federal Communications Commission, urging him to closely examine AOL's IM dominance when studying the company's proposed merger with Time Warner.

Microsoft has also helped lead IMUnified, a coalition of companies including Yahoo, AT&T and Excite@Home, which is expected to launch a system that will link the messaging products and networks of its members. IMUnified aggressively lobbied federal regulators and Capitol Hill to force AOL to open its IM network as a condition of its merger with Time Warner.

The FCC did say it would require interoperability, but only once AOL begins to offer "advanced" IM services such as video and audio streaming through its product. Although competitors called the requirement insufficient, AOL Time Warner remains under the scrutiny of regulators wary of the company's ownership of cable networks; TV, film and music content; and interactive TV.

In addition to AIM, AOL owns the second-largest instant messaging service: ICQ. Both services are available free; their value comes from the marketing and cross-promoting of other AOL products, or in the recruiting of new subscribers to the company's online service.

None of this is lost on Microsoft, which has built its business through similar kinds of promotions for its products. That means it views instant messaging as a way to maintain control of the entire computing environment, not just as a tool for real-time text conversations punctuated by smiley-face icons.

"Browsers weren't a big business, but they were strategic," said David Smith, an analyst at Gartner. For instant messaging, "there's no dollars involved, but it's important for other reasons," such as advertising, e-commerce and other complementary software.

IM proponents believe the technology will become as ubiquitous and convenient as the telephone.

Of particular importance is the technology's ability to let people know when others are online--"presence," in industry vernacular. The detection in turn can help communications devices such as cell phones, handheld computers and telephones reach a desired party.

On the desktop, the software that provides IM services sits on top of a computer's operating system. That is precisely what concerns Microsoft, which has ferociously guarded its Windows franchise.

"I think Microsoft is ultimately going to win the instant messaging wars," said Jeff Pulver, a telecom entrepreneur and organizer of the annual Presence & Instant Messaging conference. "Microsoft thinks strategic, while AOL thinks tactical."