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AOL sharpens ICQ ambitions

Last year AOL paid $287 million for a product with 12 million users but no revenue. A year later, its popularity has nearly trebled, but it's still not clear whether ICQ was a good buy.

A year ago, America Online paid $287 million for ICQ, a product with 12 million users but no revenue. A year later, its popularity has nearly trebled, but it's still not clear whether ICQ was a good buy.

ICQ, instant messaging and chat software created by four Israeli 20-somethings, had achieved cult-like status among users around the world when AOL snapped it up. Like Hotmail, it offered a model of how a popular free Web service can create an audience without spending a dime on marketing.

Today, AOL is trying to turn this Internet growth phenomenon into a money generator, but it has a long way to go. The big question: Will 35 million registered users accept AOL's changes? Or, as AOL infuses advertising and direct marketing into ICQ, can the online giant convert the software's young, Web-savvy, more international audience into online consumers?

According to Ted Leonsis, president of AOL's Interactive Properties Group, the conversion process is on track. "This year is really a year to [turn] that time online into page views, page views into impressions, and impressions into dollars," Leonsis told CNET News.com.

Others aren't so sure. "There's very little concrete evidence of exactly how they're going to make revenue, much less any demonstration that they are," said David Simons, managing director of Digital Video Investments.

ICQ's commercial appeal lies mainly in its persistence. Since the software sits beneath an icon in the Windows desktop tool bar, it is a constant fixture whenever the computer user turns it on. In industry parlance, ICQ is very "sticky," which means people use it for a longer period each time they launch it.

As one indication of its stickiness, the company said that on average there are 1.1 million ICQ users simultaneously using the service. AOL's proprietary service has 1.2 million simultaneous users.

To date, AOL achieved two of its objectives for the product: growing ICQ's use and building out its network infrastructure. Since the acquisition, ICQ's registered base has grown almost threefold, while AOL has relocated ICQ's back-end infrastructure from Tel-Aviv to its network operations center in its headquarters in Dulles, Virginia.

In February, AOL's influence began to show further when it released a new version of ICQ called ICQ99a. The software client fused together new features that make ICQ more like a portal, such as a Web search engine, community pages, desktop organization tools, and IP telephony. Since many of these new services linked the buttons on the client to Web pages, AOL also began serving advertisements.

Show them the money
Despite all this effort to turn ICQ into a "desktop communications portal," as the company labels it, ICQ is far from becoming a significant revenue generator.

The service currently rides on the coattails of other AOL network-wide deals. Under Myer Berlow, AOL senior vice president of interactive marketing, AOL's national sales force takes the lead in striking deals for ICQ, which is thrown in with other AOL-owned properties when the online giant strikes large-scale distribution agreements. As for its own sales, Leonsis said there is currently a five-member special ICQ team, whose role is not formally defined.

For example, in AOL's four-year, $75 million deal with eBay, ICQ took a percentage of the pay-off. It also gained more interactive auctioning capabilities from eBay.

But Simons noted that AOL has yet to show exactly how the company plans to monetize its immense user base. While on paper it makes sense to drive ICQ traffic onto Web pages with advertisements, these features are more than a typical ICQ user wants out of the client, Simons said.

Are all of these bells and whistles going against AOL's motto of "convenience is king?" Simons thinks so. "Why click on your toolbar to call up ICQ and then go from ICQ to a portal when you can go directly to a portal through your browser?" Simons said.

Cash cow: opt-in marketing
But Leonsis said the real revenue driver is waiting in the wings: opt-in direct marketing. While not formally unveiled, the idea is to have ICQ users develop a one-to-one communications channel with e-commerce vendors or other services. For example, if a user wants to know when Amazon has a book sale, the company can notify the ICQ user through a buddy list message.

"You could envision on your buddy list your banker, stock broker, or travel agent," said Leonsis. "This would be a very convenient way to communicate with them."

Using opt-in marketing is widely accepted by privacy advocates and industry analysts as a positive way to market to Web users. Instead of sending out spam, or mass unsolicited emails that peddle goods and services, users can choose whether they want to receive offers from vendors.

"As long as they approach it as an opt-in option, they'll get the best response from consumers," said Ray Everett-Church, counsel for the Coalition Against Unsolicited Commercial Email.

Whether these models yield dollars will depend on the ICQ user. There has been little indication of what the user wants and whether the user wants to buy.