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Corporate IM not an instant success

Yahoo and AOL's exit from selling instant-messaging services to enterprises is not a surprise. The lesson: Stick to your day job.

Converting free consumer products into paid services tailored to a business clientele can be harder than it looks.

Just ask Yahoo and America Online. Millions of people use Yahoo Messenger and AOL Instant Messenger to trade short text messages at home and at work, but the two Web consumer titans found themselves on the sidelines when it came time to sell their products to professional IT managers.

In the past week, both have decided to pull back on their corporate IM businesses, with AOL handing over important sales relationships to partners with better channels into business customers.

The about-face is a disappointing reality check for the two instant-messaging leaders at a time when corporate interest in the technology--and the promise of lucrative service contracts--is on the rise. Even as Yahoo and AOL step back, companies that have long served the enterprise market, such as IBM, Microsoft and Sun Microsystems, have made bold inroads in offering their own corporate IM products.

"While (AOL and Yahoo) have strong expertise with instant messaging, in many cases, businesses are either adopting free consumer technologies or dealing with software vendors who they're already dealing with," said Michael Gartenberg, an analyst at Jupiter Media.

Consumer IM leaders once thought that offering software to enterprise customers would be an easy way to add direct revenue to their businesses. Yahoo, in particular, gives away most of its services for free and supports these products with advertising. While AOL generates most of its revenue from subscriptions, it has long tried to grow the software sales business that it inherited from its acquisition of Netscape Communications in 1998.

But these enterprise initiatives have failed to gather steam. Yahoo tried to sell customized versions of its Web portal and Web-casting capabilities for internal corporate use but dissolved its enterprise solutions division in October 2003.

Last week, Yahoo confirmed that it had stopped selling Yahoo Messenger Enterprise Edition, a messaging software package for use in large companies. A few days later, AOL said it would pull its AOL Instant Messenger (AIM) Enterprise Gateway, which allowed companies to manage internal IM conversations. It plans to hand over its existing AIM-EG customers to IMLogic.

That's not to say the companies are stepping completely out of the enterprise market. Instead, they are tapping business users indirectly.

AOL still offers instant-messaging technology to some corporate clients, but only through third-party vendors. For example, it has a partnership with Reuters that offers AIM to corporate messaging clients. Reuters sells directly to financial companies, the AIM software piggybacks into the Reuters Messaging client, and AOL gets a cut of revenue for every "seat" licensed.

AOL has also taken another track, letting people download add-ons that target business-oriented use to AIM. The software now lets people download Web conferencing tools from WebEx and online teleconferencing tools through Lightbridge. The services charge people for each minute of use, and AOL takes a cut of the revenue.

"We are using other people's sales forces and the popularity of the AIM client inside these enterprises," said Edmund Fish, a senior vice president of desktop messaging at AOL.

Yahoo was less detailed in outlining its approach. The company said it would fold its enterprise product into its common consumer service and then consider ways to add features for business customers. Yahoo did not say what features it is exploring, but it did say it wants to provide them "based on market segments."

Too tempting to resist
On paper, selling instant-messaging software seems like a slam dunk for Yahoo and AOL. Their IM services have drawn millions of users who exchange real-time text messages at work and at home. Osterman Research estimates that there are 14 million AIM users and 11 million for Yahoo in the workplace. Microsoft's MSN Messenger, a free download that's separate from its enterprise IM product, has 12.6 million work users, according to the research firm.

The growth of instant messaging in the work environment has largely been a grassroots phenomenon. Employees first began downloading IM clients to keep in touch with friends, family and business contacts. Soon after that, entire departments started linking up on common IM networks, while individuals began using multiple IM clients to keep in touch with different groups of people.

This prompted AOL, Yahoo and Microsoft to explore ways to sell their IM products directly to corporations. Their biggest selling point was security and compliance, since many IT departments feared that the software would let an influx of viruses in through their firewalls. The financial-services sector and other strictly regulated industries shut down their workers' IM clients, worried that they didn't have enough controls to monitor internal IM conversations.

However, many companies beyond Wall Street continued to turn a blind eye on IM use, often as a result of pressure from top executives who had become IM loyalists themselves.

"Prospective customers were not as worried about they should have been," said Sara Radicati, CEO of The Radicati Group, a market research firm. "And the security being offered was not convincing."

The entry of consumer IM providers into enterprise sales spurred established software vendors into action. Microsoft, whose MSN online division operates separately from its larger software business, took its own giant leap into enterprise IM. The company last year launched Live Communications Server as a secure IM service. Microsoft hopes that the product will evolve into a corporate hub that enables real-time communications via linked instant messaging, e-mail and, eventually, Internet phone calls.

Other tech veterans, such as Sun and IBM, are pushing their own IM products and embedding them into their existing applications. Smaller software companies, such as IMLogic, FaceTime Communications and Akonix are also offering feature add-ons as partners of AOL, Yahoo and MSN.

Nevertheless, Yahoo and AOL are adding lots of users and evolving their software through new features. For example, Yahoo recently updated its services with more bells and whistles.

The consumer IM services have been able to use their popularity as a way through the door. But convincing already cash-strapped IT managers to pay for something that works fine for free became a tough sell.

"If you ask what happened to their enterprise businesses--well, they walked away from it," said David Gurle, the executive vice president of Reuters Messaging. "They've decided to use a (third-party) channel to help them go to market in the enterprise without risking their own resources."