Has Microsoft backed off instant messaging war?

The decision comes as Microsoft plans to launch a new version of its MSN Messenger Service, as previously reported. The new software will have deeper integration with the MSN.com Web portal, as well as with Hotmail.

"We've been thinking about interoperability ever since we launched (MSN Messenger)," said Deanna Sanford, lead product manager for MSN. "It's getting harder and harder to provide that interoperability."

Sanford added that the hesitation over whether to include AIM access in its next version of MSN Messenger stems from an apparent software bug in AIM.

The interoperability issue surrounded the launch this summer of Microsoft's long-awaited instant messaging product. Users communicate via instant message by sending written messages to a far-flung list of "buddies" in real time; the messages pop up on each user's screen.

When MSN Messenger Service first launched in July, its users could chat with AIM subscribers, which numbered about 40 million at the time.

Sensing a threat to its franchise, AOL took steps to block interoperability between the two products.

Microsoft responded by creating a fix to circumvent the blockade. AOL fired back by issuing an automated warning telling MSN Messenger users that they were entering territory that was off limits.

"We're happy to hear that they decided to respect the security and privacy of our members and of our network," said Tricia Primrose, a spokeswoman for AOL.

Now that AOL and Microsoft appear to be entrenching themselves, the question remains whether the companies will ever shake hands on this issue.

Is the battle over?
AOL continues to maintain its dominance in the instant messaging market with its ever-expanding pool of subscribers and screen names on its Buddy List.

But Microsoft has plans of its own to boost its number of users. Similar to the way it packaged different productivity software products into Microsoft Office, the company plans to more closely integrate its Internet communications products throughout its Web services. For example, the newly redesigned MSN Web portal includes a prominent "communications" box where users are notified when messages appear in their Hotmail accounts and when MSN Messenger buddies log on to the service.

This is part of Microsoft's plan to market "megaservices" to Web proprietors. That means the software giant wants other Web sites, especially those focusing on e-commerce, to use Microsoft Web applications on their sites, such as its MSN Passport universal registration and e-wallet service, Hotmail and MSN Messenger.

The strategy is tried and true for Microsoft; it's the strategy of being everywhere for everyone. But some analysts wonder whether the company can replicate what it accomplished with PC software on the Web.

Michael Graham, an equity analyst at Robertson Stephens, wrote in an analyst note that Microsoft's gargantuan market value has been pinned against the ubiquity of its software products. But with a federal judge's recent ruling that Microsoft is a monopoly, Graham questions whether Microsoft can duplicate its success in PC software online.

"We view the Department of Justice's finding as strengthening America Online's competitive position, pointing to the possibility of America Online eclipsing Microsoft's reach and eventually its market value," Graham wrote in the note.

But other analysts such as Seamus McAteer of market research firm Jupiter Communications put a more blunt perspective on the instant messaging fiasco. To him, Microsoft's statement could signal that the software giant is making a tacit retreat.

"The battle's been fought and won," McAteer said. "Microsoft has lost this battle."