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IM start-up on crash course with AOL

PalTalk, a tiny instant-messaging company that survived a brutal shakeout among its peers, is spoiling for a fight with 800-pound IM gorilla AOL Time Warner.

PalTalk, which runs its 16-person operation out of Silicon Alley offices on a shoestring budget, plans to give its users access to AOL's claimed 100 million registered IM contacts, or "buddies," in AOL Instant Messenger (AIM) parlance.

The move comes against the backdrop of a high-profile fight between AOL and Trillian, another tiny start-up offering software that lets people communicate with AOL buddies. For the past two weeks, the two companies have been locked in a game of cat and mouse, with AOL blocking Trillian, and Trillian working around AOL's blocks. Trillian is struggling to undo AOL's latest foil.

One analyst called PalTalk's plans ill-advised.

"This cat-and-mouse game is not interoperability--it's guerrilla warfare," said James Kobielus, senior analyst with the Burton Group in Alexandria, Va. "This effort is very quixotic, which (the) Merriam-Webster (dictionary) defines as 'foolishly impractical, especially in pursuit of ideals.' Here you have this huge windmill and the blades keep coming down and chopping your lance to bits. I can't believe yet another company is going to attempt this doomed effort to break into the AIM environment."

While doubting the wisdom of PalTalk's move, Kobielus also criticized AOL for keeping its systems closed. He noted that the company had allowed interoperability with Lotus' IM system, but only after Lotus licensed AIM technology. Microsoft and other IM competitors have refused to take out that license.

"When is AOL going to make this capability available to everybody on a nondiscriminatory basis?" Kobielus asked.

PalTalk and Trillian are not the first to offer access to AOL buddies. The media giant has found itself working to keep out MSN Messenger and Yahoo Instant Messenger, among other, smaller IM players, for years.

AOL, which has pledged to make its systems interoperable through a standard being ironed out by the Internet Engineering Task Force (IETF), claims that the improvised interoperability moves compromise IM security.

PalTalk acknowledged that it is heading for a Trillian-style confrontation with AOL, and AOL promised to continue its practice of blocking unwanted guests.

"Our policy has been quite clear and consistent: When a company introduces software that hacks into our system, endangering the security of our system and users, our policy is to block them," said AOL Time Warner spokeswoman Kathy McKiernan. "It's often a game of cat and mouse with these multiheaded clients."

Block and tackle
PalTalk said it had studied the previous engagements with AOL and had devised a more resilient method of accessing its buddies and dodging its blocks.

"They may block us for a little while, but because of the fail-safes and redundancies we've worked out, we'll be back very quickly, within minutes," said Jason Katz, chief executive of PalTalk. "We've done a lot of thinking about how to avoid the pitfalls of what happened with the other guys. To me, it's a shame that AOL puts its development energies into blocking the other guys rather than improving its feature set."

The feature set--namely audio, video and group-multimedia chat capabilities--is where the scrappy New York start-up claims its advantage. Launched in 1998 and funded to the tune of just under $4 million, PalTalk has managed the rare Internet feat of charging subscriptions for premium services and has been profitable for the past six months.

AOL has for the most part downplayed multimedia features, claiming that mass-market preference is for text messaging. AIM does offer some voice capabilities. Yahoo offers video and audio messaging at a slower frame rate for video than does PalTalk but has not charged for the service so far.

Focusing at first on the consumer market, PalTalk charges an annual fee of $24.95 to 110,000 subscribers, accounting for 70 percent of its revenue. The introduction of group video caused subscriptions to jump, according to Katz. The company now adds 15,000 new users every day and converts the same number per month to paying customers.

The company has also benefited by the demise of its nearest competitors. From these it acquired the domain name, trademark and user list of Firetalk Communications, and the trademarks, pending and granted patents, and source code of the once richly funded HearMe. Another close competitor that recently shut its doors was Lipstream Networks.

Billing itself a "multimedia community," PalTalk offers consumer features geared to make its audio and video features attractive. These include a karaoke feature, a radio station and an online dating service.

One of the company's competitors cast a jaundiced eye at PalTalk's warlike stance at AOL, suggesting it was egging on the company strictly for the publicity such a fight would generate.

Indeed, Trillian said it had experienced a "much more pronounced" spike in traffic and downloads after the spate of stories on its tussle with AOL.