Is Gates pulling the Net's strings?

Those who inhabit America Online's massive compound in Northern Virginia's lush countryside talk about getting "AOL religion," a fervent dedication to building something as fundamental to American society as a town meeting.

So it is understandable if a bunker mentality has emerged from its latest battle over a seemingly innocuous service called instant messaging. AOL is, after all, crossing swords with perhaps the most formidable opponent of cyberspace--Microsoft--in a digital holy war that pits the leading online service's prowess in the mass consumer market against the software giant's laser-like expertise in technology products.

Many industry executives and analysts initially played down the messaging standoff between AOL and Microsoft as a relatively confined skirmish between two companies pushing their versions of similar products. But a closer look reveals some unsettling parallels between this conflict and the early days of the now-legendary rivalry between Microsoft and Netscape Communications over the Web browser.

"This is exactly the same thing that Microsoft did in '95-'96. They basically said that Netscape was the evil empire and that it didn't stick to standards," said Ramanathan Guha, chief technology officer of start-up Epinions and former principal engineer with Netscape. "Now that they seem to be ahead in the browser wars, they've put a different spin on things. Everybody but the leader likes open standards."

The competition with AOL rose to new heights yesterday when Microsoft disclosed that it is considering free or low-cost Internet access. Such a move, which would be led by the same executives who spearheaded Microsoft's browser campaigns, could be an instant replay of the Internet Explorer giveaway that eventually undid Netscape.

As with browsers, the fight over instant messaging is part of a larger conflict involving these and other major players that will ultimately determine who controls the Internet itself. At this early stage in the development of the medium, these clashes are only the first of many monumental battles over key technologies and the industry standards that govern them.

Just as the PC fundamentally changed the way we work, Web-based technologies are defining the era of Internet computing and revolutionizing the way we live. Yesterday it was browsers, today instant messaging, and tomorrow digital wallets, interactive video, and an entirely new Web language called XML--all areas where Microsoft is heavily involved.

"There is no question that the Net is changing the paradigm of the desktop and of computing," said David Simons, managing director of Digital Video Investments. "However, unlike the wholesale change envisioned three years ago by the Net PC and Java, the process is highly incremental and full of unforeseen twists."

Those winding roads have brought AOL and Microsoft face to face from opposite corners of that universe: one focused on product, the other on the consumer. Where AOL has attempted to fashion its service around the demands of its community, Microsoft has pushed the use of its products through business channels and alliances, giving software developers as much incentive as possible to write their applications to work with Windows.

The nexus of the world's largest software company and the leading online service shows how quickly divergent businesses are heading in the same direction--away from the largely saturated desktop PC market and toward Internet-connected pagers, handheld devices, interactive television, and other non-computer boxes.

These are markets that Microsoft has targeted with its scaled-down Windows CE operating system, but with limited success. "For the first time, a complete product that is completely Microsoft-free is now within reach," said David Cassel, publisher of the AOL Watch newsletter and frequent critic of the online service.

It is this kind of talk that worries Microsoft most: the specter of new products that ignite enthusiasm among the masses and threaten to grow well beyond their original designs, much like today's PalmPilot craze. AOL, with its purported 17 million members and 78 million registrations for instant messaging, could spark an Internet wildfire.

"Instant messaging is an alternative to a browser, in a sense. You have this application open all of the time. It has a search feature in it if you need to do a quick Net search. It can deliver ad banners or active banners," said Paul Hagan, a Forrester Research analyst. "All of the sudden you have this competition with the browser. It's become a really potent way to deliver content to the desktop."

The fact that both companies are meeting on unfamiliar terrain could help AOL, for Microsoft is accustomed to engaging its enemies at the corporate level, not the newbie mass market. "Microsoft has never been good at making things trivially easy for people," Guha said.

Some scoff at the notion that instant messaging deserves the full wrath of Bill Gates. But signs from his command post in Redmond, Washington, are chillingly reminiscent to Netscape veterans who saw Microsoft's share of the browser market go from single digits to leading the market in a few short years, with some projections reaching 80 percent of desktop PCs.

That's what happens when Microsoft detects even a hint of a threat to its coveted Windows franchise, for it knows how easily a software leader can be toppled from its perch. In a CNET interview three years ago, while some skeptics were still questioning the significance of the browser, Microsoft executive Steve Ballmer said Netscape's Navigator could effectively displace Windows as the first screen booted up on the personal computer.

"Let me tell you a story. Once upon a time there was a piece of software that was an extension of an operating system, and it had a nice little user interface and it had some programming interfaces and people kind of liked it, and over time they built on top of it. One day, the thing that it was built on top of wasn't all that important anymore," said Ballmer, an outspoken college buddy of Gates who is now president of Microsoft. "I'm telling you, of course, the story of Windows 95, Windows, and DOS. And when we tell the story about what's happening today with browsers ten years from now, I want the thing that replaces Windows to be Windows."

The truth is that Microsoft doesn't care what that first piece of software is called or what it does--it just wants to own and control it. If history does repeat itself, such technologies may fall into familiar pattern in which the Redmond empire wields its influence over competitors, allies, and ostensibly impartial industry organizations to become the dominant player in an important arena.

"You have to believe that Microsoft will bundle instant messaging with Windows," Hagan said. "It's just another application."

Critics say that Microsoft is late to the game in instant messaging, but this lag time may be a built-in component of its strategy toward all pivotal technologies as they develop. Ever since it miscalculated the Internet explosion and the importance of the browser, Microsoft has positioned itself to strike quickly in many areas, planting stakes in technologies far from its desktop computing roots and traversing such diverse landscapes as television and communications.

Then, taking a cue from the Japanese approach to consumer electronics of decades earlier, the software behemoth attacks only after a particular technology emerges as a potential Web leader. That way, it can marshal maximum forces instantly without spending time and resources in generating market interest at its nascent stages.

Unlike Netscape, however, "AOL is a skilled counter-puncher in roughly the same weight class," said Chris Misner of iTixs, who served as director of business development for Netcenter.

"With the browser, Microsoft's operating system monopoly was a huge advantage," he said. "It's still an advantage, but unlike a browser, IM adoption and usage is driven by millions of people-to-people networks, so it's harder for Microsoft to siphon off users via the inevitable bundling with the OS."

In the cyber-parlance of new media, AOL executives and proponents like to talk about the "sticky" nature of instant messaging--meaning users tend to spend a lot of time with it and are hesitant to switch brands. In contrast, consumers often flit among several Web portals or e-commerce sites.

"AOL continues to have a strong user base, so this will be a replay of MSN vs. AOL rather than Microsoft vs. Netscape," said Naveen Jain, chief executive of Web directory Infospace and a former executive with the Microsoft Network.

The imperative for AOL is to create services that bypass Microsoft's chokehold on the desktop. And sources say AOL hopes that one answer lies in Netscape.

AOL, whose subscribers usually dial in from home at night,

The players
ICQ	Instant messaging and Web portal hybrid acquired by AOL last year. Claims 38 million registrations, with 60 percent of them international.
AOL Instant messenger	Popular among AOL and non-AOL members, can be downloaded off AOL Web site. Claims 40 million screen names. Was the first messaging software to be introduced to the market.
MSN Messenger	Microsoft's new instant messenger can communicate with AIM screen names, and is bundled into Outlook email service and Hotmail. Blocked by AOL.
Yahoo Messenger	Combines instant messaging with the Web giant's personalization features. Blocked by AOL.

plans to create a daytime service to tap the workplace market. One possibility is to create a service that melds Netscape's browser code with its Netcenter portal and then attach applications like AIM to keep members hooked, sources said. AOL could use its ties with Sun Microsystems to bundle the Netscape service into Sun's computing systems, which are sold exclusively to businesses.

Although the exact benefits of instant messaging is the subject of debate, there is no denying its impressive numbers. America Online says it has 40 million registrations in its Buddy List network, which include "screen names" from AOL Instant Messenger and AOL's proprietary service. Every AOL member or AIM user can register more than one screen name, so the number of people using the software is undoubtedly far lower.

Still, America Online swelled its rolls significantly last year when it acquired another instant messaging service called ICQ (short for "I Seek You"), which now has 38 million registrations. Earlier this year, AOL released a new version of ICQ with features such as a search engine, email, chat communities, and yellow page directories.

The idea is to turn ICQ into a "communications portal" on the PC desktop. AOL hopes users will use ICQ to not only instant message friends, but also to shop, check stock quotes, or send email.

Moreover, AOL apparently intends to use instant messaging as an important recruiting tool to expand the ranks of subscribers to its general online service. Along the way, some analysts believe the real-time communications feature presents tremendous advertising opportunities.

"I think the key reason Microsoft feels threatened is that it is a popular application that millions of people use every day, Microsoft doesn't own, and gives AOL a persistent presence on the desktop--meaning that the app is open every time a person goes online," said one industry source who asked not to be identified.

No one recognizes this more than AOL, which tellingly bought former Microsoft archrival Netscape only months ago. Given the recent history with browsers, it is not difficult to envision a scenario in which Microsoft's version of messaging software is thrust to the center of yet another pivotal competition driven largely by the Windows operating system and its unparalleled power to leverage.

In what seemed like a sign of panic, AOL hastily recruited Apple cofounder Steve Jobs and other high-profile allies to help form a coalition for instant messaging.

Microsoft's history with Windows weaponry is well-documented. It has combined the ubiquitous operating system with various utilities, productivity applications, and finally Web browsers--an aggressive pattern that eventually drew the attention of the Justice Department and other antitrust regulators.

Now the question is whether instant messaging will join email and other applications as part of Internet Explorer. Although a combined product may look good on the drawing board, the company has not always guessed correctly in its Internet strategy. For example, an attempt to steer Web traffic to cobranded sites through Explorer channels failed in a earlier release of the browser.

"In the narrow-band world the 'open Web' has mostly won. Microsoft's desktop Web channel system didn't catch on, and even AOL had to make Web surfing from the proprietary system easy," said Charles Conn, chief executive of Ticketmaster Online-CitySearch.

All of which helps explain why AOL reacted so vociferously to the threat of a Microsoft encroachment on this potentially lucrative turf. Yet in its rush to block its opponent as early as possible, AOL may have made a short-term strategic error by alienating some of its own members who wanted the ability to communicate with people using all forms of messaging software.

The backlash was philosophical as well as practical. For the most part, citizens of cyberspace are opposed to anything that creates unnecessary boundaries, and AOL's blockade of Microsoft's Messenger technology was widely viewed as an act of corporate selfishness that reflected bald hypocrisy for a company that claims to do everything in the best interests of its members. Microsoft's public pleas for open standards on messaging also rang hollow because of its own market dominance in so many areas.

"I think the medical term is schizoid," one Web veteran said of AOL's apparent double standard. Making matters worse, he added, "it's not immediately clear what AOL should do with the millions of instant messengers they've got using the system."

Indeed, with opportunity comes competition, and AOL has plenty of both. If the online service is planning to exploit instant messaging outside the PC realm, potential challengers proliferate in a hurry. The Baby Bells, TV networks, and a powerful cable industry led by AT&T are just a few.

"I think it could actually be bigger than the browser wars," Conn said. "It will be new coalitions of players, not just the old battle. AT&T/Excite, AOL/Netscape/Bells, and others will be the new cast."

Others see competition for AOL even from traditional allies in PC hardware such as Compaq, Dell, and Gateway. Sony, which has massive operations in consumer electronics devices, could be a natural opponent.

"Eventually you will see that every device will come built in with Internet access. This means device manufacturers will control the initial screen when going to the Net," Jain said. "People's first experience with the Net will be with what they see on a device, not by going to portals."

Even if Microsoft were to lose its dominant status in this new world order, many believe that the consequences for the average consumer may be hardly noticeable.

"Steve Case has said he wants to be the next Microsoft," AOL Watch's Cassel said of the online service's leader. "I don't believe either one of these guys as far as I can throw them. I have friends who say they hope they'll both beat each other into the ground."  

News.com's Mike Ricciuti, Aimee Male, Beth Lipton, and Paul Festa contributed to this report.

Go to: Where the Web will be won