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FCC critics call IM conditions toothless

As the industry takes a closer look at the IM conditions imposed on America Online by the FCC, a consensus is forming that the Internet giant got a free pass.

As the industry takes a closer look at the instant messaging conditions imposed on America Online by the Federal Communications Commission, a consensus is forming that the Internet giant got a free pass.

Among the few conditions placed on the merger between America Online and Time Warner is the stipulation that the merged company will under certain conditions have to open its IM systems, AOL Instant Messenger (AIM) and ICQ, making them interoperable with competitors including Microsoft, Yahoo and smaller fry such as Odigo.

But that interoperability will only become mandatory if AOL implements what the FCC described as "advanced, IM-based high-speed services (AIHS) applications."

AOL said Friday it had no plans to launch any such services.

In other words, analysts said, the FCC approved the merger without any meaningful requirements regarding instant messaging.

"The FCC has gifted AOL the market," said Seamus McAteer, a research fellow with Jupiter Media Metrix. "They've decided IM is not a core telephony market."

Initially underestimated in its popularity, instant messaging is a powerful form of communication that has become part of a larger conflict that will ultimately determine who controls much of the Internet itself. As with e-mail and browsers, companies that own this technology can lead their subscribers to advertising and other revenues while increasing the value of their real estate on the PC desktop.

AOL underscored the importance of this fight last year by blocking other forms of instant messaging from working with its own. But this aggressive tactic increased scrutiny from Congress and federal regulators, who have been lobbied heavily by AOL competitors--led by the now-defunct CMGI-owned companies iCast and Tribal Voice--seeking to turn instant messaging into a key issue in the AOL-Time Warner merger.

AOL critics have testified in front of regulators, demanding the government force the online giant to open its IM network to rivals. IM proponents say the technology could be as pervasive and influential as the telephone if a common communication standard is established. Competitors have also criticized AOL for backing away from its promises to open its network.

Given the stakes, many had hoped the FCC would impose strict conditions on the merger to help level the playing field for competitors. By all accounts, rivals did not get their way, despite personal lobbying efforts on IM open standards by Microsoft Chairman Bill Gates and Excite@Home Chief Executive George Bell.

AOL said that it was generally pleased with the FCC's decision regarding IM interoperability.

"The FCC imposed no conditions on our current IM services," said AOL representative Kathy McKiernan. "While we believe the condition is unnecessary, we are pleased that it will have no financial effect on the company, and we are pleased that we'll be able to continue to offer the safest, most secure service to our members."

The FCC's "AIHS" condition received harsh criticism both from AOL competitors, which wanted interoperability requirements with teeth, and from opponents of such a requirement.

"By its action, the commission mandates that AOL Time Warner must offer interoperability for a product that does not as yet exist," wrote Commissioner Michael Powell, who voted to approve the merger but dissented on the IM provisions.

For their part, AOL's competitors judged the provision inconsequential for all practical purposes.

"It's an interesting angle that they found, but I don't think it changes anything immediately," said Avner Ronen, founder and vice president of strategic development at Odigo. "I don't think videoconferencing has much to do with IM. It's a long shot, and it allows AOL to continue to grow its service in an environment where it has a monopoly, while continuing to block companies like Microsoft, Yahoo and ourselves."

An author of the FCC's IM conditions countered that the agency had to be concerned not with the present state of the IM market, but with the potential effects of the companies in combination.

"When a merger comes to you, you have to look at what harms come out of that marriage that wouldn't be there but for this marriage," said Deborah Lathen, chief of the FCC's cable services bureau, which wrote the provisions and recommended them to the commissioners. "AOL had an earned monopoly in instant messaging. They had earned their market share because they had innovated the product. But we did not want them to take the monopoly in text messaging and leverage it into new areas. If they do decide to do that, there are conditions."

Microsoft lobbying falls short
A representative for IMUnified, a group of AOL competitors whose members include AT&T, Excite@Home and Microsoft, said that the FCC's order Thursday was a partial win because before the petitioning efforts, instant messaging wasn't on the commission's radar.

Even so, the group said the conditions did not go far enough to protect consumers and facilitate competition.

"We were glad that the FCC recognized the importance of the instant AOL Time
Warner package messaging issue," said Estela Mendoza, a spokeswoman for Excite@Home, a founding member of IMUnified, which plans to establish open standards for instant messaging. "But the decision was a limited one, and it falls short of benefiting consumers and competition today.

"Moving forward, members will remain committed to establishing interoperability," Mendoza said, adding that the coalition's members expect to create an application for interoperability this year.

Microsoft has tried to confront AOL on instant messaging before. In the summer of 1999, the software giant released its MSN Messenger Service with a feature that lets its members communicate with AOL's members. AOL promptly blocked Microsoft and criticized the move as akin to "hacking" into its network. The software giant defended its actions by saying it was defending consumers' right to open communication.

AOL has said it supports the development of an interoperable system for all IM networks but has cited privacy and security concerns as the reasons it's taking its time. But IMUnified said Friday that this support has faltered since it expressed interest a year and a half ago.

As a result, "federal officials, the industry, standards-setting bodies and consumers will be watching AOL's actions in the coming months to see if it lives up to the promises it has made," the group said in a statement.

Is interoperability inevitable?
Regardless, IM interoperability may be the future. Financial analysts say that despite the FCC's decision to enforce open standards only for "advanced services," AOL may begin to implement an interoperability application for current offerings as soon as this year.

Industry analysts agreed, citing market pressures that will nudge the new media giant toward a more open system.

"While the FCC hasn't mandated an opening, I do expect to see a more open approach to messaging once AOL starts cutting deals with wireless carriers to facilitate cross-platform communications," said Jupiter's McAteer. "Telcos like to implement standards-based technologies."

The FCC said the provision will prod AOL into embracing an interoperable system.

"We have increased their incentives to be interoperable by limiting their abilities to move into these new areas," Lathen said.