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AOL Rivals Have a Message for the Feds

As America Online (AOL) and Time Warner (TWX) shareholders prepare to vote Friday, there is an unlikely cloud on the horizon. Not only is the Justice Department eyeballing concentration in Time Warner and AOL media properties, they are also taking a deep and meaningful look into instant messaging, or IM, as part of the review of the companies' $130 billion merger.

Competitors to AOL's AOL Instant Messenger and ICQ instant messaging services -- such as Yahoo! (YHOO), with its Yahoo! Messenger service, or CMGI (CMGI), through subsidiary Tribal Voice's PowWow -- are hoping that after the shareholders approve the combination, the government will make AOL commit to interoperability as a condition of the proposed deal.

It turns out, there's a lot of money at stake in IM. AOL's rivals are fighting to gain compatibility with AOL's instant-messaging services because unification offers the prospect of vast revenue streams, whether through software licensing, advertising and e-commerce or directory services. These rivals say they'll be locked out of those markets unless the government pushes AOL toward what's called interoperability -- the ability to communicate with people using another company's instant messaging service.

If that doesn't happen, competitors say, AOL might end up dominating the instant-messaging market the way Microsoft (MSFT) has owned the market for personal computer operating systems. Last week, AOL proposed a set of guidelines for interoperability, though it's unclear if and when AOL and other companies will mesh their systems. The entire debate raises the question of how AOL or its rivals might make a popular free service into a big moneymaker.

Finding the Value

Where's the commercial value of instant messaging? Depends who you ask. David Card, senior analyst for Jupiter Communications, sees instant messaging as an essential part of some next-generation unified-messaging system. This directory, an electronic descendant of the phone book, would manage a user's communications, routing calls and emails to the appropriate address or device according to instructions it's given. Card and others say the ability of instant-messaging systems to detect whether a user is online, and where, make IM a crucial part of this unified-directory system.

Stock at a Glance
AOL (AOL:NYSE)
Recent Price 58 1/4
52-week high 95 13/16
52-week low 38 7/16
52-week change +4.5%
Market cap $131 billion
Source: Company, Yahoo! Finance.
"It's a pretty powerful concept," says Card. Were the directory in AOL's hands, "It's something that would certainly lock you into an AOL service. ... The more they'd control it, the less you'd want to go away to some other place."

But the directory idea isn't the only attraction for businesses, says Tribal Voice CEO Ross Bagully, who sees licensing as a major money maker for IM providers. A major corporation, for example, could have an instant-messaging system set up through a secure computer for the use of employees, partners and suppliers. "That would be a huge application, and of course, there would be license fees associated with that," Bagully says.

The Marketing Angle

An even bigger opportunity, Bagully says, is enabling businesses to market to consumers over IM. An airline with a block of unsold tickets could send messages to people who have indicated a willingness to react quickly to marketing offers, Bagully imagines. An instant message on a PC, pager or PDA would inform recipients of the special price on a plane leaving in six hours for Paris, say. An airline might pay 15% of revenue for that, says Bagully, given that the alternative is an empty seat.

Similarly, a stockbroker might pay $1 to IM a client with a time-sensitive stock-buying suggestion. Or maybe Fedex (FDX) could IM package recipients instantaneously. "Maybe it's worth a nickel to Fedex to pay someone to make it happen," Bagully says.

Instant-messaging software company Odigo says an appropriate business model is to license its technology to online publishers and Internet access providers, getting a setup fee, a monthly usage fee and one-half of the gross profits on e-commerce transactions that Odigo's software enables. (Odigo has been trying to make its software interoperable with AOL's, but says AOL has blocked it; an AOL spokeswoman, speaking generally, says the company is concerned about protecting the privacy and security of subscribers who use instant messaging.) Like Card, Avner Ronen, co-founder of Odigo, suspects that instant messaging likely won't stand alone. "We don't think we'll be the service on its own," he says. "We think we'll be a core component of many of our partners' offerings."

The Stakes

As to how much money is at stake, Bagully says you can make a guess by comparing it to current communications media. Many users pay $20 monthly for Internet access and $25 to $75 for telephone service. If, perhaps, 100 million people paid $2 a month for a high-end instant-messaging service, that would mean $200 million in monthly access revenue, or $2.4 billion annually.

Or, to use that 100 million number again, imagine that businesses pay a nickel a transaction to send 100 million IMs a day -- a total of $5 million a day, or $1.8 billion a year. Of course, those numbers might be too high -- 5 cents a transaction translates into a cost-per-thousand of $50, pretty high on the scale of Internet advertising. "Is 100 million the right number? I have no idea," Bagully says.

Brian Park, a senior producer at Yahoo! working on instant messaging, suggests to get an idea of money made from instant messaging, one could look at estimates for the wireless text messaging business. A Lehman Brothers report on wireless communications suggests that a type of wireless text messaging used in Europe will grow from 3 billion brief messages monthly at the end of last year to 50 billion at the end of 2001.

But what's clear to Bagully is that there's money in volume, volume, volume. "Whatever the monetization factors are," he says, "the numbers are so big, it becomes an attractive potential."

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