Microsoft Sending AOL a Message

REDMOND, Wash. -- The rumors were true. Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) founder Bill Gates on Monday unveiled a handful of software building blocks, code-named "Hailstorm," which will be used to battle rival America Online (AOL Quote - Cramer on AOL - Stock Picks) for control of the instant messaging market.

As reported on TheStreet.com last week, Hailstorm will become Microsoft's platform using instant messaging technology to share information among consumers' PCs, cell phones and other devices. It's part of Microsoft's .Net initiative, which promises to move the software leader's programs into Web-based delivery.

Microsoft wants to dethrone AOL, the current king of the instant messaging (IM) market with 130 million users. Microsoft, whose MSN Messenger messaging service has 18 million users, also is looking for revenue opportunities in every corner of the Web to make up for the sputtering PC market.

"Microsoft and AOL are targeting exactly the same user base," said ING Barings analyst George Godfrey, who rates Microsoft a buy. "AOL won't write the software, but it has other strengths like incredible consumer reach through Time-Warner content like Sports Illustrated." (Godfrey's firm hasn't done recent underwriting for Microsoft.)

In a presentation before 50 financial analysts and industry experts, Gates presented Hailstorm as a Web service that allows applications and services to communicate with one another to suit the user's needs. He trotted out new versions of the company's MSN Messenger service, and Passport identification service upon which Hailstorm is based. Passport is an Internet authentication service that allows people to keep a single login that can be used to access various registration-required Web sites from PC or non-PC devices, such as handhelds.

Hailstorm will allow consumers and business people to access data from their calendars, address books, bank statements, from any location, at any time. This design resembles AOL's offerings -- its users can access IM, news and other services from PCs or handheld devices. Hailstorm, however, is planned to have far more comprehensive offerings than AOL currently does. The initiative will start with 14 software services, including MyNotifications, which gives updates and other information; MyProfile, which includes a name, special dates and photos; My Contacts, an electronic address book, and MyAddress, an electronic and geographic address for identifying the user. The company is already trying to woo third-party developers to create many more applications for Hailstorm.

Microsoft says it won't launch Hailstorm to the public until 2002. Users will pay as yet-unknown subscription fees based on chosen features, and length of usage. Microsoft will offer the service for free to Passport and MSN users. Microsoft's latest OfficeXP and WindowsXP software and its upcoming Xbox game console all will support Hailstorm.

In the meantime, AOL will certainly continue to work on its offerings. But eventually one company will become the clear winner. As Godfrey put it, "Once you input your calendar, contacts and the rest of your life into one service, you're not going to use the other. The cost of switching is too high."

And though analysts applauded the impressive technology demonstrated during Monday's event, they made clear that the real significance to investors is at least a few years away.

"Right now Hailstorm is targeted to consumers, but they are going to be moving into enterprise (large corporation) services. That's where the real opportunity is," says Alex Baluta, Robertson Stephens analyst, who rates the stock buy. (His firm hasn't done recent underwriting for Microsoft.