Analysis: Microsoft, Yahoo Alliance Takes Aim At IM Competition - InformationWeek

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Analysis: Microsoft, Yahoo Alliance Takes Aim At IM Competition

Microsoft and Yahoo said they would provide customers in the second quarter of next year with the basic communication services of text communication, computer-to-computer voice calls and presence, which is the ability to see who is available on the network.

Microsoft Corp. and Yahoo Inc. on Wednesday said they would let instant-messaging subscribers communicate across their networks for the first time, a move seen as a response to competitive pressures building from market leader America Online Inc., EBay Inc. and Google Inc.

Microsoft and Yahoo said they would provide customers in the second quarter of next year with the basic communication services of text communication, computer-to-computer voice calls and presence, which is the ability to see who is available on the network. The deal does not apply to higher-level services, such as tying IM to search, online music or photo sharing; nor do the companies plan to enter an advertising agreement.

Instead the deal focuses on providing consumers with the ability to communicate across two of the top three instant-messaging networks. Instant-messaging subscribers have long complained about the inability to chat across networks, unless someone is willing to join multiple services.

"It's about providing a service that users really want," Dan Rosensweig, chief operating office for Yahoo, said in joint news conference with Microsoft.

As to why the companies didn't provide interoperability sooner, the complexity of linking two networks with 10s of millions of subscribers was one hampering factor, as well as the business implications of opening up a network of customers to a competitor, the companies said.

Keeping customers on a closed network creates a captured audience for online advertising and makes it easier to lure subscribers to other services.

Nevertheless, company officials insisted that more open instant messaging has been a longtime desire by Microsoft and Yahoo, which expect the combined network to make their IM services more valuable to each other and customers.

"This is a situation were one and one will equal three," Blake Irving, corporate vice president for Microsoft MSN communication services, said.

Nevertheless, the deal is seen more as a result of a changing market in Internet communications. For one, AOL, a division of Time Warner Inc., is firmly established as the market leader in instant messaging in the United States, which is the world's largest consumer market, with 49.2 million subscribers in August, according to web metrics firm ComScore Networks. MSN was second with 24.4 million and Yahoo third with 22 million.

In addition, online auctioneer EBay has agreed to acquire Internet telephony vendor Skype Technologies SA for $2.6 billion. Skype's voice over Internet protocol software has been downloaded 163 million times worldwide. EBay competes with Yahoo and Microsoft in online retail.

Google, on the other hand, launched in August its own instant-messaging service Google Talk, which includes PC-to-PC voice calls. As the new kid on the block, Google has a tiny portion of the IM market. Nevertheless, Microsoft has identified Google as a top competitor on the Internet.

"The most important objective for an Internet portal is to make itself attractive to advertisers: the bigger your base of registered users, the bigger is the audience that you can offer to advertisers," John Delaney, analyst for market researcher Ovum, said in a research note. "By combining their IM user bases, MSN and Yahoo ‘raise the bar’ that Google would need to clear to establish dominance as an IM provider, to a very high level."

With all the major web portals offering web mail, Internet telephony and instant messaging, experts also believe they are gradually building a communications platform that could one day seamlessly integrate email, voicemail and IM, making it all accessible through multiple devices.

The heart of such a communications hub would be the contacts directory, experts say. Besides grouping people by their relationship with the IM subscriber, such as a family member, friend or colleague, the directory also establishes whether they are reachable. That could one day be expanded to add how the person wants to be reached, by PC, cellular phone or some other device.

Knowing whether people are available, how to reach them and where they are could one day open up a lucrative advertising market.

Microsoft and Yahoo, however, appear to be taking a cautious approach, since the deal does not go beyond basic services. Also, the deal essentially creates a larger proprietary network, and will not, on its own, lead to an open system, such as email.

"I would not say this is a sign of great openness," Joe Wilcox, analyst for JupiterResearch, said. "It's more like establishing diplomatic relations between two countries, rather than opening borders."

As the market leader, AOL's next move is important. The company has refused to open its IM network in the past, but is also in talks with Microsoft to combine their Internet operations, according to the Wall Street Journal.

"Assuming there may have been, or may be, talks between AOL and Microsoft, the timing of the (Yahoo-Microsoft) announcement may have been intentional to influence those presumed discussions," Wilcox said. "AOL has to decide does it want to work with the Microsoft camp, go its own way or form a strategic alliance with someone else."

AOL did not return calls for comment.

Customers of Yahoo and Microsoft are expected to be able to sign in with one user ID and password for either network, and automatically have access to subscribers of both companies. The combined service is expected to use session initiation protocol, or SIP, a protocol for real-time communications.

Security on the larger network, however, is expected to be more problematic, since the two companies would not have the same level of control as with their own networks, Jon Sakoda, chief technology officer for IM security firm IMlogic, said. With the combined networks, virus writers will have an easier path in reaching more people.

"These are real-time communication networks that are on disparate technology standards," Sakoda said. "There are some significant challenges."

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