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AOL Escalates the IM Wars

By Burt Helm On Feb. 28, Time-Warner's AOL (TWX) unveiled "AIM Sync." The new service, which is still in testing, links an AOL Instant Messenger's buddy list with contacts stored in Microsoft's (MSFT) Outlook e-mail software. It scans an AIM user's Outlook contact list for any matches in AOL's own giant database of AIM customers' e-mail addresses. If any show up, it adds their IM screen names to the user's AIM buddy list.

AIM Sync also recognizes when an AIM user sends an Outlook user an e-mail. In that case, the AIM user's message appears in Outlook's in-box with a little AIM running-man icon. The Outlook user simply clicks the icon to initiate an IM conversation with the e-mail sender.

Presto, it's e-mail-IM synchronization.

With the new contact-foraging service, AOL execs are making it plain that they'll try just about anything in their hunt for new revenue sources to make up for declining subscriptions.ver the last year, AOL's subscription revenue declined 2%, to $5.68 billion. Online ad sales, however, continue to grow at a healthy 28% annual clip. But they're still less than 18% of subscription sales, and adding new AIM customers could be a boon to online ad sales.

COLLECTING EYEBALLS. This also constitutes a clever play for the future. An estimated 37.3 million U.S. households use instant messaging, according to market researchers at Yankee Group. Of those, 50.7% use AOL's service, 24.3% use Yahoo's (YHOO), and 20.8% use Microsoft's MSN Messenger. Those are big numbers -- but a pittance compared with the 588 million or so people using Outlook around the world. And as time passes, some analysts believe IM'ing will increasingly become a substitute for traditional e-mail, even in the workplace.

By targeting Outlook customers, AOL is going on the offensive while protecting itself in the growing IM market. AIM, though free to use, makes an excellent enticement for consumers to click into AOL's Web portal and use its search service. If they do that, AOL can count them as an audience for online advertisers, who are ever mindful of how many people are visiting a site. "Get as many eyeballs [as you can], and we'll be able to sell it," says Chamath Palihapitiya, vice-president and general manager for instant messaging at AOL.

Don't forget, these aren't any old eyeballs -- they lie right in Microsoft's backyard. Building a plug-in into Outlook beats out Microsoft's own IM service, which now synchronizes with only Redmond's free Hotmail e-mail service. When installed, AOL's plug-in gives AIM users the option of sending an e-mail to every address in the Outlook contact list that's not already in AOL's AIM-user database, inviting each to join AIM.

As mass marketing opportunities go, that's a biggie.

SEAMLESS CONNECTIONS? This represents an aggressive spin on an old model. In addition the links between MSN Messenger and Hotmail, Yahoo ties its instant messenger program with its e-mail. And for paying subscribers, AOL itself has linked AIM to its own e-mail service since 1996.

But this marks the first time any one of the big players has leaped the competitive fence. It's all in preparation for what industry insiders are calling the "instant messenger dial tone," according to Nate Root, a vice-president at Forrester Research. It's only a matter of time, Root says, until IM services are able to work together -- an AOL member chatting with a Yahoo member, and so on. When that happens, little will distinguish providers except for added services like games, weather, and AIM Sync."AOL has a majority position right now, and it's trying to find ways to protect that," says Root.

If AIM Sync catches on, users will be able to employ Outlook to jump directly to AOL content. Though the strategy is clever, it still hinges on whether the product actually proves helpful enough to get people to use it. Critics point to several problems. For instance, AIM Sync will work only if the sender uses the e-mail account he or she submitted to AOL when signing up for a screen name. The alternative is to painstakingly type in the screen names into the contact sheet by hand.

JOINING THE BATTLE? Furthermore, it synchronizes with only the personal "contacts" list on Outlook, rather than the larger "address book" maintained on large corporate servers. However, the product is still in beta testing. But it already has more Outlook synchronization than Microsoft can offer its own customers.

Microsoft execs don't rule out providing similar syncing. "Today, the majority of our customers access their e-mail through," Brooke Richardson, lead product manager for MSN Communication Services, says in an e-mail. "However, we'll continue to...explore broader presence options in the future, including with Outlook."

But for now, that synchronization could well be a big leg up for AOL. Helm is a reporter for BusinessWeek Online in New York

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