Yahoo! Changes the IM Picture

By adding video to its instant-messaging software, the portal is hoping to leapfrog MSN -- and maybe get the jump on AOL

Who says nothing is happening in the Internet world except pink slips? On June 26, Yahoo! announced that it's offering new instant-messaging software that incorporates a Webcam into IMing. In addition to a pop-up box with text in it, users can now send camera shots of themselves instantly over the Net. That gives the struggling portal a jump on IM rival Microsoft, which won't release a video-enabled IM system until October. It could also help Yahoo! in its long-running battle with IM giant America Online.

More important, Yahoo!'s move may be a gambit to pressure AOL to make its own instant-message system compatible with others. In approving AOL's merger with Time Warner, federal regulators decreed that AOL may not offer video-conferencing services. But if the new Yahoo! feature were to become popular, AOL might feel compelled to offer video IM -- a move that could be construed as breaking the merger restrictions.


  Here's the scenario some analysts see: If video IM takes off, AOL might agree to allow other IM systems to become interoperable with its own -- something it has fought for years -- both to allay regulator concerns and get in on the action. "It's no coincidence that Yahoo! went with video chat rather than other collaborative features," says Nicole Lewis, analyst for Jupiter Media Metrix. "They went for the one that was the hot button in the debate."

The video offering comes at a critical time for Yahoo!, which has been battered by weak online advertising numbers. It also has been losing IM market share to Microsoft, according to a study by Jupiter Media Metrix. Through May 1 of this year, MSN messenger users increased from 14.5 million to 18.4 million. Yahoo! users increased, too, but just barely, from 11.4 million to 11.8 million. Both still lag far behind AOL, which this year saw its IMers go from 24.3 million to 25.5 million. Yahoo! claims Jupiter overestimates the number of actual MSN users.

The new video system will integrate into Yahoo!'s existing IM offering. Users will have a buddy list, and the system will alert them when buddies are online, which ones have a Webcam, and who is accepting video. The software can be set to allow only specific buddies to trade video and to ask permission each time someone seeks to establish a video connection. Yahoo!'s IM software can also be set to let all comers share the scene being viewed by a user's Webcam.


  Once users install the software, they'll be able to include 120x160 pixel pictures as they send messages. As part of the initiative, Yahoo! will promote Logitech's low-price, popular QuickCam Web cameras. Logitech will bundle the Yahoo! IM software to install automatically with the rest of the Logitech Webcam software. The Yahoo! software can already be downloaded for free.

Exactly what audience Yahoo! is aiming for remains unclear. Web cameras are lightly used in comparison with IM software. According to Logitech Senior Vice-President Junien LaBrousse, his company, which is a market leader, has sold about 10 million cameras -- 4 million of them last year. That's a tiny slice of the 192 million visitors Yahoo! reported in March, 2001.

Yahoo! claims that users had requested the service but admits it wasn't at the top of the wish list. "Someone around Yahoo! was saying, 'We should add this.' I don't think it was the No. 1 feature request," speculates Bob Zurek, senior analyst at Forrester Research in Cambridge, Mass. He also wonders whether video messaging will ever find wide acceptance, pointing out that it reduces the anonymity of the Web by attaching an image to words. Notes Zurek: "That's why they have buddy names instead of real names."


  Furthermore, with images refreshing at a top rate of one frame per second, video messages will look more like slide shows than movies. "This isn't streaming video. It's rich media," says Lisa Pollock, director of Yahoo! messaging products.

AOL says it won't be tempted into video IM. "What we've seen is that real-time typing is what's most appealing and remains the biggest draw," says Jim Whitney, an AOL spokesman in Dulles, Va. Nobody really knows yet how regulators under the Bush Administration would react to an explosion in video IM, or how it might change AOL's strategy. For Yahoo!, however, it's a no-lose proposition aimed at making its flagging IM stand out from the pack.

By Roy Furchgott in Baltimore

Edited by Alex Salkever

Before it's here, it's on the Bloomberg Terminal.