The MSN-Yahoo! IM interoperability deal will be great for consumers. It will also likely increase the pressure on AOL to open its IM services and make them competitive on the strength of software and features instead of ubiquity (or to work harder to form a partnership or joint-venture with MSN).
Messaging produces little revenue, but with AOL placing its future growth eggs in the web basket, it is a key global asset. It is also one of the only AOL services that benefits from the network effect. As such, it is very much in AOL's financial interest to keep its IM systems closed as long as possible, especially in geographies in which it has dominant market share (as the mere fact of this helps attract additional users).
In areas where AOL doesn't have a dominant share, however, the walled-garden approach will make the service less attractive to users--especially once everyone begins to view the MSN-Yahoo! open approach as the way the world should be. Thus far, AOL has been insulated from bad PR by being able to argue that interoperability is a technical challenge and that no one else does it either. By mid-2006, however, if the MSN-Yahoo interop works, AOL's IM services will be exposed to (justifiable) criticism.
According to Radicati Group data published in the WSJ, AOL's worldwide share of instant messaging is only 56% versus 44% for the combined MSN and Yahoo!. This is a far less defensible advantage than 56% versus 25% for MSN and 19% for Yahoo! individually. It also seems reasonable to assume that, in many geographies, the MSN-Yahoo! combo will have significantly greater share than AOL, thus putting AOL at a significant competitive disadvantage in areas where today it may be holding its own.
I think a co-op between AOL and MSN on the IM side could reveal some nice synergy effects. Putting together both market shares, technologies, jointly marketing and advertising could strenghten their position on this market. I actually can't think of a competitor, perhaps other mergers will occur to face AOL-MSN IM?
Posted by: Patrick | October 12, 2005 at 02:20 PM
Sorry, please replace AOL with Yahoo in my post...
Posted by: Patrick | October 12, 2005 at 03:36 PM
Although the installed base of a combined instant messenger via Microsoft and Yahoo closes the gap, I'd argue that the actual usage of the service favors AOL much more heavily than the installed numbers show. AOL was the first (not counting ICQ) and continues to be the most popular. It has replaced the phone in a lot of teenage conversations.
Posted by: GTKdoug | October 12, 2005 at 05:57 PM
What would be interesting is to get China-based Tencent with its 180 million plus IM users involved in this discussion. I would like to see Google take a stake in Tencent...
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