The Wall Street Journal

Copyright (c) 2001, Dow Jones & Company, Inc.

Friday, March 23, 2001

Talk Is Cheap: AOL's Buddy Lists Spark Race to Harness The Power of 'Presence'

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Microsoft, Yahoo and Others Seek to Exploit Ability To Know Who Is Online

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A HailStorm of Criticism

By Julia Angwin

Staff Reporter of The Wall Street Journal

America Online Inc. owes a lot of its success to its Buddy List. Now, it's about to find out how loyal its buddies are.

The Buddy List -- an instant-messaging system that lets AOL members see who among their friends is online -- is a standard feature of AOL's service, derived from technology that has been around for years. But it has become one of the most precious pieces in AOL's collection of Internet properties. Today, most of AOL's 28 million subscribers use the Buddy List, a huge draw that helps keep them from defecting to rival services. Tens of millions more use one of the two versions the company distributes free over the Internet.

The result: As instant messages explode in usage to become an important medium, the newly merged AOL Time Warner Inc. is the dominant player. But now it's drawing intense competition from Microsoft Corp., Yahoo! Inc. and others who see vast untapped potential in expanding messages to businesses, phones, and beyond. Already, accusations of unfair tactics are flying back and forth among the major players. Regulators are keeping a close eye on the proceedings. And a potential spoiler lurks on the horizon: an independent instant-messaging program designed to overcome the incompatibilities between the instant- messaging systems of AOL, Microsoft and other major suppliers.

The popularity and promise of Buddy List technology rests on what people in the online industry call "presence," or the ability to know when someone else is logged on. With Buddy List, when an AOL user signs on, a list pops up on the computer screen to display only the names of the user's selected "buddies" who are online at the time. The list is updated in real time, as buddies sign on and sign off. The user selects a buddy who is online, types in a message, and sends it; a split-second later, the message pops up in a box on the buddy's screen, announced by a telltale chime.

The next generation of presence technology aims to expand the concept beyond computers to cover cellphones, pagers and television sets, letting others (among them, eventually, advertisers) know not only when people are available, but where they are, too. And messages aren't confined to text, but include voice and, potentially, video. With the rise of round-the-clock broadband connections, which means people are "present" constantly, many companies are also fine-tuning ways to let users set controls on who contacts them and when.

In the view of some, it's the next step in an evolutionary process that began with the telephone. "Instant messaging is the tip of the iceberg for using the Internet as a communications hub," says John Patrick, vice president of Internet technology at International Business Machines Corp. "In terms of maturity, we're probably 5% of the way into the real impact that instant messaging is going to have." At IBM, 65,000 employees use the company's own instant-messaging system daily. Its Lotus division also sells instant-messaging systems to corporate customers.

"I don't think it will replace the phone, but the technologies will complement each other," says Brian Park, senior producer at Yahoo. Yahoo launched its free instant-messaging service with buddy-list features in March 1998. The service ranks third in the U.S., with more than 12 million users, according to Media Metrix, a New York research firm.

That puts Yahoo ahead of dozens of other companies entering the fray with their own versions of the technology, but behind AOL and the other heavyweight, Microsoft, which has more than 15 million users in the U.S. of its free MSN Messenger, a system similar to AOL's.

Earlier this week Microsoft made clear the seriousness of its intentions with the announcement of its HailStorm initiative. The idea is to create a "single sign-on" that customers can use to access many Web services from their PCs, cellphones or pagers. Some of the services will use MSN Messenger's presence and instant-messaging technology. Microsoft says it will eventually charge for some of these services.

Most troubling to AOL and others, Microsoft says it plans to include some support for HailStorm in Windows XP, the next version of its dominant operating system, due out in the fall.

That is unfair, says Barry Schuler, chief executive of the America Online division of AOL Time Warner. He draws a comparison with the battle for Web- browser dominance that sparked the government's successful antitrust suit against Microsoft in 1998, now pending before an appeals court. "When Microsoft feels like it can't compete, it goes back to the old tactic of integration with the operating system to try to kill all competitors," Mr. Schuler says. "It's the same thing over and over again."

Some antitrust enforcers say they are concerned that HailStorm raises many of the same issues that were central to the 1998 lawsuit. "Our concern is whether they are continuing to use the operating system to enter and dominate other markets, rather than having competition decide who prevails," says Tom Miller, Iowa's attorney general. New York, Connecticut and other states have echoed this concern; the Justice Department declines to comment.

"AOL has nothing close to what we're about to deliver with presence," retorts Yusuf Mehdi, a vice president at Microsoft. "Now that we have debuted the magic and excitement of HailStorm, it's completely predictable that they've decided to change strategy and complain about it in traditional fashion." In announcing HailStorm, Microsoft stressed that the services are compatible with many operating systems, in addition to Windows.

Microsoft is pitching HailStorm at consumers, but it hopes eventually to pursue the corporate market, where customers tend to be more willing to pay for Internet services. Already, the company builds instant messaging into its latest corporate e-mail system, Exchange 2000.

And the corporate market is where AOL is most vulnerable. The Buddy List doesn't generate much in the way of earnings for AOL, other than revenue from ads that appear on users' Buddy List windows. To many AOL executives, the value of Buddy List is that it provides a lot of "control of the namespace," meaning subscribers are less likely to switch services once they have established a screen name that all their friends know and use.

Yet, while businesses find the idea of presence -- knowing when employees are online and sending and receiving instant messages -- appealing, many worry about the security of storing employees' buddy lists and routing their instant messages through AOL's computers in Virginia. Few companies encourage employees to use AOL's instant-messaging service, though many workers do so anyway.

UAL Corp.'s United Airlines is installing a Lotus instant-messaging system, in part because the system lets the company store all the buddy lists and instant messages internally, on its own computers. "Often, we're dealing with secure and confidential information, and we want to make sure we can control that environment," says Casey Hossa, director of sales and marketing in the information-services division of the Elk Grove, Ill., company.

Mr. Schuler concedes that AOL is "focused on solutions for consumers." He says the company hopes to offer something to businesses soon through iPlanet E- Commerce Solutions, its two-year-old business-software alliance with Sun Microsystems Inc. So far, the alliance hasn't released any instant-messaging products.

If AOL doesn't act fast,"some of the AOL consumer properties could end up becoming, I would fear, a bit of a backwater," says Tim O'Reilly, founder of publisher O'Reilly & Associates. In 1995, Mr. O'Reilly sold his Global Network Navigator, an early Web directory, to AOL, but AOL didn't aggressively exploit it, leaving an opening for Yahoo to dominate the field.

Not only is AOL vulnerable in the corporate market; its dominance of the consumer side is under attack, too. Microsoft, Yahoo, AT&T Corp. and others complained last year to the Federal Communications Commission during its review of the AOL-Time Warner merger that AOL wasn't working hard enough to let its users send instant messages to other companies' customers, though none of the major rival systems are compatible, either.

Many at the FCC were convinced that instant messaging could become a communications platform like the telephone, but the agency was also wary of breaking its pledge not to regulate the Internet. In the end, the agency let the status quo stand for AOL Time Warner, but for one exception. The agency said AOL can offer video services via instant messaging, assuming the technology is developed, if the company meets one of three conditions: implementing an industry standard; signing a contract with at least one competitor that would allow their systems to talk to each other; or showing that it no longer dominates the market for instant-messaging services.

At an FCC hearing last summer, AOL said it would begin testing on its own an"interoperable" messaging system by this summer. However, Mr. Schuler now says the company might be forced to re-evaluate that idea in light of Microsoft's HailStorm. "It's a dramatic change in the landscape," he says.

Though many large companies used crude forms of instant messaging in their old, closed computer networks as long as 40 years ago, the technology was largely lost as businesses switched to open, desktop networks and began using e-mail. In 1989, AOL began offering instant messaging, but the service didn't take off until the idea of presence was added.

That arrived with Barry Appelman. While working at IBM, he used instant messaging on the company's mainframe computer, and he and some colleagues wrote small programs that told them who of their friends was logged on -- an early application of presence. By 1994, he was at AOL, which was looking for a way to differentiate itself from its competitors and keep members signed on to the service longer (this was when members paid by the hour). Mr. Appelman says "the germ of the idea [for the Buddy List] came from the chat-room list," the AOL window that displays the screen names of people who are in an AOL chat room at a given time.

The technology wasn't that complex. After all, presence is an inherent feature of many computer networks, particularly those at AOL, which from the start have monitored subscribers' behavior while online. Mr. Appelman hired a single contract programmer, Stephen D. Williams, to build a system that allows subscribers to create a buddy list and that then matches entries on the list with the subscriber database. It took Mr. Williams five months to build the prototype. The first Buddy List allowed each user to have 100 buddies (the current list allows 160).

When Mr. Appelman launched the service internally in September 1995, many employees weren't comfortable with their colleagues knowing when they were signed on. Some called it a "stalker" feature. Soon enough, though, employees were hooked. These days, the halls of AOL headquarters in Dulles, Va., echo with the chimes of instant messages.

In March 1996, AOL launched the Buddy List for subscribers. With few changes, today's version is the same simple text-messaging system subscribers used back then. In 1997, the company launched AOL Instant Messenger, or AIM, a free version available to nonsubscribers via the Internet. It has more-advanced features than Buddy List, such as allowing users to trade text, sound and image files, and to talk using digital microphones. ICQ, the Israeli service AOL bought in 1998, offers similar features, and lets users build their own chat rooms. Last month alone, 16.4 million people in the U.S. used AOL's Buddy List, according to Media Metrix. An additional 25.5 million people used AIM, and nearly 9.8 million people used ICQ.

It's those numbers that have lured dozens of others to the instant-messaging business -- not just the likes of Microsoft, but start-ups like Groove Networks Inc., which allows Web surfers to meet, chat and work together on the same computer files. Another start-up, ActiveBuddy Inc., builds "buddy bots" that can run around the Web and gather information for the computer user. PresenceWorks Inc. is developing buddy-management systems for corporations.

And then there's Jabber, a small but potentially damaging threat to all the efforts to wring money from instant messaging. In January 1999, 25-year-old programmer Jeremie Miller of Cascade, Iowa, posted some software code on the Web and invited others to join him in writing a program allowing people to run their own instant-messaging systems that could communicate with systems already in use. By May 2000, the program was available free on the Web.

"One of the seeds that started Jabber was that it bothered me to no end that AOL was basically controlling all these conversations people were having," Mr. Miller says. "I wanted to build an open network to give control back to the people who want to do instant messaging."

Jabber hasn't made a huge dent in instant messaging. Roughly 60,000 people have downloaded it so far. Yet AOL apparently sees the danger. Just this week, the company started blocking messages sent from Jabber users to people using AOL systems -- to protect the privacy and security of those people, an AOL spokesman says. Mr. Miller says Jabber's programmers have already figured out a way around the blockade. "Currently," he says, "we're up and running."

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Rebecca Buckman and John Wilke contributed to this article.

---- INDEX REFERENCES ----

COMPANY (TICKER):America Online Inc.; Microsoft Corp.; Yahoo! Inc. (AOL MSFT YHOO)

NEWS SUBJECT:Regulation and Government Policy; Newspapers' Section Fronts; Page-One Story; Internet; Front-Page Stories; Antitrust News; Monopolies and Antitrust; Dow Jones Total Market Index; Wall Street Journal; English language content; Content Types; Internet: World Wide Web; Corporate and Industrial News (C13 FRT NPAG NET PAG TST C34 WEI WSJ ENGL NCAT IWWW CCAT)

MARKET SECTOR:Consumer Cyclical; Consumer Non-Cyclical; Technology (CYC NCY TEC)

INDUSTRY:Consumer & Household Services; Consumer Products & Services; Information & On-Line Services; Media; Publishing; Software; Dow Jones Industrial Average components; Dow Jones Global Titans Index components; NASDAQ 100 components; Dow Jones Sector Titans Index - Technology; Internet: Web Tools (CSV HOU IAS MED PUB SOF XDJI XGTI XNQ1 XSTX IAWT)

PRODUCT:Computer Hardware; Consumer Products; Computer Software; Internet; Media; Washington News and Views (DCO DCP DCS DIT DME DWV)

GOVERNMENT:Federal Communications Commission (FCC); Federal Government, U.S. (FCC FDL)

REGION:California; North America; Pacific Rim; United States; United States; Southern U.S.; Western U.S.; Virginia; Washington (State); North American Countries (CA NME PRM US USA USS USW VA WA NAMZ)

LAYOUT CODES:Page One Umbrella; Right Leader (PGO RGT)

Word Count: 2193

3/23/01 WSJ A1

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