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AOL aims for revenue from Instant Messenger

America Online, it seems, can do little right these days.

Its core subscriber base is shrinking, its users are being swamped with junk e-mail, and its financial woes have forced founder Steve Case and other top officials to resign.

Yet in one area, America Online Inc. continues to enjoy spectacular success: It is the leading purveyor of instant messaging, the world's most popular electronic communications tool. The only problem is, the service is free and no one has figured out how to make much money from it.

Every day, about 2.3-billion instant messages are sent around the world via America Online, eclipsing e-mail as the favored way for people to communicate with family, friends and co-workers. About 40 percent of Americans ages 14 to 24 use AOL's instant messaging services, the company says.

America Online's new senior management, led by chief executive Jonathan Miller, has focused on IM, as it is known, as a powerful tool with the potential to provide the company with the fresh revenue needed to restore growth.

AOL has begun trying to sell specialized versions of IM to businesses. For example, it has a revenue-sharing partnership with a cell phone company, Nextel Communications Inc., to offer instant messaging to its customers, and it is pushing for more such deals. And while it has no plans to charge consumers for the existing service, AOL is considering selling add-ons such as matchmaking and games.

Instant messaging is the person-to-person ability to send electronic messages back and forth in real time on computers. It once was seen mostly as a trendy alternative for teenagers who otherwise would be chatting on the phone. But without any special help from AOL, it has taken strong hold among workers sitting at their desks.

In February, hundreds of people gathered for a two-day conference in Boston on IM in the workplace. Alan Meckler, head of Jupiter Research, which organized the forum, said IM is surging from the "bottom up," as employees download software from AOL or its rivals onto desktop computers and send messages without supervision from their company's computer administrators.

"This is really an enormous untapped audience online," said Stephen Kim, research director of ComScore Media Matrix. "It is a big audience, and it is really active, but it is really hard to turn that into dollars."

The strong appeal of instant messaging stems from various features that distinguish it from e-mail. While e-mail is more like a letter sent through the mail that lands in the recipient's electronic in-box, IM resembles a phone call, with two parties chatting at once.

IM has what experts call "presence," meaning that senders know whether the desired recipient of an instant message is online. Second, there is immediacy; senders and receivers communicate through text messages in real time. Then, there is urgency; as e-mail in-boxes get jammed with junk e-mail, IM has become the most reliable way to ensure that an electronic message receives priority attention. Finally, there is control; computer users have the power to message people they choose, while avoiding others.

The runaway growth of instant messaging is tracked at America Online's Dulles, Va., headquarters, where display screens monitor how, minute by minute, IM is outpacing the use of AOL's other features. The staggering numbers stare AOL executives in the face as they also must contemplate the stagnating subscriptions for their core business of providing Internet access for dialup customers. AOL's loss of subscription and advertising revenue is the main cause of Wall Street's disillusionment with parent company AOL Time Warner Inc.

Users of the dialup service receive instant messaging software as part of their monthly $23.90 subscription, but nonsubscribers can download the software free. AOL and its main rivals, Microsoft Corp. and Yahoo Inc., have given away IM software to more than 100-million people, analysts said.

But users of different instant messaging systems cannot communicate readily with each other. AOL has the biggest instant messaging system in the United States, followed by Microsoft and Yahoo.

AOL's main instant messaging software is called AOL Instant Messenger, or AIM. Overseas, AOL has a major presence in Europe, Asia and South America through more sophisticated text-messaging software called ICQ ("I seek you"), which was developed by an Israeli company that America Online bought for $400-million five years ago. ICQ has a directory of messaging addresses for users who want to be listed and 19 languages for instant messaging around the world, and it offers a glimpse into the future of instant messaging in the United States through its ubiquitous presence in mobile messaging among cell phones, computers and other devices.

"The business opportunity for instant messaging is something that is growing every day," said Michael Gartenberg, Jupiter's director of research.

To attack the corporate marketplace, AOL is partnering with Hewlett-Packard and IBM to sell versions of instant messaging to businesses that want to remain in close touch with customers, suppliers and employees.

AOL is permitting Hewlett-Packard to devise new IM features to meet the specific needs of individual businesses. IBM sells its own instant messaging software, called Sametime, which has about 8-million users. But that software enables workers to message only employees within their company. By combining it with AOL's software, IBM will be able to sell a package enabling employees to communicate with people on the outside.

Significantly, this enterprise package will include features that the free consumer version of IM lacks: ensuring that messages are transmitted over secure networks, with the capability to save messages for future reference, for example. Analysts predict that corporate interest in keeping track of employees' instant messaging will drive demand for new software from AOL, Microsoft and other companies.

On the consumer side, AOL is proceeding cautiously. Some of the factors that make instant messaging popular also make it challenging to turn the service into a big moneymaker.

Part of its appeal is that there are no popup ads or other commercial intrusions to get in the way of communicating. America Online executives fear that charging consumers for basic IM use, which they are not considering, or loading the service with ads and promotions could drive people to use the services offered by Microsoft and Yahoo.

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