August 20, 2003 11:48 AM PDT

FCC lifts AOL messaging limits

The Federal Communications Commission has agreed to lift restrictions that have barred AOL Time Warner from offering advanced instant messaging services including videoconferencing.

FCC commissioners voted 3-2 in a nonpublic meeting to drop the restriction, imposed by the commission when it approved the merger between America Online and Time Warner in January 2001.

The ruling by the FCC, made public Wednesday, said that AOL Time Warner offered compelling evidence that competition with Microsoft and Yahoo was alive and well and that allowing AOL to offer "advanced instant messaging-based high-speed video services" (AIHS) would offer a third alternative to MSN's and Yahoo's video streaming services and "accelerate the pace of innovation for IM services."

FCC chairman Michael Powell, who originally dissented against the IM restriction in 2001, said evidence of MSN and Yahoo's rapid market share growth discredited the restriction's assertion that AOL's dominance posed an unfair advantage to competitors.

"The fact that AOL Time Warner's market share is decreasing in a growing market, combined with the fact that two nontrivial competitors--Microsoft and Yahoo--have established stable and growing market shares, directly contravenes the theory that the market is tipping towards AOL Time Warner," Powell said in a statement.

Commissioners Michael Copp and Jonathan Adelstein dissented from the decision, saying the restriction was lifted prematurely. They argued that AOL Time Warner had not offered "clear and convincing evidence" that the restriction no longer serves the public interest.

"The IM market may be more mature now than in 2001?and AOL's market share may have eroded slightly, but the majority has not conducted the requisite analysis of these market changes and their implications for the public interest, convenience, and necessity," the dissenting statement read. "As such, any removal of the condition is premature and unwarranted."

AOL Time Warner praised the ruling.

"The FCC clearly recognized that text-based instant messaging today is highly competitive," AOL Time Warner spokeswoman Tricia Primrose said in a statement. "This decision, which will allow AOL to fully compete in advanced IM services, will clearly benefit consumers through increased choice and innovation."

A Yahoo representative declined to comment. An MSN representative did not immediately return calls for comment.

Leveling the playing field
Relief from the ban is a significant win for AOL Time Warner's America Online division. The world's largest Internet service has argued that the once-unshakable dominance of its AOL Instant Messenger program has been challenged by the rapid rise in popularity of IM programs from Microsoft and Yahoo. Thus, AOL has claimed, the FCC's original reasoning for the ban is outdated, leaving AOL at a disadvantage against competitors.

In January 2001, the FCC ruled that the combination of AOL and Time Warner could pose problems for competitors trying to develop their own IM products. Regulators and rivals were concerned that combining AOL's leading Internet subscriber base with Time Warner's entertainment content and regional cable monopoly would create an unfair advantage in the market.

But the world AOL inhabits in 2003 is drastically different from the one it dominated in 2001. Back then, messaging services from Yahoo and MSN were still in their infancy and dwarfed by AOL's seemingly insurmountable market-share lead. Rival IM providers also lobbied the FCC aggressively to force AOL to open its servers and allow other IM products to interoperate with its product.

As it turned out, the lack of interoperability helped Microsoft and Yahoo make gains in market share faster. A spike in the popularity of instant messaging forced people to run multiple IM clients on their PCs simultaneously, allowing AOL, MSN and Yahoo to equally prosper.

With nothing to lose, Yahoo and MSN began competing more aggressively against AOL in a features war, launching high-bandwidth video features that AOL was barred from offering. These features have served as the cornerstone for AOL's argument for relief from the FCC's restrictions.

In April of this year, AOL filed a petition to the FCC arguing that competition in IM services is alive and well. Backed up with market statistics showing MSN and Yahoo's growth since 2001, AOL argued that the FCC's original ruling was passe.

Although AOL's AIM and ICQ together make up the largest IM network, MSN and Yahoo are making strides. In March 2003, AIM had 31.9 million unique users while ICQ had 28.3 million, according to ComScore Media Metrix. MSN Messenger reached 23.1 million unique users while Yahoo Messenger reached 19 million. Both Microsoft and Yahoo launched IM clients with virtually zero market share.

Because of these gains, Microsoft and Yahoo have quieted their calls for interoperability. Their new reluctance to open their doors to one another stems in part from their push into selling IM bundled with security features to corporations. This nascent enterprise IM business has become a hot topic largely because AOL, MSN and Yahoo already have millions of business users who have downloaded their clients at work.

 

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