December 18, 2000 4:10 PM PST

Gates urges regulators to address instant messaging

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AOL pressured to open IM
Mike Goodman, analyst, The Yankee Group
Microsoft chairman Bill Gates telephoned the chairman of the Federal Communications Commission last week to urge a close examination of America Online's dominance in instant messaging, a Microsoft representative confirmed.

The call came as the FCC closes in on a recommendation concerning AOL's proposed merger with Time Warner, which could include requiring AOL to make concessions on instant messaging, according to sources close to the agency.

Instant messaging has become a front in the ongoing war to control the Internet, pitting the biggest names in technology against AOL. The wildly popular feature lets people exchange text messages in real time. Proponents say instant messaging will become as pervasive as the telephone only if the network is open to all technologies.

More importantly, IM services have become prime real estate on the PC desktop because people use them so frequently and keep them on for long periods of time.

Gates' round of calls Thursday and Friday included FCC Chairman William Kennard, Commissioner Susan Ness and Commissioner Michael Powell, the Microsoft representative confirmed.

The FCC and AOL declined to comment. Microsoft declined to comment further.

FCC commissioners last week received a staff order for review, sources said, marking one of the final steps in the regulatory approval process. But the blockbuster merger may face more regulatory attention from the FCC than many had anticipated because of concerns about AOL's dominance in instant messaging.

AOL has an overwhelming lead in the sector with its IM population, a distinction that many competitors, including Microsoft and Yahoo, say should require it to open its network to rivals.

The FCC review follows last week's approval of the deal by the Federal Trade Commission, which came with significant restrictions concerning the combined company's high-speed cable business.

With the final terms of the deal firmly in the FCC's court, some of the companies' biggest rivals have begun turning up the heat on the IM issue.

Gates spoke with Kennard on Thursday--the day the FTC announced its conditioned approval of the merger--to express his opinions on the matter. He advocated the need for a standard for IM interoperability and voiced concerns about AOL's alleged backtracking on promises, sources familiar with the conversation said.

Bill Gates Gates and Microsoft are not known for courting the government to take regulatory action. The company continues to staunchly fight antitrust regulators after U.S. District Judge Thomas Penfield Jackson ordered Microsoft to be broken into separate companies for operating systems and for software applications because it violated two sections of the 1890 Sherman Act. Jackson has stayed the order, and Microsoft is appealing the case before the U.S. Court of Appeals for the District of Columbia Circuit.

Gates' phone conversations with regulators came a week after AOL chief executive Steve Case, along with Time Warner president Richard Parsons and other executives, met with FCC officials to address merger concerns. One argument raised by the executives was that FCC intervention into instant messaging would "risk harm to consumers, competition and innovation," according to a Dec. 7 public filing with the FCC.

The filing added that such intervention would "herald the FCC's initiation of regulation of the Internet." The FCC has taken a nonregulatory stance on Internet services, as witnessed in its hesitation to force cable networks to open their lines to rival Internet service providers.

AOL and Time Warner executives also argued that competitors with large audiences could create IM services to challenge AOL's lead.

Challenging the leader
Microsoft has taken a lead among a coalition of AOL's competitors advocating an open IM system, dubbed "IMUnified." The coalition's members include Yahoo and AT&T.

This is not the first time Microsoft has tried to confront AOL on instant messaging. In the summer of 1999, the software giant released its MSN Messenger Service with a feature that let its members communicate with AOL's members. AOL promptly blocked Microsoft and criticized the move as akin to "hacking" into its network. The software giant defended its actions by saying it was defending consumers' right to open communication.

Puppet masters: Who controls the Net Some analysts and industry executives compared Microsoft's actions to its piecemeal dismantling of Netscape Communications in the Web browser market. AOL announced it would acquire Netscape in November 1998.

The FCC's Kennard has said publicly that he wants to finish the AOL-Time Warner review and voting process by the end of the year. Approval of the merger is likely, but the question is how many strings the FCC can attach to the final agreement.

On the table could be stricter guidelines for AOL to open its IM network. It is unclear whether proposed guidelines would apply to both cable and dial-up uses for instant messaging or just to new high-speed applications.

"I'm not sure if (instant messaging) warrants scrutiny or not, but clearly there's a concern about the domination of essentially one provider, and (a concern) that, while in general the FCC does tend to take a market approach in terms of allowing the market to open things up, it hasn't worked that well in terms of IM," said Michael Goodman, an analyst at The Yankee Group.

Typically, FCC staffers who have been reviewing a proposed merger prepare an order with formal recommendations for how to act on the deal. The order is a proposal for the FCC to remedy situations in the deal that may be deemed threatening to the public interest.

Orders are approved by a majority vote from the agency's five commissioners.

A history of mudslinging
In all likelihood, the FCC will consider whether AOL's dominance in instant messaging will require government intervention. Since the January announcement of the AOL-Time Warner merger, rivals have openly fired at AOL's instant messaging lead, sparking a burning debate between the online giant and its competitors that has at times turned nasty.

Critics such as Microsoft, Yahoo, AT&T, Prodigy Communications and start-up service Odigo say AOL has not lived up to its promises to open its IM network. Some companies, most notably Microsoft, Odigo and now-defunct CMGI companies iCast and Tribal Voice, tapped into AOL's IM network without its approval. AOL responded by blocking these attempts, causing a series of cat-and-mouse games over the past year and a half.

These parties want regulators to impose a timetable for AOL to provide the technology for rival services to tap into its network and to require AOL to abide by the schedule as a condition to merger approval.

Making progress?
AOL, however, has said repeatedly that it remains committed to interoperability, or to letting other IM technologies communicate with its members. During testimony in front of FCC commissioners in July, Barry Schuler, AOL president of interactive services, said it would take a year for AOL to build technology to allow rivals to tap into its network. However, issues such as protecting the privacy and security of its members must first be resolved.

AOL executives also have pointed out that the company's lead in the IM battle is not secure. A November study conducted by Jupiter Media Metrix showed that Microsoft and Yahoo each have services with roughly half the membership size of AOL's in the United States. More damaging to the competitors' argument, the study showed that Microsoft's and Yahoo's IM services are growing faster than any others and that Internet users are using multiple services simultaneously.

Rivals with interests in instant messaging have reason to want access. AOL owns the two largest Creating a media titan services in terms of members: AOL Instant Messenger (AIM) and ICQ. In July, AOL reported that AIM had 61 million registered users, 20 million of whom were active. ICQ had 70 million users with 20 million active. The company defines "registered users" based on the number of downloads of its software and identities registered, not on the number of individuals, who may register more than one identity.

Under last week's consent decree with the FTC, AOL Time Warner will be held to three primary conditions. It must offer one rival broadband ISP access to its cable system before AOL can begin such service, followed by at least two additional services within 90 days. It is prevented from disrupting the flow of content being provided to consumers through rival ISPs or interactive TV services on its network. And it is required to offer AOL's digital subscriber line (DSL) services equally to all subscribers.

 

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