[WashPost] AIM/ICQ advertising arrives on the bottom line

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From: Rohit Khare (Rohit@KnowNow.com)
Date: Tue Jan 09 2001 - 18:41:14 PST

Pop-Up Profit For AOL
By Alec Klein
Washington Post Staff Writer
Tuesday, January 9, 2001 ; Page A01

America Online Inc. has long played down the financial potential of
its popular instant-messaging software.

"We've always viewed it as a feature, not a business," chief
executive Steve Case told Congress in September, arguing that it
should not be included as part of the government's review of AOL's
takeover of Time Warner Inc. "It's not really a revenue-generating
business for us."

It is now. In recent months, AOL has transformed the product that
first caught on with teenagers as a way to trade quick messages into
a money-making enterprise -- raising new questions about whether AOL
has a financial incentive to use its current dominant position in
instant messaging to unfairly thwart competitors.

The company has placed several big advertisers on the pop-up window
that appears on millions of computer screens when users activate the
software. The advertisers include Gymboree Corp., J.C. Penney Co. and
Universal Studios' hit movie "How the Grinch Stole Christmas."

AOL's two instant-messaging services -- AOL Instant Messenger and ICQ
-- count more than 140 million registered users worldwide, far more
than any of the company's rivals, including Yahoo Messenger and
Microsoft's MSN Messenger Service.

Many analysts believe instant messaging is becoming the next great
revolution in communications to rival the telephone. AOL is building
its advertising base at a time when there is no competitor of
comparable size, although Yahoo and Microsoft are gaining ground.

The Federal Trade Commission, which has jurisdiction over antitrust
policy, reviewed the instant-messaging questions and decided to
approve the merger last month without attaching conditions to that
aspect of the deal. The Federal Communications Commission is now
weighing in, the last federal agency that must approve the deal
before it is made final. The FCC has statutory responsibility to
examine whether a merger would serve the "public interest," and it is
under that authority that officials there are raising questions about
how AOL runs its instant-messaging services.

Barry Schuler, AOL's president of interactive services, said
yesterday that Case was not misleading members of Congress about the
importance of the company's instant-messaging system because it is
not "big business."

"That's not to say there's not revenue associated with it. There is,"
Schuler said, adding that AOL is still in the early stages of
determining what business model it will use for instant messaging.
"This is all experimentation," he said.

Schuler declined to say how much revenue it generates, characterizing
the amount as "very, very small."

AOL competitors say it is important for federal regulators to view
instant messaging not simply as a feature, but as a business that AOL
could dominate and extend beyond enabling real-time exchange of text
messages; some believe the service could become the preferred way to
exchange music and videos, for instance. Instant messaging could
become even more ubiquitous as the technology migrates to wireless
phones and other devices.

"This is growing more rapidly than e-mail. What would happen if one
company had a monopoly on e-mail?" said Jon Englund, vice president
for policy and government affairs at Excite At Home, an Internet
service that offers a rival instant-messaging product. "In some ways
it's more important than e-mail. It gives you the ability to
communicate with people in real time. That means that AOL will have a
way to drive the Internet's future killer applications."

AOL officials denied the company is trying to harm competition,
noting that AOL freely licenses its software to other companies.

Some FCC officials want to impose conditions on the firm guaranteeing
that it will allow rival instant-messaging systems to connect to its
own. AOL has refused to make its software interoperable with others
because it says it is concerned about users' security and privacy.

An FCC decision could occur this week. Dulles-based AOL and Time
Warner of New York announced their $183 billion marriage a year ago
and have been working ever since to secure all the necessary
regulatory approvals.

AOL insists that its instant-messaging system is nothing more than a
component of its online offerings. Users can download the software
free from the Web, and they do not have to be AOL subscribers to sign
up. AOL recently started selling promotional space to big advertisers
whose banner ads appear inside a pop-up box that lists a user's
instant-messaging "buddies." When users click on the banner ad, they
are taken to that advertiser's Web site. Most other instant-messaging
systems, including Microsoft's MSN Messenger Service, also sell
banner ads.

It's not just ads for "The Grinch" and Gymboree, but a host of other
companies as well. Ads for computer maker Gateway Inc., Telefonica
SA, a Spanish telecommunications company, and retailers Target Corp.
and Circuit City were on the service yesterday.

For Universal, promoting "The Grinch" on AOL's instant-messaging
system "was part of our overall advertising buy with AOL," said Kevin
Campbell, vice president of new media for Universal Pictures, the
movie division of Universal Studios. Campbell said Universal paid AOL
a certain amount per 1,000 impressions to advertise "The Grinch," a
blockbuster film that has so far made $257 million. The
instant-messaging ads helped the movie reach younger viewers and
families, he said. At its peak, "The Grinch" Web site had more than 2
million visitors per month.

AOL charges $3 per 1,000 impressions on its AOL Instant Messenger, or
AIM, software, sources said. An impression is the number of times an
ad is displayed. The length of time can vary from seconds to minutes.
AOL counts 61 million users of its AIM software.

AOL charges $5 per thousand impressions to advertise on its other
instant-messaging system, which is called ICQ, sources said. The
higher price apparently is in recognition of ICQ's larger user base
of about 80 million. Until recently, industry estimates said AIM and
ICQ together accounted for as much as 90 percent of the
instant-messaging market. But rivals are gaining significant ground.

Although no firm market share numbers are available, Internet
research firm Media Metrix released a report in November that
measured growth in instant-messaging use, comparing August 1999 with
August 2000. It measured only actual use, based on company surveys,
rather than the number of registered users. Media Metrix found that
21.5 million people in the United States used AIM in August 2000 and
9.1 million used ICQ. Yahoo had 10.6 million and Microsoft had 10.3

In contrast to Universal Pictures, AOL approached Gymboree about
advertising on its instant-messaging system, said Susan Neal, vice
president of business development at the big manufacturer and
retailer of children's apparel. She said Gymboree's instant-messaging
ads were not a separate line item but part of a package deal to
advertise on AOL's service. "We're paying them a fee annually to be
on their site," Neal said, adding that it was too early to tell
whether the promotions have helped reach Gymboree's target audience
of mothers.

AOL promotes the notion of advertising on its instant-messaging
services on its AOL.com site. Under the rubric "Advertise With Us,"
AOL calls instant messaging "a pioneering innovation that makes
communication even easier than e-mail."

It is difficult to measure AOL's instant-messaging advertising
revenue in part because some of the ads are part of a package deal,
like Gymboree's.

Also, officials at other instant-messaging firms say it is common to
arrange barter deals, in which companies will agree to place banner
ads on their instant-messaging service in exchange for ads promoting
their own service.

Youssef Squali, an analyst with investment bank ING Barings LLC,
estimates that as of Sept. 30, the end of AOL's first quarter, the
company had a backlog of about $100 million in instant-messaging
revenue for its ICQ service alone, including banner ads. That figure
represents how much advertisers have committed in contracts to

"Until very recently, they didn't even have advertising," Squali
said. "The whole leveraging of the instant-messaging service is just

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