The Problem of IM Interoperability

With the news that Yahoo! is blocking Trillian and considering a clone there will undoubtedly be further cries from the digerati about ‘network effects’, the ‘power of free’, etc. bemoaning the short-sightedness of the major IM providers for preventing interoperability.

First, note that the point of IM is business, not communications. Communications is the product, which must both satisfy the consumers and support the business case. As of today, there has been little business sense in the IM world, with free clients and free service chasing hundreds of millions of users in exchange for some very weak advertising placements. The unprofitable IM situation is a colonial skirmish in the global portal war, with AOL, Yahoo, and MSN pushing their IM clients as relationship builders rather than profit centers. Now if the whole point of offering AIM is to maintain the AOL-branded relationship with the customer, please remind me exactly why it would be smart for them to open up their networks to other brands? After all, if the medium allows communication across multiple brands what is going to keep the AIM user from switching to MSN or Trillian?

Fine. As long as IM is a relationship builder for the portals it doesn’t make sense to offer interoperability. But why can’t they make money from IM other than dinky advertisements? The common reasoning is the same as holds for free email; if one player started charging for IM the others could hold out as a free option and take all the market share. So the only way to charge for IM is for everyone to charge at the same time. And, thanks to Uncle Sam competitors can’t exactly coordinate their pricing, if you know what I mean.

The classic solution to the prisoners dilemma is to find a way to communicate to your other prisoners. In the IM market, interoperability is the key to allowing the major players to essentially (though not illegally) collude on pricing to turn this money-losing service into a major profit center.

Here’s how it could work. AOL, as the largest player, would announce three changes to the marketplace:

1. It would offer full AIM interoperability to any other service in exchange for a set of standard connection fees based on the number of connections to the AIM service. The fees would have a steep volume discount, making it much more beneficial on a per-user basis for Yahoo! and MSN than to Joes’ IM service.

2. AOL would be willing to pay these same rates to the other major players for their interoperability.

3. As of a specific date in the future AIM would be available as a subscription service for non-AOL users. AOL subscribers could still get AIM free.

The effect of this announcement would be to create a payment system for IM which would push the other two major players into moving to a paid system as well. After all, if you’re Yahoo! would you rather hold out and try to get more free IM users, without any interoperability; or join the bandwagon and create a new profitable subscription service.

This move for interoperability fees would also greatly benefit the three portal players because the business IM companies would be providing a net inflow of capital into the ‘free’ marketplace.

Finally, the beauty of the pre-announcement plan is that AOL could always back out of charging before going live. This pattern of announce-retreat has been used in the airline world for price raises for years.