Chat Buddies

Discussions between Yahoo! and Microsoft have finally begun. No, the companies aren’t promising a merger, but they are trying to make their instant messaging systems talk to each other.

The companies said Wednesday they had started interoperability testing between their proprietary instant messaging clients, more than nine months after the feature was initially announced.

“This is a turning point for the IM industry,” Yahoo! (nasdaq: YHOOnews people ) Chief executive Terry Semel said back in October 2005. But back-and-forth chatting ability between all Yahoo! Messenger and MSN Messenger users likely won’t roll out for a few more months.

The top Internet Portals–Yahoo!, AOL and Microsoft (nasdaq: MSFTnews people )–have been vying for market share in the chat business for nearly ten years, although they do not charge for the services. For their efforts, they earn display advertising dollars, as well as the ability to attract traffic to other products like e-mail, news and games. Nearly 70 million Americans use instant messaging applications every month, according to ComScore Media Metrix.

By joining forces, Yahoo! and Microsoft hope to unseat instant messaging leader AOL–part of Time Warner (nyse: TWXnews people )–from its U.S. leadership position with a greater than 50% share of the chat market. But the un-duplicated American user bases of Yahoo! Messenger and MSN Messenger combined can’t match AOL’s huge audience, according to June data from Nielsen Ratings. Internationally, however, MSN is the most widely used chat client, according to ComScore Media Metrix, which counts the application’s global market share at 61%. Americans, however, are considered more valuable as revenue sources than users in many other countries.

Yahoo! and Microsoft have left the door open to partnerships with other instant messaging networks, although that would probably not include AOL. In December, it was announced that AOL and Google (nasdaq: GOOGnews people ) would work to make their chat systems compatible. Google Chat is a distant fourth-place player in the market, but the two companies became allies at the end of last year, when the search engine bought a 5% stake in AOL and signed an advertising deal.



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