NEW YORK -(Dow Jones)- Instant messaging, a tiny cog in the alliance between Google Inc. (GOOG) and Yahoo Inc. (YHOO), may turn out to be a large motor of growth in the long term and make the companies best friends forever.
While instant-messaging services don't generate much revenue, they serve as guideposts directing users to various Internet portals. Google's push to make Yahoo's more popular Messenger work with its own lagging Google Talk demonstrates the importance placed on the feature. Instant messaging, or IM, is seen as playing a key role in the battle for eyeballs in the mobile arena - and possibly more so with Google's mobile operating system Android.
"In the mobile story, instant messaging will be more important," said Michael Wolf, an analyst at ABI Research. "Right now, it's a fuzzy business proposition."
IM and email are similar in that they are basic services with little business potential, but are necessary tools for driving traffic and building customer loyalty. Eventually, some say, data gleamed from social-networking tools such as IM and email will help create more targeted advertisements. That reality, analysts warned, is still a long way off.
In the meantime, Google doesn't want to fall behind. Late Thursday, much of the attention revolved around the search-advertising pact between the two Internet giants, which essentially quashed a potential merger of Yahoo with Microsoft Corp. (MSFT). The Yahoo-Google deal, though, also allowed users of the competing IM services to communicate with each other. It was seen as a minor victory for Google because usage of its IM service falls well behind other, more established, services.
In terms of audience reach, Yahoo holds a slight lead with 23% of users surveyed by research firm IDC. AOL, a unit of Time Warner Inc. (TWX), trailed closely with 22% of users, while Microsoft's MSN Messenger was at 18%. Google Talk reached 5% of users.
The deal opens up Google Talk, which already works with AOL's IM, to Yahoo's large base of users, making it a more attractive service because it can connect with the big two. It boasts an edge over MSN Messenger, which currently works with Yahoo.
Advertising Potential
Personal computer-based IM services currently generate little revenue, and likely operate at a loss for their companies. The current opportunity for advertising is limited to scrolling ads in buddy lists or with start pages that launch when a user signs on to the service.
But down the line, Internet portals can take information from IM and email services, along with other social-networking tools, to determine how individual relationships work. The frequency of IM conversations and emails can point to how close people are.
"People I exchange emails with are close to me, but people I exchange IMs with are even closer," IDC analyst Karsten Weide said.
That could lead to opportunities, for example, where one person purchases a television or pair of shoes, and close friends get advertisements for similar products.
"From what we know anecdotally, ads based on social networking are more effective than behavior targeting," Weide said.
That is likely why privately held Facebook has begun offering IM services that don't need to be downloaded and ride on top of the Web site.
But portals must walk a fine line in balancing the use of information for targeted advertising and violating their users' privacy. Facebook's much-hyped Beacon advertising platform, which tracked what its users bought and posted that information on its advertising partners' sites, suffered heavy criticism from privacy advocates, and was ultimately shuttered.
While there remains opportunity in IM, industry observers say it will take a while for companies to settle on a business model.
Mobile Endgame
Gaining a large foothold in the IM arena now is crucial because it is seen as an eventual tool to funnel users to the various Internet giants' mobile Web sites.
"It's very, very important," Weide said. "IM usage has become very popular, especially in the younger demographic."
Indeed, more users are seeking out devices that allow for IM. The Sidekick line of devices, produced by Microsoft's Danger division, has been popular with younger customers because of the devices' full keyboards and compatibility with services such as AOL's IM. Handset makers, meanwhile, are rolling out more devices with full keyboards.
The Internet giants are eyeing the younger crowd and see potential visitors to their mobile portals.
Advertisements on cellphones are seen as a potentially lucrative business because the ads can rely on user information and location, improving their relevancy, timeliness and effectiveness. As a result, the companies want to be the top destination for users on their cellphones.
Yahoo has developed and upgraded its mobile-centric OneSearch engine for handsets, and is the current independent leader in the mobile-search field, trailing only the wireless carriers' own portals.
Google has been pushing the free Android mobile operating system and Open Handset Alliance as a way of grabbing a foothold with handset makers and wireless carriers. Google Talk may be one of the features that could show up on Android devices, particularly if it becomes more popular.
The companies hope their moves will give them an edge over their rivals now that the PC search business has been largely set.
For now, the portals are content with IM driving traffic and fending off user defections.
"It's not a sexy business, but it's an important one," Wolf said.
