Telcos look at instant messaging providers with deep suspicion. Transporting voice is just a special case of transporting bits, and even the global Internet is now good enough for telephony (indeed, many telcos are already using IP to transport voice for their phone networks, albeit on private IP backbones). The main remaining barriers to VoIP adoption are interoperability with the legacy network during the transition, and signaling (i.e. finding the destination’s IP address). IM providers offer a solution for the latter, and could thus become VoIP providers. AOL actually is, indirectly, through Apple’s iChat AV. This competitive threat explains why, for instance, France Télécom made a defensive investment in open-source IM provider Jabber.

Two recent developments promise to change dramatically the economic underpinnings of the IM industry:

1. Yahoo announced a few weeks ago it would drop its enterprise IM product. Within a week, AOL followed suit.
2. AOL and Yahoo agreed to interoperate with LCS, Microsoft’s forthcoming Enterprise IM server. Microsoft will pay AOL and Yahoo a royalty for access to their respective IM networks.

These announcement make it clear neither Yahoo nor AOL feel they can sell successfully into enterprise accounts, and certainly not match Microsoft’s marketing muscle in that segment.

The second part, in effect Microsoft agreeing to pay termination fees to AOL and Yahoo, means that Microsoft’s business IM users will subsidize consumers. This is very similar to the situation in telephony, where businesses cross-subsidize local telephony for residential customers by paying higher fees. For most telcos, interconnect billing is either the first or second largest source of revenue, and this development may finally make IM profitable for Yahoo and AOL, rather than the loss-leader it is today.

Apparently Microsoft has concluded it cannot bury its IM competitors, and would rather make money now serving its business customers’ demand for an interoperable IM solution than wait to have the entire market to itself using its familiar Windows bundling tactics. Left out in the cold is IBM’s Lotus Sametime IM software.

Businesses will now be able to reach customers on all three major networks, but this does not change the situation for consumers. The big three IM providers have long played cat-and-mouse games with companies like Trillian that tried to provide reverse-engineered clients that work with all three networks. Ostensibly, this is for security reasons, but obviously the real explanation is to protect their respective walled gardens, just as in the early days the Bell Telephone company would refuse to interconnect with its competitors, and many businesses had to have maintain multiple telephones, one for each network. It is not impossible, however, that interoperability will be offered to consumers as a paid, value-added option. Whether consumers are ready to pay is an entirely different question.