Microsoft, Yahoo Will Let Users Exchange Messages (Update1) 
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Oct. 12 (Bloomberg) -- Microsoft Corp. and Yahoo! Inc. will let their users instant message each other for the first time, challenging America Online Inc.'s dominance of Internet messaging.
Under the agreement, Microsoft's MSN Messenger users will be able to exchange messages over the Internet with Yahoo Messenger subscribers starting in the second quarter of 2006, the companies said today in a statement.
The alliance may help Redmond, Washington-based Microsoft, whose MSN is the third-ranking search engine, stem defections to Google Inc., ranked No. 1, and Yahoo, ranked second. Microsoft and Yahoo are trying to fend off a threat from Google, which began a messaging service in August. Combined, Yahoo and Microsoft will have 49.2 million U.S. message users compared with AOL's 51.5 million.
``This alliance is a defensive move and likely a reaction to the current market share dynamics in which Google continues to gain market share,'' J.P. Morgan analyst Imran Khan in New York wrote in a report today. ``This alliance could aid user retention efforts at Yahoo and Microsoft.''
Microsoft and Yahoo users will also be able to make telephone calls to each other using their computers, Yahoo Chief Operating Officer Dan Rosensweig said today on a conference call.
Shares of Microsoft, the world's largest software maker, rose 8 cents to $24.49 at 11:38 a.m. in Nasdaq Stock Market composite trading. They had fallen 8.6 percent this year before today. Sunnyvale, California-based Yahoo rose 48 cents to $34.58. Google fell $1.48 to $304.62. AOL parent Time Warner Inc. dropped 2 cents to $17.78.
`In the Cold'
Yahoo messaging had 21.9 million U.S. users in September and Microsoft had 27.3 million, according to Internet tracker Nielsen//NetRatings. ``It's a good move for both companies in trying to take on No. 1 America Online,'' said Matt Rosoff, an analyst at Kirkland, Washington-based research firm Directions on Microsoft. ``AOL is way ahead in terms of subscriber numbers.''
Internet users have previously been required to download several instant messaging tools to chat with friends that use different software.
``This increases the utility and value of the Yahoo Messenger and MSN Messenger,'' said Charlene Li, an analyst with Cambridge, Massachusetts-based Forrester Research Inc. ``Google Talk and AOL are left out in the cold.''
Compatibility Sought
Microsoft already offers software called Live Communications Server that lets corporate users of Microsoft, Yahoo, and AOL software communicate with each other. Other software, such as Cerulean Studios' Trillian, lets users exchange messages with Microsoft, AOL and Yahoo subscribers.
Mountain View, California-based Google, whose software also lets users place phone calls to each other, is also seeking to make instant messaging programs compatible. Google Talk users can currently talk to people using software including Apple Computer Inc.'s iChat and Trillian.
There may be less incentive for Yahoo and Microsoft to open up their systems to Google because Google currently has fewer users, Forrester's Li said.
Google spokeswoman Eileen Rodriguez said she didn't have an immediate comment. AOL spokeswoman Krista Thomas didn't return a call seeking comment.
To contact the reporter on this story:
Jonathan Thaw in San Francisco at jthaw@bloomberg.net.
