Morpheus IM service guns for the big leagues

When StreamCast Networks Inc. released the updated version of its Morpheus peer-to-peer (P-to-P) file swapping software last week, it also issued a little taunt at Internet maven America Online Inc. (AOL) in the form of a chat service that is interoperable with AOL's Instant Messenger (AIM).

The new IM service, dubbed Morpheus Messenger, is powered by New York software company and is being made available with the 1.9 version of Morpheus. But more than just sealing a collaborative deal with Morpheus, PalTalk hopes it can use the alliance to launch its software into the big leagues, against IM stalwarts like AIM and Microsoft Corp.'s MSN Messenger.

After all, 90 million Internet users have downloaded previous versions of the Morpheus software, according to StreamCast, with an average of 29 million downloads per version.

Given Morpheus' track record, PalTalk said it expects some 1.75 million users to download the new version of Morpheus each week, giving them access to the company's IM service.

"We have a compelling product that generates cash flow and we decided to partner with someone who has a large audience," said PalTalk President and Chief Operating Officer (COO) Robert Lee.

Although the Morpheus Messenger software is free, offering text messaging, audio chat and still image communications, the company has a "Plus" version of the software offering video conferencing capabilities. Morpheus Messenger Plus is priced at US$9.95 for three months or $24.95 for a year.

This subscription service has proven popular with PalTalk's own branded service, according to Lee, allowing the 4-year-old company to reach profitability last September. In fact, the company has raised the price for its subscription service four times since it launched and continues to see a growing number of users, Lee said.

In addition to its deal with Morpheus, PalTalk is also negotiating several other potential partnerships with companies that have audiences of 50 million users a month or more. The PalTalk branded service already boasts 11 million users, and this base combined with the users the company hopes to reach through its alliances with Morpheus and others could put it on the dais with the major IM powerhouses, the company said.

PalTalk's ability to generate revenue from a subscription service, rather than rely on a fickle online advertising market, gives it a key advantage in luring potential partners, according to Lee.

"There are a lot of businesses with profit problems and we give them a value proposition," said Lee. "This is an exciting opportunity for our partners to make money."

PalTalk has a long way to go before it finds itself neck-and-neck with AIM's 100 million users. But the company is not deterred.

Hoping to woo users with interoperability features that AOL has resisted, PalTalk is working to make its IM service compatible with MSN Messenger by the third-quarter of this year, Lee said.

However, Jupiter Media Metrix Inc. Research Director Michael Gartenberg is not so optimistic about PalTalk's chances in the competitive IM market, especially given that the company is pinning some of its hopes on the Morpheus alliance.

"StreamCast is going to have some very, very serious problems in the short-term," said Gartenberg, who compared the P-to-P company's challenges with those faced by Napster Inc. Napster was knocked offline last year by the major record labels amid copyright infringement complaints.

But even if StreamCast manages to maneuver the legal minefield that has come to characterize the P-to-P market, Gartenberg said that he doesn't believe that the file swappers who use Morpheus constitute the type of audience that would pay for a premium IM service.

"It's hard to imagine that people would who just want to trade files would pay for an IM service," Gartenberg said. "At this point the only people will pay are people are those who need secure messaging features."

What's more, even though PalTalk now offers interoperability with AIM, Gartenberg predicted that the Internet giant would soon find a way to block the upstart out of its network.

"AOL is the 800-pound gorilla in this space and they have shut everyone out," said Gartenberg.

Unless PalTalk can come up with some kind of relationship with AOL, they stand little chance of growing their user numbers by offering compatibility with AIM, Gartenberg said.

Other IM services offering AIM interoperability, such as Trillian, have found it difficult to stay connected with AOL's network. Trillian, which promises to connect users to popular services such as MSN Messenger, Yahoo Messenger and AIM and ICQ, has repeatedly been blocked from AOL network.

Despite these obstacles, however, PalTalk remains hopeful.

"We offer a very attractive deal so we are very optimistic," Lee said.

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