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America Online to Buy Internet Chat Service for $287 Million - The New York Times

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Business Day|America Online to Buy Internet Chat Service for $287 Million

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Business Day

America Online to Buy Internet Chat Service for $287 Million

By SAUL HANSELLJUNE 9, 1998

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With all the frenzy over the Internet, entrepreneurs have been able to create and sell companies for huge sums without ever earning a dime. But in what may be a record of financial weightlessness, America Online said yesterday that it would pay at least $287 million for a company that has never taken in a penny in revenue and has no plans to start charging money.

What the company, an Israeli concern called Mirabilis Ltd., does have is users, 12 million of them who spend an average of more than an hour a day on its Internet chat service. Ultimately, America Online hopes to put advertising on the chat service and sell its members products and services. ''When you talk about making money on the Internet, no one is doing more than America Online,'' said Robert W. Pittman, the company's president.

He compared the Internet today to the early days of cable television. MTV, which Mr. Pittman helped start, took in only $500,000 in revenue its first year.

Mirabilis is highly regarded among savvy Internet users for its chat service, known as ICQ (shorthand for ''I seek you''), which enables them to detect when fellow users are on line and to communicate instantly with them. With no promotion other than word of mouth, it has already achieved something of a cult status, growing at more than 50,000 subscribers a day.

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ICQ is attractive to America Online because it appeals to a much younger and more technologically sophisticated audience than the mainstream America Online brand. ''If this were 1980, think underground album-oriented rock radio,'' Mr. Pittman said.

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Moreover, he said, ICQ users spend an average of 75 minutes a day on the service, compared with fewer than 10 minutes a day for highly touted search and directory services such as Yahoo and Lycos.

Many Internet stock analysts praised the deal as an inexpensive way for America Online to increase its customer relationships. The company's shares rose $1.50 yesterday, to $84.75. But there is some skepticism that chat services, no matter how popular, will turn into big money makers.

''E-mail, chat and instant messaging are not good advertising platforms,'' said Bo Peabody, the chief executive of Tripod, an on-line community service recently bought by Lycos. ''When you chat, you look at what you are writing, not what other people are writing,'' he said. Moreover, advertisers worry that their advertisements will be associated with content that they do not control and may be embarrassing. As a result, chat services that do take ads receive the lowest rates of any type of Internet service.

That has not stopped other companies from buying similar services. Most notably, Microsoft paid a reported $400 million for Hotmail, which offers free E-mail services. (Unlike ICQ, Hotmail had started to sell advertisements.)

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Mirabilis also helps America Online's efforts to expand overseas. About 40 percent of ICQ's members are in the United States, 40 percent are in Europe and the rest are spread elsewhere.

Mirabilis was founded two years ago by four Israelis in their early 20's. With a few million dollars in backing from local investors, it has built one of the most popular services on the Internet.

Yossi Vardi, the Mirabilis chairman, said the company had been in discussions with a number of suitors since last August. But they were initially put off by the price the company wanted. ''People were quite amazed with our growth and it took them a while to come to grips with that,'' he said.

America Online agreed to pay $287 million in cash up front and up to $120 million in additional payments starting in 2001, depending on the performance of Mirabilis, which will continue to be run as a separate subsidiary in Tel Aviv.

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America Online's own Internet chat service, AOL Instant Messenger, will continue to be a separate product mainly to allow Internet users to communicate with those on America Online's service. America Online will also provide some technical support to Mirabilis.

Mr. Peabody of Tripod said that since America Online now controlled the two largest chat services it should embrace an open standard that would allow the user of any chat service to send an instant message to a user of a competing service, much as electronic mail works now.

''Now that AOL has a monopoly on the instant messenger space, I'm hopeful they will open the market to everyone,'' he said. Tripod hopes to offer its own message service and such a standard would help it break into the existing market.

Tricia Primrose, a spokeswoman for America Online, said that there were no standards for instant messages now, but that ''historically AOL supports open standards that gain critical mass and acceptance by consumers.''

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