The giant Internet and media company said that it is almost finished developing government-mandated technology that will let its messaging service operate with other systems.

In a filing with the Federal Communications Commission, AOL said it has selected a standard, developed new customer software, and created systems that will work with its competitors.

AOL Losing Grip

But industry observers say that AOL is losing its grip on being the top IM provider, despite having a huge lead in overall subscribers to its Internet service.

As a condition of gaining FCC approval for its US$102.6 billion merger last January with Time Warner, AOL was required to have an interoperability system ready to test by now.

In the meantime, however, rivals such as Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO) have moved forward on their own and plan to offer advanced IM features that go well beyond what AOL offers.

Microsoft Moving Up

Microsoft is putting new IM capabilities into its Windows XP operating system, which is scheduled for release on October 25th. The new features include videoconferencing and document collaboration tools.

Yahoo! has also announced videoconferencing capability in its latest version of Yahoo! Messenger.

The stakes are high for all the companies, but for none more so than AOL, which is gradually losing dominance in the IM sector.

AOL Has Lead

Jupiter Media Metrix estimates that AOL is presently the clear leader. About 25.5 million people have downloaded AOL's free service, and the online giant's 31 million subscribers also have access to the service.

But MSN Messenger claims to have about 32 million users around the world, and expects that number to increase significantly once Windows XP is released. Jupiter said that in the United States, the MSN service had 18.4 million users in the latest month tallied.

With more than 192 million people registered for the various services it offers, more people log on to Yahoo! than any other Web site. But according to Jupiter, its instant messaging service has dropped to third place, registering 11.8 million users in May.

"AOL could lose its competitive edge," analyst David Joyce, of Guzman & Company, told NewsFactor Network. "I don't know if it would be catastrophic to its business, but I think they would like to hold on to their leadership role."

Technical Problems

All the leaders have recently experienced problems with their IM services. None was more widely publicized than Microsoft's fiasco earlier this month, when its IM service was partially down for a week.

For Microsoft, the firm's Passport system -- a technology that is centered around its IM capabilities -- is the cornerstone of the company's plan to compete with AOL for supremacy on the Web.

AOL said in its FCC filing that testing of the new technology was complicated because of the likelihood of "unacceptable delays in the transmission of messages and/or presence information" and that some systems would potentially suffer poor performance.

The company said it is close to reaching an agreement with a yet-unnamed technology firm to start its testing.

"Upon successful completion of these tasks, AOL then plans to finalize its gateway, install updated code on its production servers, and begin developing a finished client that supports interoperability," the FCC filing said.