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| Entrepreneurs Party Line Instant messaging is usually a free service. What makes Jason Katz think he can make a buck selling it?Playing leapfrog technology with the biggest boys sounds suicidal--especially in a giveaway game like instant messaging. But Jason Katz doesn't appear to have a death wish. He has staked $600,000 of his own (and $3.3 million from others, including friends and relatives) to prove that his IM service can make money.
"This is next-generation IM," says Katz, 40, who started PalTalk in 1998 after America Online made a hit of instant messaging but was slow to upgrade to audio. He quit his job as a network manager for a real estate management company in New York City and holed up for seven months to create the first version of PalTalk software in early 1999. A one-to-one video feature came later that year. AOL added audio in 2000 but still hasn't added video. Microsoft supports audio and soon will have video where you can see up to 20 people, though you need to load extra software. Yahoo lets you see ten video streams, with audio. All three are gratis. (With them, as with PalTalk, you still have a monthly bill from your Internet service provider.) So Katz has had to come up with more novelties. He has developed chat rooms where hundreds of people can meet online, send messages and check each other out on video screens. AOL hasn't yet replicated that setup. Katz charges up to $600 a month to the host of the chat room, based on the maximum number of people a room can hold. People seem willing to pay because they can charge visitors for a password to enter their rooms. The service is popular among day-trading guruswho charge their fans to hang out and get tips. Of the 280 people who have rented rooms from Katz, 60 fall into this group. One avid user is Teresa Lo. A day trader in Vancouver, B.C., with a large following, Lo pays $280 a month to rent a 200-person PalTalk room, and charges around 180 people $200 apiece each month for passwords that give them access to her room and trading techniques. "It's a great business for us," says Lo, 38. Katz captures a little bit of that bounty, too. Anyone who spends time in the chat rooms of people like Teresa Lo also has to spend $30 to $50 a year for PalTalk software, if they want video. These so-called commerce rooms represent a 10% (and growing) share of PalTalk's revenue. Katz, meanwhile, isselling chat and conferencing services to corporate customers. License the software, give every employee a copy and let the chief executive do live broadcasts; employees never have to leave their desks. They can also send text IMs during the day or hold small informal meetings via video and audio. Furniture retailer Jennifer Convertibles, in Woodbury, N.Y., uses PalTalk to stay in touch with workers at its 200 retail outlets. Later this year Katz will roll out PalTalk Personals. For an extra sawbuck per month, subscribers can join a service that lets them browse profiles and send text messages to other people--even hook up using voice and video. You're free to screen those you want to talk to and block "candidates" you don't. A less savory crowd naturally migrates to such services. Katz reckons that about 5% of his traffic comes from folks using PalTalk to engage in a video-enhanced version of phone sex. But he prefers to talk about wholesome users, like Dennis Hill, a Marine at sea who uses his ship's Internet connection and PalTalk to reach his dad in Indiana. Or Reza Pahlavi, son of the late shah of Iran, who last year addressed 700 PalTalk subscribers in an online video forum. "We had people from all over the world," Katz marvels. "What other medium could do this?" Katz runs the company with 22 paid employees and 300 volunteers who give technical support to new users and are compensated with free memberships (remember those days at AOL?). He rents space in two AT&T data centers, one in Manhattan, another inSecaucus, N.J., with $700,000 worth of computer equipment, including 80 lower-end servers from Dell Computer and five IBM Unix servers. The $2 million annual payroll is his biggest expense. But how long can he keep this up? It's one thing to be a couple of months ahead of a plodding MSN, or to be able to interoperate with competing IM services, allowing subscribers to draw on buddy lists from four different systems at once. It's quite another to demonstrate staying power. HearMe and Firetalk, two former rivals of PalTalk, folded in 2001. Katz bought their subscriber lists and source code, as well as pending patents, on the cheap. He'll have to run awfully fast, and be diabolically clever, to avoid sharing their fate.
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