Software giant Microsoft is prepping a new version of its MSN Messenger software that includes an integrated webcam and gaming features in an apparent bid to beat rival AOL to market.

The next version of MSN Messenger, due to be launched during either the second or third quarter of this year, will include integrated voice and video features, allowing users to communicate live and face-to-face. Although webcam functionality is already available over MSN Messenger, it is only as an add-on service offered by peripherals firm Logitech.

Although AOL has also shown its intentions to offer web functionality with its AOL Instant Messenger (AIM), it has been prevented from doing so thus far by regulatory stipulations made as a condition of AOL's 2001 marriage with Time Warner.

When the two media giants announced their intention to join, the US Federal Communications Commission (FCC) barred AOL from launching advanced IM services such as streaming video because it found that the merged media giant would "likely dominate" new IM-based services, unless the company met certain interoperability requirements.

AOL Time Warner recently asked the FCC for relief from those requirements, however, arguing that fears that it would dominate the market have not come to pass. In fact, AOLTW said, it finds itself in a highly competitive IM market.

Microsoft's announcement to launch its own integrated streaming video service will likely serve to heighten the notion that AOL faces tough competition in the space. Microsoft's MSN Messenger now has 100 million active users a month.

However, John Delaney, Principal Analyst at research firm Ovum, warned that by gaining market share and revving up its service, Microsoft could make itself the focus of regulatory bodies.

"[Microsoft is] undoubtedly drawing attention to [itself], but it remains to be seen if this is a service that people really want," Delaney said.

Although MSN did not reveal how much integrated video and audio would cost, they are expensive services to provide. That's why players such as Yahoo have not yet offered them, noted Delaney.

In addition to webcam functionality, MSN said that the next version of Messenger will also feature more personalised services, a new user interface and integrated gaming features that allow user to play live games such as double solitaire and checkers.

No one at AOL was immediately available to comment on the news.