Can Glaser and Jobs find harmony?

RealNetworks CEO Rob Glaser has survived longer than most in the Internet business, largely by pulling rabbits out of his hat when the competition least expects it.

Glaser's latest surprise came a few weeks ago when RealNetworks announced it had figured out a way to re-create Apple Computer's proprietary technology for digital rights management--without Apple's permission. This allowed RealNetworks to begin selling songs in its digital music store that could play on Apple's hugely popular iPod, which no other non-iTunes store can do.

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Apple was not amused. The company has threatened to launch litigation and to break RealNetworks' newfound compatibility with the iPod, but Glaser isn't daunted.

The only plausible future for the digital music business, he says, is one in which customers can buy a song and have it work on any device--the same way CDs work today. The current balkanization of the industry, where songs bought at one store only work on specific brands of devices, doesn't make any sense, he contends.

So far, the company's stand for "freedom of choice"--the slogan of a new marketing campaign beginning Tuesday--hasn't translated into bigger sales. But a half-price sale in RealNetworks' store, aimed at highlighting the new Harmony technology, could change that.

News.com spoke with Glaser late Monday about the company's vision of a Rosetta stone for digital music and his relationship with his opposite number at Apple, Steve Jobs.

Q: Has the Harmony project met your expectations?
A: No, it has blown them away. We took the decision at the beginning of the year to implement Harmony. It really went back to some things we were working on before, where we've had good experience with creating technology with interoperability in the past.

That was with the Microsoft technology and the streaming media servers?
Exactly. We had created the universal server that streams all the major formats including the Windows Media formats. We'd seen it have a positive effect on the marketplace and we knew from a technology development standpoint how to do that kind of compatibility work. There is a tradition for it with Compaq, and actually even Microsoft has done some of it.

Every time you go into a situation you should have a good plan A and a good plan B. That's been true for us through this whole process.

So we thought there's a real emerging problem here and rather than just line up in a format war, let's try to rise above that. There were some significant technical challenges in terms of making sure that it would work and that it wouldn't feel like a science experiment to consumers. (But) our engineering team did a phenomenal job and implemented something that was smoother, faster, and more transparent than what we had hoped for.

Then when it came time to bring it out, we thought, "Well, consumers will like it." But it's not particularly easy to demonstrate, because all it is, is that it works. And you know, people can already play music on their iPods and they can already play music on their Rios and can already play music on their Palms, but they can't play music that they purchased once on all three. Once we explained to people why this was a problem, receptivity was good.

Then a couple of days afterward, when Apple reacted in what I consider to be kind of a hysterical fashion, that created even more attention and visibility and awareness.

I've become friends with this guy Al Franken. He wrote a book and called it "A Fair and Balanced Look at the Right," and I kind of feel like Apple Computer is playing the same role on this that Bill O'Reilly played in "Fair and Balanced."

You had attempted to ask Jobs if he was interested in providing a license to FairPlay and the iPod back in April. But you had the Harmony project already under way at that point?
Absolutely. We had reached the conclusion that technically we had all the bases covered, and that we were going to be able to implement something that was very good. We didn't have all the finish on it, and all the user interface hooked up, and hadn't done all the final tuning and everything, but at the time I contacted Steve, we were well on the way--which is when he decided to do a Bill O'Reilly on us.

At that point, we kind of kept our powder dry. We were asked, "Can you explain, Mr. Glaser, why you sent that message to Mr. Jobs?" and we explained that we think compatibility and interoperability is good. And (we were asked), "Now that he's told you that he won't do that, what will you do?" And I said, "Well, we write software here, and we're just going to keep improving our software."

Every time you go into a situation you should have a good plan A and a good plan B. That's been true for us through this whole process.

In that exchange, Jobs leaked your request to the press. That's not standard operating procedure in a lot of business. Do you feel that was fair play?
No, FairPlay is his DRM.

No, look, Steve is a one-of-a-kind guy. You know that about him when you do business with him or when you work with him. I don't take any of that personally. My view is that we're doing something that's important for consumers here. The personalities make for interesting press, but the reality is that we were going to do what we thought was the right thing for consumers, in a way that we thought was completely in the tradition of well-established things like Compaq's compatibility for computers.

We think we're doing the right thing for consumers and the right thing for industry, and it might well be the right thing for Apple.

Because Apple has had the experience of having a wave of compatibility wash over it, it was and is hard to predict how they would feel if a wave of compatibility came in and they embraced it. Certainly when that happens, that changes the dynamics. But we think Apple does very innovative work. And if they keep driving innovation with the next generation of iPods, they could have a very successful business over the long haul.

This a is case where we think we're doing the right thing for consumers and the right thing for industry, and it might well be the right thing for Apple. But we think it's going to happen in the long haul regardless.

Your "freedom of choice" campaign gets at what the record labels have been asking for, and what consumers have been asking for in terms of digital music interoperability. But in terms of Real's interests, if everyone else also winds up being compatible, is that a good thing?
You have to assume long-term that everything is going to be compatible with everything else. Is it good for us if that happens? Absolutely, that means there's a bigger market. Our view is that the switchover of the industry from the $30 billion physical music sales industry to hopefully over time an equally large digital business is a tremendous opportunity.

We think we benefit significantly when there is freedom of choice. That doesn't mean we end up with a monopoly in the business because we don't think that's the nature of the business. Yahoo doesn't have a monopoly in portals, but they have a great business in that world. Amazon doesn't have monopoly on the place where you buy physical goods on the Internet, but they have a great business. So in our view you can have a very fine business in a rapidly growing marketplace even if you're not a monopoly.

Do you still ultimately see yourselves focusing more heavily on subscriptions?

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We still think that long-term, most consumers will have subscriptions. Long-term we think that we want to serve that kind of dial tone need for the largest base of subscription.

What now have with Harmony are two things that are relevant. We have something that is differentiated and better. While we will license it to other people, we will license it on terms where if people use it and they pay us a little money for it and we multiply that by the volume of all the songs, that's great.

If nobody uses it and it turns out we're the only ones with Harmony technology for a year or two and ours is the best and the most reliable and whatever because we've been at it the longest, then we have that benefit too.

So we will put relatively speaking more emphasis on (individual) tracks than on subscription than we had because we have a compelling differentiation in both those areas. But I think at the end of the day we will continue to focus very substantial amount on subscriptions. We have had great success with Rhapsody. Not only with the number of subscribers, but with how active they are and with the kind of feedback they give us. Which is why I think it's not either/or, it's both/and.

But we'll also follow consumers. We'll learn.

You are in licensing talks now for Harmony?
I would say preliminary talks. We just introduced Harmony three weeks ago, and we're just releasing the RealPlayer with Harmony as a consumer product Tuesday, so any of the conversations we're in are in very preliminary phases.

Do you see yourself doing the same kind of thing with Sony? Or are you talking about licensing their DRM?
We support (the Sony music format) ATRAC. We have had interoperability for in-the-clear music with OpenMG-based devices, which is Sony's DRM, in the past, and we may well do that in the future.

Today, Sony's hardware products for this market are not particularly significant in the marketplace. They still have some significant limitations, like they don't play MP3s natively. So the poor consumer has to transcode all their MP3s for these devices, which is kind of a backward way of looking at things.

We think Sony's a terrific company and have a good relationship with them on a number of fronts, so I wouldn't rule anything out. But by covering Helix, and Windows Media and FairPlay or iTunes devices, we've covered 90 percent of the secure devices that are out there.