Devil is in the details

Initially, many took it in stride as one of the daily flood of industry announcements touting some company product, service or partnership. But on closer examination, some say RealNetworks' latest licensing agreement with Microsoft could be the high-tech equivalent of doing a deal with the devil.

RealNetworks said the license allows it to incorporate rival Microsoft's Windows Media audio format into products ranging from RealJukebox, which organizes downloaded music, to its lucrative RealPlayer streaming server, software that allows people to listen and view files while they are being transmitted. The company announced that it will support Microsoft's audio format for Jukebox but has refused to comment on whether it has similar plans for its server software.

Many of those who follow both companies and the multimedia industry say the company is being forced to react to market pressures exerted largely by Microsoft, much the same way Netscape was forced to move beyond its core mission in browsers. That is exactly what the software giant had in mind, according to Microsoft sources, especially after some bad blood had resulted from previous dealings.

"A lot of us were clear that it was a very Netscape-like battle. But it was more personal," one former senior executive at Microsoft said. The agenda, this source said, was to push RealNetworks out of the software business: "Our No. 1 goal was to force Glaser to become a hoster of content."

Glaser says RealNetworks is in no danger of following Netscape's fate. "If you have to make an analogy, AOL is a much closer comparison," he said in an interview. "Microsoft was offering a functional clone of Netscape's product. We offer a unique value-add proposition."

Dismissing attention to the Windows license as "a tempest in a teapot," Glaser said: "These types of licensing deals happen all the time and carry no geopolitical significance whatsoever," he said.

To be sure, there are some important differences between RealNetworks and Netscape, as well as the multimedia and browser businesses in general. Unlike Netscape's original plan to charge for its browser, RealNetworks has given away some versions of its multimedia player from the start, getting its primary revenue from the servers used by the content companies doing the streaming. Moreover, Microsoft's reach on the server side is tied to the success of Windows 2000 and Windows NT, meaning that RealNetworks isn't likely to disappear as long as Unix, Solaris, Linux and others continue to compete with their own operating systems.

But many industry veterans say the similarities

RealNetworks timeline
April 1995	Progressive Networks founder and CEO Rob Glaser introduces RealAudio to National Association of Broadcasters convention; product bundled with Microsoft and Netscape Web browsers.
March 1996	Progressive Networks agrees to support Microsoft video streaming technology.
Feb. 1997	RealVideo unveiled.
July 1997	Microsoft and Progressive Networks extend technology-sharing relationship; Microsoft takes 10 percent stake in company for $30 million.
Sept. 1997	Progressive Networks becomes RealNetworks, files for initial public offering.
Oct. 1997	RealSystem 5.0 introduced.
Nov. 1997	RealNetworks stock surges on first day of trading.
Jan. 1998	Company says RealSystem 5.0 servers will support Microsoft Windows Media Player.
March 1998	RealNetworks acquires Vivo Software, streaming media creation tools provider.
April 28, 1998	RealSystem G2 introduced.
July 1998	Glaser suggests in Senate testimony that Microsoft sought to "break" RealPlayer using Windows operating system.
Nov. 1998	Microsoft divests from RealNetworks; stock plunges.
April 1999	RealNetworks acquires MP3 firm Xing Technology.
May 1999	RealJukebox launched.
Oct. 1999	Company reports first profit.
March 2000	Microsoft licensing deal lets RealJukebox play Windows Media Player audio files.
April 2000	On fifth anniversary of RealAudio launch, Glaser says RealPlayer has 100 million unique users.

between browsers and streaming are more compelling. Business associates say both RealNetworks and Netscape underestimated Microsoft on a number of fronts, including the power of packaging its products with the Windows operating system, especially free of charge; the impact of billions of dollars in resources used to buy competitors; the marketing machine and industry influence of the world's largest software company; and the armies of engineers dedicated to research and development that allow Microsoft to cut into market shares exceeding 80 percent, as in the case of browsers and in streaming.

Web analysts and executives sum up the situation this way: At best, RealNetworks sees the need to include Microsoft technology in it products because it can no longer ignore Windows Media Player as demand for both formats grows. At worst, the company is already looking for an exit strategy from the software sales business as it recognizes that Microsoft is encroaching on its turf at an unstoppable rate.

Industry veterans say any broad cooperation with Microsoft at this juncture is tantamount to raising a white flag, at least in the immediate fight over the use and sale of streaming software. Although it is unclear whether any legal issues will come into play, they see further parallels to the Netscape browser case in RealNetworks' redirection toward a portal model and Web services.

"It's like Netscape. Real doesn't want to keep up a technology race since Microsoft has the resources to keep spending on R&D," said Howard Dyckovsky, PC Data's vice president of operations.

Those who argue in favor of RealNetworks point to the company's commanding market share: It has 115 million unique registered users for its RealPlayer product, which is compatible with about 85 percent of the streaming content on the Internet. Its jukebox product counts 26 million "installed units," which translates to about 80 percent of the market, according to Nielsen/Net Ratings.

But Microsoft has built its empire by coming from behind: In April 1996, when Microsoft was just beginning to amass its forces in the browser business, Netscape's share of the market was as high as 84 percent. Just a few months later, Microsoft's Internet Explorer's reach more than doubled, from 7 percent to 15 percent in July.

At that time, Microsoft was on the verge of preparing a major new version of its browser, to capitalize on its recent growth. Just two weeks ago, Microsoft introduced its new Media Player, complete with features that will compete directly with RealJukebox.

Against this recent history, many believe that the clock is ticking ever more loudly for RealNetworks.

"It's only in the last six months that Microsoft has caught up," Jupiter Communications analyst Seamus McAteer said, though market share estimates vary widely. "The Microsoft train ain't stopping, and if you want to compete, you've got to continually compete as well, and that's a problem when you're competing with a company that's sitting on 20 billion of cash."

As in the browser wars, the use of the ubiquitous Windows operating system to distribute other Microsoft products is an undeniable threat to RealNetworks.

"It's perception vs. reality. People have the perception that Real has better penetration in the marketplace. The reality is that the Windows Media Player is in Windows 98," said a Web content executive who works with both companies. "What has better penetration in the marketplace: Windows 98 or Real downloads?"

Others believe that Microsoft can undercut RealNetworks' business through sheer deal-making prowess alone.

In addition to enticing Web sites, Microsoft has targeted corporate intranets, where companies are increasingly finding uses for in-house streaming technology for such things as training employees and broadcasting announcements. In recent months, Microsoft has signed up large corporate customers for Windows Media, including J.D. Edwards, Aetna, Hewlett-Packard, Deere & Co., Northrop Grumman and 3Com.

"Microsoft's ability to catch up with Real has absolutely nothing to do with Windows," McAteer said. "It was Microsoft's ability to be an amicable partner for major media companies. Real couldn't give the individual attention that Microsoft could give them."  

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