Real hits Microsoft with $1 billion antitrust suit

The streaming media provider sues Microsoft, accusing the software giant of illegally using its Windows monopoly to limit consumer choice in digital media.

Evan Hansen Staff Writer, CNET News.com
Department Editor Evan Hansen runs the Media section at CNET News.com. Before joining CNET he reported on business, technology and the law at American Lawyer Media.
Evan Hansen
7 min read
Streaming media provider RealNetworks on Thursday sued longtime nemesis Microsoft on antitrust charges, accusing the software giant of illegally using its Windows monopoly to hurt digital media rivals.

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Real sues Microsoft

In the suit, filed in federal court in San Jose, Calif., RealNetworks alleges that Microsoft has "pursued a broad course of predatory conduct over a period of years...resulting in substantial lost revenue and business for RealNetworks."

RealNetworks CEO Rob Glaser The complaint adds that Microsoft has wielded its "monopoly power to restrict how PC makers install competing media players while forcing every Windows user to take Microsoft's media player, whether they want it or not."

In a conference call with reporters, RealNetworks General Counsel Bob Kimball said he believes the company's damages could exceed $1 billion measured in lost business stemming from Microsoft's actions. The suit also seeks injunctive relief to prevent "further illegal conduct" by Microsoft.

Microsoft Chairman Bill Gates Thursday's lawsuit is the latest in a long line of antitrust attacks on Microsoft, stretching back to 1995, when the Justice Department won a consent decree from the software giant in which it promised to behave fairly with competitors. Since then, Microsoft has been dogged by accusations of market abuse from rivals and authorities, including claims that it tried to knock Netscape Communications out of the browser market. Those charges led to a federal appeals court decision in 2001 finding the company had illegally abused its monopoly in desktop operating systems, followed by a settlement that many observers saw as a slap on the wrist.

Echoes of Netscape rang through Thursday's suit from RealNetworks.

"Our case is based on many of the same types of Microsoft conduct that have already (been) declared to be illegal--such as failure to disclose interface information and imposing restrictions on PC makers--as well as a broad course of additional predatory conduct," Kimball said.

Real said its lawsuit is complementary to the European Commission's ongoing investigation of Microsoft business practices. Real is cooperating with that inquiry.

In a statement, Microsoft responded that key allegations of the suit appeared to conflict with evidence of strong competition in the digital media market.

"RealNetworks' legal action today is unfortunate and particularly surprising given the intense competition in the digital media marketplace," Microsoft said. "The facts are clear. There is vibrant competition in this marketplace and Real Networks' own reported growth shows that they have thrived on Windows and many other operating system platforms. Computer manufacturers are free to install and promote any media player on new PCs. Consumers are free to use any media player--and many consumers use several different media players."

The charges
Real's 64-page complaint accuses Microsoft of "tying" its Windows Media Player to its Windows operating system, shutting out competitors such as Real and instantly achieving

Read the lawsuit

"virtually universal distribution." From October 2001 to March 2003, for example, Microsoft's "tying" ensured that Windows Media Player was preinstalled on about 95 percent of PCs shipped, the suit reads. By contrast, it continues, RealNetworks' digital media player was preinstalled on less than 2 percent of the estimated 207 million new PCs shipped.

RealNetworks said Microsoft has failed to share important information about the Windows code, thus hurting the performance of its RealPlayer product. For example, Microsoft refused to disclose details about certain security features, preventing Real from using them directly, according to the lawsuit.

Other charges allege that Microsoft used contractual restrictions and financial incentives to "force PC makers to accept Windows PC operating systems with the bundled Windows Media Player and to restrict the ability of PC makers to preinstall or promote competing digital media players."

According to the suit, PC makers told Real that their contracts with Microsoft kept them from removing or changing the status of a Windows Media Player; promoting RealOne subscription services during the first run of a new PC; and providing a desktop icon for Real Networks. "Microsoft's agreements with PC makers are exclusionary and anticompetitive," the suit concludes.

The suit also says Microsoft's pricing practices stifle competition. It alleges that Microsoft effectively forced competitors to provide free versions of their software to compete with Windows Media Player--a practice that has resulted in significant losses for RealNetworks. "Microsoft's below cost pricing, separately or together with Microsoft's other exclusionary conduct, poses a dangerous probability of creating a monopoly in the digital media markets," RealNetworks said in the filing.

'Knifing the baby'
The suit is just the latest legal headache for Microsoft stemming from its efforts in digital media. Start-up Burst.com has filed a patent infringement suit against the software giant, accusing Microsoft of stealing the technology it uses in the latest version of its digital media software, Windows Media 9. And digital rights management developer InterTrust Technologies has filed a patent suit over security locks in Microsoft's media software to prevent unauthorized copying.

And the story stretches back much farther.

Rob Glaser, a former Microsoft executive, started RealNetworks a decade ago, quickly establishing the company as the leader in the nascent business of delivering audio and video over slow dial-up Internet connections.

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Swimming with sharks
RealNetworks may be dangerously
close to Netscape's fate.

After a short honeymoon, Glaser had a falling out with his former employer, setting the stage for a bitter rivalry that's grown more and more heated as Microsoft has slowly chipped away at Real's once substantial lead.

"Rob is as competitive as they get," said one former colleague who worked closely with Glaser during his Microsoft days. "He's cut from the same cloth as Bill is in so many ways: intelligence, drive, competitiveness--he definitely looked to Bill as his mentor at Microsoft. Certainly their styles were very similar."

The tables finally turned in 2002, when Microsoft overtook Real as the leading streaming media company, according to some market measures. Years earlier, in response to the Microsoft threat, Glaser had begun steering his company deeper into digital media programming, launching a successful online multimedia subscription service.

Microsoft's successes have come after a long and determined drive that has drawn regulatory scrutiny and searing accusations of strong-arming--charges the software company has vociferously denied.

In the late 1990s, the U.S. Department of Justice reviewed Microsoft's activity in the streaming media market, paying particular attention to the software giant's investments in Progressive Networks (now called RealNetworks), VDOnet and VXtreme. But no action was taken at that time.

In 1998, Glaser told members of the Senate Judiciary Committee that Microsoft's Windows Media Player "breaks" Real's RealPlayer software. A few months later, Apple Computer Senior Vice President Avadis Tevanian testified at the Justice Department's antitrust lawsuit against Microsoft that the company tried to "sabotage" QuickTime by causing misleading error messages to appear when it ran on Windows-based machines.

Beyond the charges that Microsoft tried to trip its competitors, Tevanian also testified that Microsoft executives tried to encourage their Apple counterparts not to market a version of QuickTime that would run on the Windows operating system. He quoted Microsoft executive Christopher Phillips as telling Apple, "We are talking about knifing the baby," a reference to Microsoft's wish that Apple kill QuickTime for Windows.

Weak remedies
One veteran of the Microsoft antitrust battles said RealNetworks' lawsuit serves as an example of the ineffectiveness of the antitrust trial's resolution.

"This shows how little the government's consent decree has remedied the problem," said Gary Reback, an attorney with Carr & Ferrell.

Judge Colleen Kollar-Kotelly approved a settlement between Microsoft, the DOJ and nine states in a 344-page memorandum issued in November 2002.

Among the conditions of the settlement, Microsoft was required to disclose sections of its Windows code to ensure that it was not using application programming interfaces (APIs) or communications protocols to favor its products or harm others.

The company also agreed not to retaliate against PC manufacturers or software developers for supporting some kinds of competing products. To help enforce this provision, Microsoft agreed to license Windows to computer makers uniformly, rather than offer better pricing to some and higher prices to others for meeting certain conditions not related to volume sales and discounts, for a period of five years.

A small group of states challenged the settlement in a bid for tougher remedies, with just one holdout, Massachusetts. In addition, Microsoft has been hit by private lawsuits from rivals such as Sun Microsystems and Time Warner.

Jonathan Zuck, president of the Association for Competitive Technology, a pro-Microsoft trade group, said RealNetworks' suit may have been prompted by the actions of others in advancing legal cases against Microsoft. Sun has sparred with Microsoft over its Java programming language, forcing few concessions from Microsoft. And Time Warner this summer agreed to a $750 million settlement stemming from a private lawsuit over Netscape's fate.

As part of the deal, Netscape parent Time Warner agreed to license Microsoft's Windows Media 9 product and work with the software giant to develop media services.

"I think RealNetworks is trying to hide their red ink by blaming their problems on Microsoft," Zuck said. "They learned from Sun and (America Online) that if you have a tough quarterly report to put out, why not blame Microsoft?"

Richard Grossman, a lawyer for the San Francisco-based law firm that negotiated one of the biggest class-action settlements against Microsoft, said RealNetworks' case is likely to be combined with suits by Sun and other competitors pursuing private antitrust claims against the software giant.

"I would expect it will be made part of the same proceeding that is now going forward in the U.S. District Court in Maryland, so all the competitor cases are heard together," Grossman said.

Grossman added that the outcome of Microsoft's investigation by European regulators is likely to play into RealNetworks' strategy. "If the European authorities go against Microsoft, I imagine that would have a detrimental effect on this case," he said.

Regardless of any benefits that might come to individual companies suing Microsoft, antitrust attorneys said it's unlikely the Department of Justice will revisit the issue of Microsoft's monopoly and its bundling the Windows Media Player in with its operating system.

"RealNetworks doesn't have any greater opportunity to bring about change. All they will see is a big (settlement) check, if they're lucky," Reback said.

CNET News.com's Jeff Pelline and Dawn Kawamoto contributed to this report.