RealNetworks: A tale of opportunities missed

Rob Glaser's 16 years at the helm of RealNetworks started with the pioneering of the early dot-com days and ended with a courtroom drubbing at the hands of the entertainment industry. In between, Glaser, who by most accounts saw the promise of Web video and music long before his peers, proved himself to be a better visionary than executive.

Earlier this month, Real announced it was giving up on attempts to defend its RealDVD technology against a lawsuit filed by the major movie studios. RealDVD is software that enabled users to create copies of their film discs and store the digital versions on hard drives. It was also the backbone of a planned DVD player, code-named Facet. The device would copy and hold 70 digital movies and enable users to instantly jump from film to film and scene to scene.

Real agreed to walk away from its copying technology as part of a settlement with the studios and pay their legal fees, which came to about $4.5 million. In development costs and courtroom expenses, the total hit to Real was more than $10 million.

As the case slogged to a finish in recent months, CNET set out to find out how exactly Real got into this mess. In short, we found the Seattle company had drifted toward irrelevance for a decade. No doubt, Real helped lay the foundation for streaming video and music. But it took a backseat as Apple's iTunes ignited the digital music revolution and later when YouTube did the same for Web video.

Much of the blame for Real's decline can be laid squarely at Glaser's feet, six former Real managers and employees said in on- and off-the-record interviews. Glaser gave up the CEO title in January but retained the chairman's role. Through a Real spokesman, Glaser declined to comment.

Some think the management change should have happened before Real got into its ill-conceived fight over RealDVD. In fact, they describe Glaser as an executive who was too eager for confrontation and too focused on his own ideas rather than listening to advice. In the end, say his critics, Glaser never had a great follow-up to his breakthroughs of the mid-1990s.

"If you look at what Real could have been, it could have been YouTube," said Steve Banfield, Real's former vice president of strategic relations. "Real could have been the absolute leader in digital video advertising, the leader in mobile advertising. Why didn't Real create Netflix? Rob really is a great guy, a super sharp guy. His aggressiveness, no matter what the origin, served him well. But if he has a weak spot, it's his focus on his own vision to the exclusion of listening to others. Had he listened to others over the years, maybe the company could have done a lot of things different."

Now, Real is in the middle of a reinvention led by Bob Kimball, the company's interim CEO and a longtime Real attorney. Since taking over two months ago, Kimball has been unhitching Real from some of Glaser's troubled strategies. Besides walking away from RealDVD, Real has drawn up plans to spin off Rhapsody, the subscription music service that has been losing subscribers for years.

Real reported last month that Rhapsody, owned by Real and Viacom, lost 125,000 subscribers in 2009, from 800,000 to 675,000. A partnership with Comcast that ended last year also meant Real waved goodbye to 1.1 million of its 1.2 million Web radio subscribers. That's not a typo. Real was left with 75,000 subscribers.

Last month, when Real reported earnings results for 2009--which saw the company lose $212 million on revenue of $562 million, a 7 percent decline in revenue from 2008--Kimball said he plans to build on two of Real's four major business units: the RealPlayer, which is a cross-platform media player, and the company's software as a service business, according to a report in the blog PaidContent.

Wall Street seems pleased. Since Kimball took over for Glaser, Real's share price has inched up and recently topped $5 for the first time since September 2008.

The tides turn
Had things gone differently, Glaser might now be as well known as Bill Gates or Sergey Brin. Once a rising young star at Microsoft before he left to start Real in 1994, Glaser was designing streaming-media software before most understood the Web could be a distribution vehicle for music and video. If not for Glaser and Real, some of us may not have watched Michael Jackson's funeral online or listen to the Arctic Monkeys on Pandora. There may not be a YouTube or Hulu.

"Rob's contributions will be measured for years to come," said Bill Hankes, a Real spokesman. "His pioneering work sparked the growth of new industries for streaming video, casual games, and online music."

Despite Glaser's technology prescience, Real's products were never very consumer friendly. In CNET's January story about Glaser's departure as CEO, a reader wrote one word in the comments section that said plenty: "BUFFERING," a reference to the delay that frequently occurred when trying to stream media via the RealPlayer.

Even with the often-annoying buffering, the RealPlayer was the dominant media player of the dot-com boom. But users grew frustrated with Real's attempts to make the proprietary software a marketing tool. Critics called it malware.

"(Consumers) wanted control and not be forced to install something invasive," Banfield said. "They didn't want to be forced to stick something in their system trays...Real is one of those companies that over time became more hated than Microsoft."

Later, competitors such as Apple (iTunes) and Adobe Systems (Flash) eclipsed Real by providing playback tools and media managers that completed those tasks quickly and easily, sans a sales pitch.

The fact that Real's product offering failed to keep pace with competitors can be traced to Glaser, say former employees. They describe him as a tough, forceful character unafraid to litigate. But when it came to market strategy, Glaser was sometimes hesitant and unwilling to stick with one plan, said Banfield.

"Most corporations are under-led and over-managed," said Kevin Foreman, Real's former general manager of the mobile business unit. "Rob was a great leader but he wasn't the best manager...In all fairness, Real probably missed some opportunities. We probably tried to do too much and should have done fewer things better."

With Real's products in decline, Glaser scored one big win. In a 2003 lawsuit, Real accused Microsoft, his former employer, of illegally using its Windows monopoly to hurt digital media rivals. In October 2005, Microsoft agreed to a settlement that called for it to pay Real $460 million in cash and another $300 million to support Real's music and gaming efforts.

But Real failed to turn that cash into a product that excited customers. What Glaser did dream up was troubled from the get-go.

Glaser said last year in court testimony that he and his wife fell in love with a DVD-copying device from Kaleidescape while she was pregnant and confined to a bed several years ago. The box, which retailed for $10,000, "liberated us from DVDs," he said.

"Kaleidescapes are like Porsches," Glaser told the court, in discussing his Facet plans. "They're very expensive. We thought we could develop Chevys, a $300 product that could replace a person's DVD player."

Kaleidescape had won an important legal victory against Hollywood on the issue of whether the company's device violated licensing agreements between it and the studios, which likely encouraged Glaser to go through with his plans. But it was a legal head fake. Last August, the Kaleidescape decision was overturned on appeal.

There were other shortcomings: RealDVD was DVD-ripping software that some say was inferior to many of the illegal and free products readily available online. It was also a questionable bet on DVDs, sales of which are in decline. The Digital Entertainment Group, which represents studios and electronics firms, recently reported that U.S. home video revenue fell 5 percent last year to $20 billion.

"You can only ask what would have been different had the company not won the Microsoft lawsuits," Banfield said. "At the end of the day, think about what Real got from the Microsoft suit; a big pile of money and it got Rob up on stage with Bill Gates, which I'm sure made Rob happy.

"But in terms of what it really accomplished, it was a distraction for the company, and it probably led to RealDVD."