Microsoft said today that RealNetworks and several other major Internet companies, including Yahoo, have agreed to license its Windows Media audio format. The technology has been picked up by 70 companies, according to the software giant.
"Windows Media is poised to become an audio standard," Will Poole, general manager of Microsoft's digital media division, said in a conference call.
Shares of RealNetworks fell on the news, dropping $8.75, or about 12 percent, to $66.25 by the 1 p.m. PST close of regular trading. The shares have traded as high as $96 and as low as $17.53 in the past 52 weeks. The company announced a 2-for-1 stock split in January.
RealNetworks will continue to offer products in competition with Microsoft, including its RealPlayer for streaming video and audio and its Jukebox software for playing audio tracks on PCs. But it now has the right to incorporate Microsoft technology into its products.
RealNetworks said it would not discuss its plans for the technology license.
If the company chooses to support Windows Media in its streaming media player, it could benefit content companies, which would no longer be required to format material for both companies' players. It also would be a boon for consumers, who could access content regardless of which player they use. But such a move could hurt RealNetworks' credibility as the dominant Web streaming company.
RealNetworks also could choose to support Windows Media only on its Jukebox product, which does not compete with any existing Microsoft products.
Although RealNetworks charges $30 for its full-service player, Microsoft gives away Windows Media for free. Many people have installed both products, according to a study last fall.
"Consumers want to consume media regardless of file format," said Rob Grady, product manager in RealNetworks' consumer division, who said the company's Jukebox software already supports nine file formats. "We've always been focused on providing a great media experience across all technologies...We want to work with anybody who has audio technology that we can integrate in a seamless way to provide a great consumer product."
Still, today's announcement could be seen as a setback for RealNetworks, which has long held pride of place as the undisputed leader in online audio streaming. By licensing Windows Media, the company appears to be acknowledging that after years of chipping away at the market, Microsoft has finally become a force to be reckoned with.
Microsoft executives today made much of the fact that its Windows Media audio format includes built-in digital rights management (DRM) features to impede illegal copying of protected works, something they said has helped power adoption of the format. RealNetworks, by contrast, has so far avoided endorsing any one anti-copying feature, preferring to support multiple DRM products chosen by content companies.
How times have changed
RealNetworks' RealPlayer topped the increasingly contested field of audio-video Internet software for the month of November, according to one study. RealPlayer was chosen by 12.1 percent of users, while Apple's QuickTime claimed 7.4 percent and Microsoft's Windows Media Player had 3.2 percent, according to a Nielsen/NetRatings report.
"RealNetworks just doesn't have the capacity to compete head-to-head with Microsoft on the software level," said Aram Sinnreich, an analyst with Jupiter Communications.
Sinnreich said today's announcement was not surprising, as RealNetworks already had begun to transform itself from a software technology company to an Internet media destination.
The company relaunched its entertainment portal, Real.com, last November. In addition, it released a channel bar, dubbed Take5, to direct Web surfers to content over the Net. The service quickly became one of the most popular entertainment sites on the Web.
But the move also increased tension between RealNetworks and some of its content partners, such as Warner Bros., which pulled out of a deal last fall to stream an episode of the "Drew Carey Show" over concerns that the company was becoming a competitor.
"RealNetworks has been moving to the media space for some time," Sinnreich said. Today's announcement "is just a step along the continuum...It's a sign that RealNetworks and Microsoft are stepping out of each other's way."
Microsoft's efforts to rule streaming date back nearly three years, when it took an undisclosed stake in VDOnet, an early player in the market, and landed a seat on its board of directors.
The company's push also included investments in a handful of other companies, including a $30 million stake in RealNetworks that was later divested after the two companies had a widely publicized falling out.
Microsoft has been accused twice in sworn testimony of resorting to underhanded tactics to promote its media software.
RealNetworks chief executive Rob Glaser in July 1998 told members of the Senate Judiciary Committee that Microsoft's Windows Media Player "breaks" his RealPlayer software. A few months later, Apple Computer senior vice president Avadis Tevanian testified at Microsoft's antitrust trial that the company tried to "sabotage" QuickTime by causing misleading error messages to appear when it ran on Windows-based machines.
Microsoft vigorously denied the charges, saying the problems RealNetworks and Apple experienced were caused by bugs in the software. In each case, Microsoft hired independent computer labs that verified the bugs.
A separate study by Ziff-Davis Virtual Labs also confirmed that programming in RealNetworks' G2 player was responsible for the problems about which Glaser complained.