Streaming into dangerous waters

RealNetworks has built its success on Web streaming. But as the popularity of music downloads pushes technologies beyond the desktop computer, the company could quickly be relegated to underdog status in one of the hottest businesses driving the multimedia industry.

RealNetworks has been virtually absent from the rapidly expanding world of digital devices, failing to develop a version of its multimedia player software for handheld computers and so-called Internet appliances. Although the company maintains that the best way for it to compete is on the desktop, it has stated its commitment to portable devices--confusing analysts, investors and others who say the company's actions have not reflected this goal.

The importance of this market is twofold: Handheld devices pose an increasing threat to streaming as MP3-type music downloads gain momentum. At the same time, they could represent an enormous opportunity for RealNetworks and others if technologies are developed to provide wireless streaming, widely believed to be the next major multimedia battlefield.

Even if it successfully expands its focus from the PC to the mobile market, RealNetworks will again encounter Microsoft, which already has a substantial lead in that direction. And both will compete for a much smaller overall market share: Unlike the desktop-dominated streaming business, the download arena is occupied by a diverse mix of hardware and software companies that straddle the computer, consumer electronics and entertainment industries, such as Sony, RCA, MP3.com, S3 and Handspring.

Considering the stakes, RealNetworks has been surprisingly late to the MP3 revolution. The company sells its RealJukebox music management software to bundle with digital music players, but it has yet to develop a version of its software player for handheld devices or cell phones.

"Our whole idea is that Jukebox is the easiest place to do this," a RealNetworks representative said. But commitment to the desktop has its risks when the competition has a monopoly in PC operating systems.

Real admits that it will eventually need to develop some type of portable music software. The company says it wants to be compatible with all multimedia formats, including portable technologies.

That realization is coming none too soon. Annual sales in the handheld companion market, which encompasses all handheld devices that aren't cell phones, will more than triple from 5.4 million units worldwide in 1999 to 18.9 million units in 2003, according to International Data Corp.

Aside from its alliances with manufacturers like RCA, which makes the Lyra MP3 player, RealNetworks has done little to cement its position in the rapidly growing market. At the same time, Microsoft has worked to include its Windows Media Player into the next version of its Windows CE software for handhelds.

"Microsoft reacts whenever it senses a threat to its (Windows) platform," Earjam.com's Ulmer said. "With Netscape, Microsoft saw that the operating system would have to support Internet access. Now the threat is that non-PC devices, like portable music players, won't need Windows. So Microsoft wants to control the code to ensure its operating system remains relevant."

Pocket PC, the revamped and re-branded version of Windows CE scheduled for release this month, will include Windows Media Player for the first time. Accordingly, hardware manufacturers like Casio and Compaq are expected to position their future devices as multimedia powerhouses.

Microsoft also has exercised its deal-making experience with chipmakers, having learned the value of such relationships through its longtime duopoly with Intel. But the balance of power is weighted toward the processor companies in the handheld market, as more capabilities are built directly into their chips to avoid bulky software in portable devices where space is an obvious premium.

"Microsoft is really benefiting from licensing deals it signed with chipmakers about a year ago," said Bob Hildeman, chief executive at Streambox.com, which has been sued by RealNetworks over its competing streaming player. "Once Windows Media was supported at the chip level, it became very attractive, and that's driven a lot of the demand. I don't see similar growth for Real."

Microsoft has inked deals with chipmakers to enhance the performance of the portable Windows CE operating system, which includes the Windows Media Player for free. Some chipmakers, such as Texas Instruments, are working to include "native support" for the Windows Media audio format in addition to the MP3 and RealNetworks audio formats.

The handheld market may still be young enough for RealNetworks to have a shot at catching up to Microsoft. Downloadable digital music and video may be the trend at the moment, but RealNetworks' fortunes could turn if streaming technologies catch on among portable devices.

Downloads are popular because music can be stored and replayed in a device's memory. But those files are tight, making them vulnerable to technologies that could allow a limitless number of songs streamed to the listener as they are transmitted, while using space on a server somewhere else--in effect, an on-demand broadcast.

"As you might guess, in the portable and mobile space, the infrastructure for doing streaming isn't exactly there. But it will be potentially, in the future, with a wireless network," said Kevin Hause, an analyst with IDC. "It's not all going to be about Windows CE going forward. It will be about lots of different OSes, lots of different devices. Microsoft isn't the end-all."

Still, that doesn't put RealNetworks in an enviable position. Microsoft has already demonstrated it is willing to throw enormous amounts of resources into the portable market, even as it has been slow to realize much return on that investment.

"Content will probably be what Microsoft goes after next--bundling content with the media player on the desktop," said Malcolm Maclachlan, another IDC analyst. "You might not even notice when it starts; then all of a sudden you'll read that the 'Donny and Marie' show is being streamed to 10 million people on Windows. And you'll say, 'Gee, how did that happen?'"  

News.com's Stephanie Miles, Paul Festa and Jeff Pelline contributed to this report.