The provider of software products and services that enable the delivery of streaming media over the Internet and intranets has watched its stock soar into record territory during the past month, hitting a new high today of 32-7/8, up 13 percent from yesterday's close of 29.
RealNetworks shares likely are riding the recent upswing in Internet stocks, as investors and fund managers take cover from the aftermath of warnings by bellwether technology companies like Intel (INTC) and Compaq (CPQ). The slumps such companies have been experiencing of late has meant that search engine and Internet stocks haven't had to look hard for new trading highs.
RealNetworks' streaming technology enables the transmission and playback of continuous "streams" of multimedia content--such as audio, video, and animation--over the Internet and intranets. While the company's revenues are growing, it faces stiff competition from a consolidating marketplace and threats from one of its own key investors, Microsoft (MSFT), which acquired a 10 percent nonvoting stake in RealNetworks last July.
From a technology perspective, the company's biggest challenge is Microsoft, said Ross Rubin, an Internet analyst at Jupiter Communications.
However, RealNetworks sees the software giant as providing benefits as well. In fact it could be strategically important to the company for cable and TV initiatives, Rubin said, noting that Microsoft has an extensive research budget.
"Many software companies face [this same situation], but we try to get value out of the relationship," said Philip Rosedale, vice president of RealNetworks' core technology group. "We licensed version 4 of our product to Microsoft so that both products are interoperable. But we are very aggressively building new technologies to stay ahead of the competition."
In February, RealNetworks released an upgrade to its RealPublisher tool that lets developers stream third-party media files to the company's RealPlayer. It also announced the acquisition of Vivo Software in a move intended to broaden its streaming media product line.
"[RealNetworks] provides one of the most mature products on the market, one that has achieved quite a deal of popularity among people doing Webcasts," Rubin said. "They have a de facto standard, but, really, the challenge is how do they differentiate themselves from Microsoft's NetShow and Apple Computer's (AAPL) QuickTime?"
Earlier this week, Apple released a long-awaited software update that allows for QuickTime multimedia content creation on Windows computers for the first time. It originally was scheduled for release during the second quarter of 1997.
RealNetworks has been dealing with products that deliver streaming media over IP networks, as well as compression technology, since the beginning of 1995, Rosedale said. Those years of experience have given the company advantages over others, he said.
In addition, RealNetworks' move to become more of a solutions provider, rather than a pure technology company, also has revenue benefits, Rubin said, noting that the company has partnered with MCI (MCIC) to get advertising placement on the telco's Web site. Rubin said also that RealNetworks is trying to "take a small piece of Webcast transactions."
The company has a variety of revenue streams, including consumer software sales, like those of its flagship product, PlayerPlus; sales to broadcasters, of products such as servers and commerce capabilities; as well as support and upgrade fees. RealNetworks also builds custom applications.
Content is another big part of RealNetworks' revenue picture, with advertising dollars generated from its Web site.
At the end of 1997, software license revenue accounted for about 78 percent of the company's revenue, while service revenue accounted for about 15 percent. Advertising revenue made up the remaining portion, according to the company's annual report, filed with the Securities and Exchange Commission yesterday.
For the December quarter, RealNetworks reported revenue of $10.3 million, compared with revenue of $7.5 million reported for the September quarter and $3.5 million reported for the corresponding quarter a year ago. Net loss for the December quarter was $2.6 million, or 9 cents a share, compared with a loss of $2.9 million, or 11 cents a share, in the September quarter, and a loss of $1 million, or 4 cents a share, a year ago.
RealNetworks believes that its success will depend largely on its ability to extend its technological leadership and to continue building its brand position. Accordingly, the company intends to invest heavily in research and development, as well as sales and marketing, despite the fact that it expects to continue incurring substantial operating losses, according to the filing.
The company has incurred significant losses since its inception, and as of December 31 had an accumulated deficit of $17.5 million. Meanwhile, it reported $62.3 million in cash and cash equivalents on hand, and $29.8 million in short-term investments.
Rosedale said that the company can only benefit from advances in bandwidth technologies.
"The value of the consumer experience grows as the bandwidth increases," he said. "I don't know in any way that consumer bandwidth would hurt us. As cable modems and DSL connections proliferate, we are really well-poised [to deliver] video at incredible quality. The more cable modems the people can install, the happier we are."
RealNetworks said in its filing with the SEC that "technological developments or strategic partnerships that accelerate the adoption of 'high bandwidth' access technologies, such as cable modems, may have a material adverse effect on the company's business."
Mark Klebanoff, the company's chief financial officer, said the statement was meant only to identify risk factors.
"We are bullish from more bandwidth, but any change in the technology is a potential risk," said Klebanoff. "All we are trying to say here is that we are in a technology space that is rapidly evolving in a whole bunch of different dimensions. The importance of bandwidth does not go away. Being smart about bandwidth is important even when there is a lot of bandwidth available."
At the end of the year, the company had grown to 326 employees, up from 185 at the end of 1996.
Also worthy of note is the fact that the Justice Department is in the process of reviewing Microsoft's activity in the streaming media market. Microsoft holds a board seat on VDOnet and a 5 percent stake in the company. It acquired VXtreme outright in early August.