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Antitrust truce frees rivals for bite at Apple

Steve Jobs rebuffed RealNetworks 18 months ago. Today's deal with Microsoft now bolsters an anti-iPod alliance.

One of the most important turning points in the relationship between RealNetworks and Microsoft may initially have had little to do with Microsoft at all.

In early 2004, RealNetworks Chief Executive Officer Rob Glaser made several appeals to Apple Computer CEO Steve Jobs, asking him to make the popular iPod compatible with other companies' music services. In a private e-mail to Apple's top executive, Glaser reportedly warned that if Jobs declined, RealNetworks could be pushed to join forces with Microsoft.

The contents of Glaser's e-mail were leaked to the press by an undisclosed person. Jobs later told Apple shareholders that working with RealNetworks was simply "not worth it." Three months later, the scorned RealNetworks announced that it had successfully reproduced Apple's iPod technology with its new "Harmony" music tool. Apple cried foul--although it has never taken any legal action--while Microsoft remained silent.

On Tuesday, Microsoft came through loud and clear with a very public backing of RealNetworks' media technology and an end to the two companies' antitrust dispute. Glaser attributes the development of Harmony, which also provided compatibility with Microsoft software, with helping to open the relationship.

"When we did Harmony, I contacted Bill (Gates), and said I thought this was a good thing for consumers," Glaser said at a press conference Tuesday. "That began a dialogue that was the antecedent to these discussions."

Indeed, if the settlement of RealNetworks' $1 billion antitrust suit against Microsoft represents the closing of a chapter for both companies, their simultaneous alliance on Internet music shows how completely the digital landscape has changed for each in the past few years. It is now Apple, and its seemingly unending stream of digital music successes, that threatens the future for both Microsoft and RealNetworks.

According to lawyers for both companies, the settlement talks have been going on since early in 2005, after both companies began realizing they had complementary interests.

"It really took time to work through all the aspects," said Microsoft General Counsel Brad Smith. "If you just want to settle a lawsuit, that's one thing, but if you want to reorient a relationship, that takes more time."

Attorneys for both companies said there had been no specific trigger for the settlement talks, and denied that Apple's continuing dominance had been a factor.

"I don't remember the word Apple coming up," said RealNetworks General Counsel Bob Kimball.

An Apple representative declined to comment.

A Real step forward
The most immediate effect of the deal will be to give RealNetworks' digital music subscription service, Rhapsody, a substantial push ahead, while seemingly sidelining Microsoft's plans to launch a rival product.

As a part of the overall $761 million settlement agreement, Microsoft has earmarked $301 million for promoting and distributing RealNetworks' music and games products over the next 18 months. The Rhapsody service will be promoted on the MSN Music page and will be integrated directly into MSN Search results.

More ambitiously, a new version of the MSN Messenger chat software will include links to the Rhapsody service and will allow subscribers to send their playlists to each other directly through the chat service. That integration between music and instant messaging communities is something that Microsoft engineers have been experimenting with, and is a core feature of Yahoo's music subscription service.

Those features will begin appearing late this year, and the integration will be largely completed by the middle of 2006, executives said Tuesday.

The alliance likely explains why Microsoft several weeks ago abruptly stopped negotiating with record companies for rights to create its own digital music subscription service, which the company's MSN service had been preparing at least since early summer.

Microsoft said the RealNetworks deal was not exclusive, and that it could launch its own subscription service at a later date. Analysts said this was unlikely in the short term, given the level of integration between the two companies' products.

No bite out of Apple?
Whatever its impact on RealNetworks and Microsoft, the deal is unlikely to change the dynamics in the broader digital music market anytime soon, analysts said.

Apple's iTunes music store, and its iPod music player each retain more than 80 percent of their respective markets. That dominance has been locked into place by consumers' ongoing love affair with the iPod, and rival MP3 manufacturers' inability to create a similarly popular product.

At least one top record company executive said that Tuesday's deal could help push Apple toward offering its own subscription service, a business model that Jobs has criticized in the past. But the same label executive, requesting not to be named, said Microsoft and its hardware allies still need to make better, simpler, more widely compatible MP3 players if they are to encroach on Apple's share.

"I think it is incumbent on Microsoft to redouble efforts to have a really consistent, stable consumer experience on portable devices," the executive said. "It's not there yet, but it's close."

Until that powerful rival to the iPod is added to the RealNetworks and Microsoft equation, Apple shows little sign of losing ground, analysts said.

The settlement "doesn't change the dynamics for Apple in any way, shape or form," said Jupiter Research analyst Michael Gartenberg. "If they weren't concerned yesterday, they don't have any more reason to be concerned today."

CNET's Ina Fried contributed to this story.