Glaser on finding harmony with Microsoft

For years, RealNetworks Chief Executive Rob Glaser has led his company through a process of constant reinvention, struggling to keep ahead of Microsoft's competitive steamroller.

On Tuesday, he and Bill Gates finally shared a stage, jointly announcing an end to RealNetworks' $1 billion antitrust lawsuit against Microsoft, and an ambitious joint marketing and development program that will see substantial integration of their music products during the next 18 months.

The agreement, more than half a year in the making, marks a historic turning point for Glaser and RealNetworks. The two companies will continue to compete in some markets, providing rival multimedia software, mobile-phone infrastructures and even music stores.

But with Microsoft funneling customers directly to RealNetworks' core Rhapsody music service and allowing the two companies' engineers to work together to improve compatibility of their software, much of the flash points will be gone. The settlement also frees both companies to focus on present-day threats such as Apple Computer's continued dominance of the digital-music market.

CNET News.com asked Glaser how the deal evolved and how it will change RealNetworks' competitive future.

Q: How did this deal come together?
Glaser: It's a process that goes back to last August, or about a year ago. When we came out with the Harmony technology, I reached out to Bill (Gates) and said, "Hey, look, we think this is a very interesting technology and overall direction, which is to have interoperability among secure digital rights management systems." We had solved a lot of the hard problems associated with how you move things in a trusted domain from one format to another, and we did it with both the Apple format, FairPlay, and Windows Media.

When we shared that we were doing this with Microsoft, their attitude was, "Hey, this is great, this is good for customers." That gave us a sense that there was a common view of the importance of interoperability that we could build on.

Did you work with Microsoft engineers at that point?
Glaser: In the initial phase, when we were doing the initial development, we didn't--at least beyond the normal ways you work with the standard support mechanisms. Not at the level that we've subsequently done. While we decided not to do something around the launch or the aftermath of the launch of Harmony, it did become clear that there was an opportunity for collaboration.

As the outline of an approach came in, it became clear that putting together a deep technical and business relationship independently of resolving the legal issues that were pending was not likely to succeed. You've got to have the emotional energy to do a deep technical and business deal; you've got to put a lot of work into it. And if you've got something else out there, it's hard to align all those different sorts of energies.

When you were doing Harmony, were you originally thinking that it might lead to a resolution on the legal side as well?
Glaser: We thought that Harmony was a good thing to do, and we did it because it was better for customers. And then having done it, it became a vehicle for engaging in conversations with Microsoft about compatibility and interoperability.

In order to get something like this to come together, you needed to get three different rings to work together in harmony, so to speak.

We didn't create it as a stalking horse, we created it because we thought it had merits for customers. But having created it, I think it showed a level of technical rigor and strategic commitment on our part to interoperability, so it probably helped establish a basis for technical collaboration between the two companies.

But then you also had to ask, in addition to the technical collaboration, can you reach common ground on economics? After all, we were settling a legal action that had value to it. And then can you reach agreement on a marketing approach. So in order to get something like this to come together, you needed to get three different rings to work together in harmony, so to speak. That it took a fair amount of time to do wasn't surprising, but it did in fact come together.

Over the last month we flipped the switch, and it went from something we thought we could do in theory to where we were convinced yes, this looks like something that's really going to happen.

So until the last month it was still theoretical, and things really got serious over the last month.
Glaser: Literally, the deal got signed at midnight last night. It was probably the weekend before last where it went from something where we thought it could happen, to let's schedule the board meeting to review it because it looks like we'll actually have something to talk about.

It was 18 months ago that you were talking to Apple and asking them to open up the iPod to be compatible with other services. Apple was adamant that they wouldn't, and you indicated that might push you toward Microsoft--which turned out to be prophetic. Do you see those events as being connected?
Glaser: The foundation of the relationship with Microsoft has multiple

aspects. So interoperability is one thing, and if everyone agreed on interoperability, it might be less of a rallying cry, but it would still be very important.

If the question is, was this an example of "The enemy of my enemy is my friend"? I would say no--it's much more multidimensional and nuanced than that. If the fact is that Apple is a company that is not very open, and that's something that might motivate people to find ways to work together, that's just human nature. But it's not a simple Hatfield-McCoy kind of thing; it's more multidimensional than that.

How do you think this positions you and Microsoft jointly against Apple, at this point?
Glaser: With regards to services for consumers, which is our focal point, I think it positions us both extremely well. I think the missing link, at this point, is hardware that a consumer finds compelling, in terms of the portable-music category.

For the portable space, I think it's fair to say that the iPod is still the best product. I think we and Microsoft have an incentive to work with the hardware community to create better solutions than have been created thus far, and I think we'll do it, but I think that is something that plays out over time.

This Christmas, the iPod will be the biggest seller, no matter what, and I think odds are good it will be the biggest seller next Christmas. I'm hopeful that next Christmas, by '06, there will be a worthy competitor from the device side, but we have to get our brethren in the hardware business to help us on that one.

The deal seems to be mostly about music and games. How does this affect Real's other businesses?
Glaser: In terms of our systems business, it's very helpful. One of the things we can now offer our customers is interoperability, for in-the-clear and secure content, on a level that goes way beyond what anybody's done today.

Was it the case that previously, you couldn't read a protected Windows Media file?
Glaser: If someone had a piece of content on a Windows device that had security rules, there would not be a trivial way to move that content into a device that had Helix or OMA (Open Mobile Alliance) or what have you. Our relationship with Microsoft puts us for the first time--and I think puts anybody for the first time--in a position of being able to solve that problem.

We went from a relationship where we were somewhere between walking and running in opposite directions to where we're walking--and maybe in some cases even walking briskly--together in the same direction.

So when we talk to the big (mobile-phone) carriers we work with, that's definitely something they're interested in. The big media companies as well. It enhances the competitive position of our system software.

The same is true for RealPlayer. We have a set of things we've done to make the experience of using RealPlayer on Windows a smoother experience than it's been before.

Even on the music side, it sounds like Microsoft hasn't given up their subscription service completely. Do you ultimately plan to compete against it on that?
Glaser: Microsoft has agreed for this Christmas and next Christmas and the period in between to promote no service on MSN (and WindowsMedia.com and a number of other places) more prominently than our service.

Clearly, there are multiple people who use Microsoft technology, and we didn't ask, nor do we expect, that Microsoft would no longer return their phone calls or no longer give them distribution. There won't be anything in that period of time that's promoted more prominently than what we do with Microsoft, including anything that Microsoft might do. So we're very happy with that. It gives us a stable foundation.

We haven't done something that guarantees we'll be partners 10 years from now. I'm sort of a crawl-walk-run guy, and we went from a relationship where we were somewhere between walking and running in opposite directions, to where we're walking--and maybe in some cases even walking briskly--together in the same direction.

Do you expect this kind of relationship to be expanded to other product areas?
Glaser: In the last couple of weeks, we've been able to put together some demos that were actually compelling and actually represent our specific intentions or in a number of cases were specifications from the contract. There will be a lot more that's already in the plan, beyond what we showed in today's press conferences. Whether there will be more than that will play out over time.

What are you going to do with the money you've gained from the settlement?
Glaser: We're going to do smart, rational things because we endeavor to be rational, long term-oriented people. We will have, by the end of this quarter, over $800 million on our balance sheet, and we will use it wisely and productively.