As Wall Street's capricious love affair with RealNetworks
overheats in the wake of the company's deal with IBM, investors may be overlooking some formidable challenges facing the streaming media pioneer.
No one disputes that the deal to develop a client based on IBM's Electronic
Music Management System is good news for RealNetworks. But analysts are
skeptical that the news merits the reception it received yesterday on Wall
Street, where RealNetworks' stock shot up almost 40 percent to an all-time high.
The deal is not exclusive, skeptics point out. That means IBM is likely to turn around after a successful trial and license its technology to any or all of RealNetworks' rivals--including archrival Microsoft.
And wherever IBM's format winds up, Microsoft remains a formidable problem for RealNetworks. Many compare the company to Netscape Communications, which
started out with upward of 85 percent market share and quickly succumbed
to the Redmond marketing machine before being acquired last month by America Online.
Microsoft's efforts to promote its Internet Explorer browser earned it a
potentially devastating antitrust action by state and federal governments,
and the company probably will go about attacking the streaming media
market more gingerly than it did the browser market.
Still, Microsoft has "formidable means at its disposal to accomplish it's
goals," said Mark Mooradian, analyst with Jupiter Communications. "The question is
what Real does in response."
One thing RealNetworks is thought to have in its favor is the goodwill of
the recording industry.
"The reason why this deal is getting such great response it that it is
perceived that Real is a favorite with the record companies over Microsoft.
Getting the labels involved is going to shape the market in a profound
way," Mooradian said.
Microsoft today will unveil its
own format, with copyright protections that may swing those record
companies in its favor.
In addition, analysts suggest that Microsoft in its last reorganization
cleared some dead wood from its streaming media organization and is getting
serious about doing whatever it takes to dominate the space. The company
will bring to bear its usual advantages, such as having little or no
pressure from Wall Street to make one part of the company profitable in the
"RealNetworks may have more mindshare right now, but Microsoft has just
restaffed that division, and they have a way to surprise Real," warned Rob
Enderle of the Giga Information Group. "They have nearly unlimited funding
potential, and they replaced some of the lead players with people that seem
to understand what would be part of a successful product. This group is
also more willing to purchase a third party if that's what it takes."
A Net phenomenon on the rise
If Microsoft is the 800-pound gorilla to deal with on one end of the
spectrum, MP3 poses a far more diffuse threat on the other. This format,
skyrocketing in popularity as a music download technology, offers no
copyright protection and so stands no chance of getting the benediction of
the record firms. But some analysts view it as a threat to RealNetworks and
the other established players for that very reason.
"I think they're on the wrong side of the tech dam," said John Robb,
principal analyst with Gomez Advisors.
"The MP3 world is exploding, and while they have an MP3 player on the
client, they're not in control of that technology. Technologically they're
under assault, which is why they've gone to IBM with its ties to the music
industry to get the cover in terms of encryption."
Other observers see MP3 as less of a threat, pointing out that streaming
versions of the technology are too bulky to compete with RealNetworks in
today's prevalent narrowband environments, and that MP3 technology is more
popular among the technologically savvy than the mass market RealNetworks
Software company or content aggregator?
Another looming question for RealNetworks is its relationship to portals
such as Yahoo, which lit a fire under the streaming space with its recently
announced intended acquisition of
Broadcast.com. While the
acquisition is expected to fuel growth of streaming on the Net, increasing
demand for RealNetworks' software, some observers see the acquisition as
RealNetworks' lost opportunity.
RealNetworks, according to this view, should have followed the example of
Netscape, which continued working on its software but primarily as a means
of driving traffic to its own portal, to which it devoted its Web domain
and considerable resources. If RealNetworks had developed itself as a
portal, it could have joined forces with a larger company that could have
waged a winning battle against the Microsoft menace.
"They took the wrong approach," said Robb. "They went with the software
company approach and screwed up their opportunity. They had a lot of
traffic on their site and they should have been showcasing the music out
there. Instead they let Broadcast.com steal their thunder, and Yahoo came
in and bought them up. In aggregating content, they would have been in a much
Not so, RealNetworks' defenders argue, pointing out that as a software
provider RealNetworks wins as Broadcast.com and Yahoo aggregate and
popularize streaming content.
"The Yahoo/Broadcast.com deal opens the market up for RealNetworks," said
Jae Kim, analyst with Paul Kagan Associates. "Their strength isn't that
they're on 95 percent of desktops, it's because everybody writes for it.
It's third-party developers that give Real its strength. They realized they
had to create a lot of market opportunities and not try to dominate all of
them. It would have done more harm than good to move too aggressively into
The for-sale strategy
While the dust settles on the Broadcast.com acquisition, speculation is
rife that RealNetworks is ripe for an acquisition of its own.
"Eighty percent of the gains in RealNetworks' market cap has been due to the Broadcast.com deal," said Kim. "Everyone thinks they're the next target of acquisition. The company is in the center ring right now, and anything it
does now makes it that much more attractive to an acquirer."
Analysts by and large believe executives' assertions that RealNetworks is not for sale. Even if it were, an acquisition of the company faces numerous obstacles. Especially with the recent run-up in the stock, the company is prohibitively expensive for most companies. Yahoo is spoken for. Relations are still chilly with Microsoft. And anyone else who bought it would put themselves directly in Microsoft's line of fire.
With all these considerations, one potential buyer remains: AOL.
But AOL's recent buying spree, particularly the large and difficult
acquisition of Netscape, makes it unlikely that an acquisition will be
announced anytime soon.
In the end, all the players in the streaming media space may find
themselves united battling the same foe: bandwidth constraints.
"The real question is how well the industry can overcome the hidden costs,
which is the bandwidth problem," said Kim. "If you can't solve the
bandwidth issue, if you can't have more than 500 simultaneous users--try
building a multibillion-dollar business out of that."