RealNetworks: A case study

special report In a filing with the Securities and Exchange Commission just before Thanksgiving in 1997, RealNetworks summed up its assessment of a direct Microsoft threat in about one paragraph. This year, it listed enough concerns to fill more than two pages.

What changed in those two years?

Many who are familiar with both companies praise RealNetworks for doing a remarkable job of staying ahead of Microsoft against long odds. But others with more historical perspective say the streaming company has fallen into the same trap as some of Microsoft's most celebrated adversaries, such as Apple Computer and Netscape Communications, by miscalculating the reach and power of the software behemoth.

Regardless of those opinions, all seem to agree on one thing: The course of RealNetworks has been dictated by the relentless personal drive of chief executive Rob Glaser to defeat Microsoft, his former employer, seemingly at any cost--including a high-profile attack before a congressional committee that sent RealNetworks' stock plummeting when investors doubted its wisdom. The question is whether that passion has translated into genius or hubris.

The answer may lie in recent dealings between the two companies announced last month, which caught many in the industry off guard. If RealNetworks is in such great shape, they asked, why sign a licensing agreement with Microsoft now?

"There's no love lost between them. The fact that they're even working together is mind-boggling," said Tom Britt, CEO of Channelseek, a self-described "TV Guide" for Net streaming. "They're like a couple that's been divorced and remarried."

After having a few weeks to digest the news of that deal, however, an increasing number of people are recognizing that such a rapprochement may have been inevitable. As it has shown repeatedly in the past two decades, Microsoft often fumbles at the beginning but can be unstoppable once it finds its way in a market--even when federal regulators question its business practices.

"We've seen faster growth in Windows Media than RealPlayer. That is a trend," said Bob Hildeman, CEO of Streambox.com, which has been sued by RealNetworks over its competing player. "Part of that is based on business models, but some of it is Microsoft's marketing. I think also more people are choosing one or the other. More people are installing Windows Media servers at a faster rate because they're free."

When it originally filed papers with the SEC to go public, RealNetworks devoted little consideration to direct competitive issues between the two companies because Microsoft had not implemented many of its strongest angles of attack. RealNetworks' filing in February this year tells a very different story, detailing many specific competitive "risk factors" posed by Microsoft on several fronts, ranging from content deals and high-speed Internet technologies to handheld computing products and server pricing pressures.

Like Apple with operating systems and Netscape with browsers, RealNetworks may have underestimated Microsoft as a direct competitor in the early stages of its business, industry veterans say. Even today, the streaming company publicly expresses confidence that its commanding market share and product popularity will ensure a comfortable lead.

"Real seems to mistakenly believe that people want its software, but that's an illusion. People only want Real's software because they want access to content they can't get any other way," said Dave Ulmer, chief executive of Earjam.com, which makes a competing product that plays Windows Media and MP3 downloads.

Others put it more bluntly. "A lot of people think RealNetworks has gotten very arrogant," said a Web media executive who did not want to be named. However, he hopes that it survives, because "anybody in our business would have to be concerned about RealNetworks going away and having only one player in the streaming business."

And concerned they are. So much so, in fact, that some suggest that RealNetworks is already getting out of Microsoft's way in the software business, repositioning itself as a Web services and content company.

Glaser scoffs at the suggestion that Microsoft has that kind of influence on his company's direction, saying that RealNetworks is simply growing beyond streaming to realize its full potential as a multimedia powerhouse. "To look at us as a streaming media play is like looking at Yahoo as a search engine," he told CNET News.com. "Those are our roots, and we're proud of our roots, but now we've transcended them."

As far as the Netscape comparison is concerned, the chief executive said RealNetworks has more in common with a company like online auction house eBay--one that has scores of competitors that have failed to seriously erode its early lead. "With eBay, you have the network effect: It already has most of the items, buyers and sellers," Glaser said. "We have the most players and servers. That feeds off itself."

But the same could be said of his chief competitor, which has the resources and wherewithal to wage a devastating war of attrition.

Perhaps in another era, Microsoft's role could be described as that of a "fixer"--a company that puts things together, introduces people and makes things happen, while profiting from those relationships in manifold ways. And if that's not enough, Microsoft has never been shy to pull strings in an industry where many either owe or fear the empire based in Redmond, Wash.

Take, for example, this scenario offered by one Web broadcaster: "They say we want to get content on Windows Media, I say I don't have money. They say, 'Call this company Ikon.' Ikon is doing hosting. Ikon says, 'Microsoft gave you the carte blanche treatment. Here's what we've got.' I didn't have to pay them anything but had to be solely in Windows Media format. Otherwise that would've cost me thousands of dollars.

"They're not breaking any laws; they're not owning the company doing the streaming. Somehow, whatever the strategic relationship is, it's a huge motivator for content companies," the broadcaster said. "They do whatever it takes to get content on Windows Media."

No one knows that pattern better than Bruce Jacobsen, former president of RealNetworks, who spent a decade in Redmond with Glaser learning the ways of the empire from behind the compound's walls. But he defends the company's head-on strategy, saying it is the only way to battle the kill-or-be-killed approach of its Goliath-like competitor.

As many others have found, the idea of sharing significant portions of its markets is a foreign one to Microsoft. "Bill plays for 85 percent share," Jacobsen said.

Go to: The man who would be Gates