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Yahoo, RealNetworks at a contract crossroads

The companies arrive at a crossroads in their relationship, with a major contract involving streaming media services on the Yahoo Broadcast site set to expire later this week.

RealNetworks and Yahoo have arrived at a crossroads in their relationship, with a major contract involving streaming media services on the Web portal's Broadcast site set to expire later this week.

Although Yahoo Broadcast says it supports all streaming media formats, RealNetworks currently has preferred status on the site. The looming Jan. 1 expiration brings uncertainty to whether the contract will be renewed, or possibly revised or revoked.

Neither company would comment on the status of the talks. But sources close to the negotiations said Yahoo Broadcast, which aggregates live media events, is seriously weighing at least three scenarios that would result in a reduced role for RealNetworks.

Sources said Yahoo is exploring replacing RealNetworks as Broadcast's preferred technology in favor of Microsoft's Windows Media; creating a Yahoo Broadcast-branded streaming player powered by Windows Media technology; or maintaining its relationship with RealNetworks in a more limited capacity.

Last week, RealNetworks' stock plummeted after a report in called into question the future of the partnership. RealNetworks has since steadfastly denied that its relationship with Yahoo is in jeopardy.

"We have a very good and ongoing relationship with Yahoo and categorically deny any rumors that would suggest otherwise," Jay Wampold, a RealNetworks spokesman, said in an interview.

But managers at several radio stations in partnership with Yahoo Broadcast this week said the company has indicated that significant changes involving RealNetworks could be in the works.

According to Ken Freedman, a radio station manager at WFMU in Jersey City, N.J., a Yahoo Broadcast sales representative informed him that RealAudio would be "phased out" in favor of Windows Media.

"From what Yahoo told me, what is going to happen is RealAudio will become an option--not the default but an option--that affiliate stations will have to pay Yahoo extra for."

Christa Wessel, the Web administrator at WCPE in Wake Forest, N.C., also said that Yahoo Broadcast has made moves to discourage stations from using RealNetworks.

"Our sales representative at [Yahoo Broadcast] wasn't excited about us using both [technologies]," she said. "They clearly wanted us to support only Windows Media, saying using two would be costly."

Sherri Mano, a Yahoo representative, declined to comment on the situation, saying only that Yahoo Broadcast supports "all streaming media technologies."

Whether Yahoo Broadcast will change its preferred streaming technology in the new year remains unclear. But the consideration of a switch may speak volumes about RealNetworks' ability to set the terms for its partnerships.

A rift with Yahoo would not be the first relationship to end badly for RealNetworks. Last month, Warner Bros. dropped RealNetworks in favor of Microsoft's Windows Media Player, with sources citing a clash over branding.

A second such switch would signify a major coup for Microsoft, which has lagged RealNetworks in the streaming market. Signing a deal with a company that has captured one of the largest audiences on the Web would significantly shift the balance in the ongoing battle between the two streaming technology providers, analysts said.

RealNetworks is by far the streaming media market leader, with consumers having downloaded more than 82 million copies of its RealPlayer product. The company says its software is used to access more than 90 percent of all streaming media content on the Web.

Microsoft's Windows Media Player, which comes bundled with Microsoft's Windows 95 and Windows 98 operating systems, has begun making inroads. According to a report by research firm International Data Corp., Windows Media showed faster gains in market share growth as users have turned to multiple streaming players in recent months.

More importantly, however, is the adoption of streaming server software, which controls the format for broadcasting Internet content.

According to Aram Sinnreich, an analyst at Jupiter Communications, Microsoft offers compelling reasons for Web sites to choose its technology over RealNetworks. Most notably, Windows Media comes bundled free in its NT operating system. Conversely, RealNetworks charges licensing fees starting at $1,995 for its servers and often charges companies a per-stream fee.

Because Microsoft is playing catch-up, it has a greater incentive to offer more appealing and sometimes more affordable deals with content providers, according to Lucas Graves, also an analyst at Jupiter Communications.

"Microsoft, because it's playing catch-up, is more willing to strike deals with other Web sites," Graves said. "If it's true that Yahoo is dropping RealNetworks, then you can be pretty sure that Microsoft granted them a deal on fairly benevolent terms in order to score such a high-profile victory in their battle against RealNetworks."

But Sinnreich also suggested that signs of trouble among RealNetworks' partners could indicate the company is suffering from a classic case of hubris. Having created technology that has become a de facto standard, it may now be pushing its luck too far.

Notably, RealNetworks has ruffled feathers among content providers by making moves to become a full-fledged media and entertainment destination. The company recently relaunched its home page as a media and entertainment destination, putting it more squarely in the same field as its partners.

Sinnreich said these overtures have made Windows Media a more appealing option for some content providers feeling threatened by RealNetworks.

"Real is moving aggressively into the media space," he said. "But Microsoft hasn't set its sights on becoming a major music player. ...Microsoft's opportunity is to differentiate themselves by saying, 'We are not in your space and competing directly with you--we are a software enabling company.'"