Under the deal, Microsoft will pay $460 million in cash to RealNetworks to settle antitrust claims. It will also pay $301 million in cash to support Real's music and game efforts, and Microsoft will promote Real's Rhapsody subscription music service on its MSN Web business. Microsoft can earn credits toward that $301 million by signing up subscribers via MSN.
"Today, we're closing one chapter and opening a new one in our relationship with Microsoft," RealNetworks CEOsaid in a statement. "The legal chapter is being closed with an appropriate and fair outcome that sets the stage for a very productive and collaborative relationship between our companies."
RealNetworks had alleged in its December 2003 lawsuit thatto restrict how PC makers install competing media players while forcing every Windows user to take Microsoft's media player, whether they want it or not." Real originally sought $1 billion in damages.
As part of the deal, Real will also end its direct involvement in antitrust investigations across the globe, including probes in Europe and Korea.
Tuesday's move resolves yet another legal matter for Microsoft, which has already settled with rivals, , , and Be, among others.
RealNetworks had been one of the key companiesand had been a major player in the .
European antitrust regulators said the settlement will have no impact on efforts to monitor Microsoft.
"It has no effect. The Commission will continue to work to ensure Microsoft's full compliance with the March 2004 decision. The Commission's role is to ensure respect for EU competition rules to the benefit of all consumers and companies in Europe--not to apply the rules to benefit any one individual company," said Jonathan Todd, a spokesman for the European Commission.
Microsoft's co-founder, meanwhile, addressed the benefits of the deal.
"This agreement will provide MSN's millions of customers with easier access to subscription services for the music and games they love," Microsoft Chairmansaid in a statement. "Digital music is one of the fastest-growing segments of the online-entertainment industry, and by promoting Rhapsody's subscription music services from within MSN, we will provide a better experience for our users."
Some analysts said the deal would allow both companies to draw their attention away from battles that had largely already been fought and focus on the more pressing matters of the present.
"It's one of those good deals for both companies," JupiterResearch analyst Michael Gartenberg said. "For Microsoft, it frees them up to focus on the competitors of the 21st century, like Google, or Apple (Computer) in the music space."
One of the big unanswered questions is whether the agreement will help both companies as they try to take on Apple, which has grabbed the lion's share of the legal online-music market with its iTunes Music Store and its iPod players.
Both Gates and Glaser said the deal should help their companies compete against Apple.
"Apple does great products and has done a number of them in the music (realm)," Glaser said. "At the end of the day, we think consumers want choice. We think consumers want openness...Over time--it won't happen overnight--I think 'open' will beat 'closed.'"
In the MSN part of the agreement, people using Microsoft's MSN Messenger instant-messaging service will be able to share and play music while chatting using Rhapsody's library. MSN Search will also be added into RealPlayer, and Microsoft will feature Rhapsody links from within music-related search queries on MSN.
In settling the antitrust disputes, Microsoft is providing a "variety of assurances" on the design of the Windows operating system, including Windows Media Player, and access for Real to a broad range of Windows platform technologies.
"We've agreed, on the Windows front, to make our platform as effective as possible for Real," Gates said on a conference call.
With, the new version of the operating system that is due to arrive next year, Microsoft will add in code so that if someone seeks to play a Real media file and does not have the proper software, he or she will be redirected to a Web site to download the player.
"It's more advantageous than it might have been before," Gates said.
The two companies said they will work to make their respective digital rights management technologies interoperable. "Microsoft will also enable Real to facilitate the playback of content on non-Windows portable devices and personal computers using Windows Media DRM," the companies said in the press release announcing the deal.
Microsoft also said it has provided Real with contractual assurance that it will have broad access to distribution via new computers.
Finally, the two companies will. Real will create a new subscription service to be offered on MSN Games and will also develop a series of new casual games for Xbox Live Arcade for the Xbox 360 console.
The two companies demonstrated some of the planned technology, including a version of MSN Messenger with a link to Rhapsody's music library. Glaser said that some of the joint products will come by the end of this year, while the remainder will be released by the middle of next year.
Glaser said that while Real and Microsoft will cooperate in a lot of areas, they will continue to compete in other areas--such as with the RealPlayer jukebox, which competes with Windows Media Player. However, even in areas where the two companies are rivals, Glaser said Real will be better off for the added technical access it is getting.
"We look forward to making the most of our new relationship," Glaser said.
For its part, Microsoft noted that the agreements with Real over Rhapsody are not exclusive, meaning that Microsoft could partner with others or offer its own subscription service. Gates stressed that the company has not announced any plans to do so, and both he and Microsoft general counsel Brad Smith characterized Tuesday's announcement as a first step toward what's possible between Real and Microsoft.
But, Smith added, "There's no guarantee that further steps will follow."
Both companies agreed that the deal will fundamentally change a longstanding relationship of animosity between the two competitors, however.
"Coming out of this, we wanted peace," RealNetworks's general counsel Bob Kimball said in an interview. "We didn't want to exchange a hot war for a cold war. We wanted collaboration, that's what we got out of the deal."