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Is RealNetworks' loss Microsoft's gain?

RealNetworks reports that its net loss nearly doubled last quarter. Is Microsoft's Windows 2000 streaming server at the bottom of it?

RealNetworks on Tuesday said its net loss nearly doubled in the third quarter, compared with the same period last year, and warned that further losses are expected through the end of 2002.

The loss is a result of worsening sales in the company's server business offsetting gains made in its consumer business.

Net loss for the quarter was $35.4 million, or 22 cents per share, compared with a loss of $19.4 million, or 12 cents per share, in the same quarter last year. The third-quarter loss included $30.8 million in special charges, including restructuring and severance, write-down of excess office facilities and some equity investments, and a write-off of net-deferred tax assets.

Revenue for the quarter was flat at $45.4 million, compared with revenue of $45.2 million for the third quarter of last year.

At the close of regular trading, RealNetworks shares were up 23 cents, or 5 percent, at $4.89. The stock gained one penny in after-hours trading.

RealNetworks Chief Executive Rob Glaser acknowledged that the company's server sales were suffering.

"From a financial perspective, the third quarter, while in line with overall guidance excluding special charges, was disappointing," Glaser said in a statement. "Our consumer business continued to grow nicely, driven by the growth of our RealOne subscriber base. On the systems side, our business remained challenging."

The company also warned that it expects similarly disappointing results for the fourth quarter, with revenue "similar to or moderately lower than third-quarter revenue." RealNetworks also said it expected its fourth-quarter operating loss to be "similar to or moderately less than the third quarter's operating loss of $4.3 million, excluding special charges."

Part of the challenge facing RealNetworks on the systems side will be the fact that the company's chief competitor, Microsoft, includes its streaming server software in its Windows 2000 operating system. By contrast, RealNetworks charges not only for the software but also for usage.

"Real is seeing erosion as people move over to Microsoft, which doesn't charge for either the separate media server or the...licensing revenues," said Michael Hoch, research director at Aberdeen Group. "That's a place where Real has been exposed for a while, and it was only a matter of time before it was going to start to hit them."

RealNetworks questioned Hoch's interpretation, chalking up the diminishing server sales to general market conditions, rather than to an onslaught from Microsoft.

"We're actually down less than just about any other infrastructure company out there," said Dan Sheeran, vice president of media systems for RealNetworks. "We believe what's going on in our systems business is much more indicative of the economic climate. There's no data we see that in the same period Microsoft's share is increasing. We think it's a tough time for telecom providers in general."

Software license fees collected by RealNetworks plummeted to $15.6 million this third quarter from $26.8 million a year ago.

On the brighter side, the company's subscription revenue for its consumer products went up to $28.2 million this quarter from $16 million a year ago.

Hoch said that growth in the consumer business, combined with the company's newly announced project to develop its software in an open-source environment called Helix, could help stimulate further revenue growth to offset increased hemorrhaging of business to Microsoft.

But RealNetworks' strategy for translating the Helix project into less dismal quarterly earnings statements remains unclear.

"Real has been trying to make itself a content aggregator and gateway to the consumer business, and that's the side that's increasing," Hoch said. "So the Helix announcement is, I hope, a play to integrate Real technology more closely with third-party applications. What Real has not announced is how that's going to affect future pricing."

The company could follow the example of Netscape Communications, the last famous victim of a Microsoft bundled-software strategy, and give its server software away for free, Hoch noted. Charging for the server but not the individual streams, or charging a licensing fee just for software integration, are other alternatives, he said.