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The (online) music man

RealNetworks CEO Rob Glaser talks with CNET News.com about the shifting future of online music.

In 1995, RealNetworks CEO Rob Glaser pitched skeptical record labels on using the company's then-new audio-streaming technology to build a "jukebox in the sky."

Eight years later, that dream is reality in Glaser's mind. And its manifestation--monthly subscription music services such as that offered by RealNetworks' Rhapsody--will be the predominant way people access audio online in the years to come, Glaser contends. His evidence: the company's 46 percent rise in subscribers for Rhapsody and RealOne's premium radio from the second to third quarter.

That may also serve to steady concerns that RealNetworks' core subscription service for streaming video, RealOne SuperPass, may be losing steam. Indeed, RealNetworks has a head start on a raft of rival services, including Apple Computer's iTunes pay-per-song service and an overhauled Napster that's emerging to compete with the top-rated Rhapsody.

At the same time, the company faces continuing weakness in sales of system servers for delivering digital audio and video files--a business Microsoft dominates on the PC but Real aims to command in the wireless market. CNET News.com talked to Glaser a day after RealNetworks announced third-quarter revenue that met analysts expectations, based on a rise in music subscriptions.

Q: Revenue was up this quarter, and music subscriber numbers were up. Can you talk about the main driver of this growth?
A: Glaser: Not only is RealNetworks doing extremely well, but the subscription model, which we have long-advocated, is at the core of how consumers are going to experience music. It's not the only way, but we think that it may be the single most important way and certainly the most logical successor to services such as the old pirate Napster and Kazaa.

Why is the subscription model better?
It's simple economics. The average consumer who uses Rhapsody--and we now have a quarter million music subscribers--listens to more than 100 different songs per month. That pattern's pretty consistent. If you go with a purchase model, that costs you over $100 a month as a consumer. If you go with subscription model...we are able to deliver that same experience to consumers and have a good business at selling it at $10 a month. So it's less than a tenth the cost.

That was the great thing about Kazaa and pirate Napster from the consumer standpoint--that you got access to all this stuff, and you didn't have to choose before you listened to a song whether you wanted to buy it or not. We offer the same thing: You can listen to 100 songs a month or 1,000 a month. Listen to five seconds of them or 30 seconds of them. You decide if it's something you want to permanently own.

Is there any support left inside Real or outside for MusicNet (a joint venture between Real, America Online and several record labels)?
MusicNet, interestingly enough, is the second-largest online music subscription service. We own lock, stock and barrel in No. 1, and we're the largest single shareholder in No. 2. MusicNet, near as I can tell, has a very solid relationship with AOL...The reality is there will be a variety of services out there. For us, it's the best possible outcome: We're the 100 percent owner of No. 1 and majority owner of No. 2.

Is Apple's iTunes, which is gaining a lot of exposure, plus QuickTime, a threat to Real's software?
We have had a multidimensional relationship with Apple for some time...The thing Apple has to decide--not for us but for the industry--is whether it wants to be completely vertically integrated, in which only things invented in Cupertino are used and promoted on the Apple platform, or whether it wants to be a broader platform. It's hard when you have a single-digit share of the market, because you have a hard time figuring out how to grow your business. So I understand the lure of going in that vertical direction. But Apple's already lost things like Adobe Premiere on its platform.

Does it want the iPod to only talk to the Apple version of the store, or does Apple want to sell iPods no matter what method (consumers want to use to) connect to iTunes? So there's this Soviet model, or there's the open-market chaotic model, exemplified by the Web and by some aspects of Wintel. And Apple has to choose.

So it's better for you if they stay in that niche market?
Either way, it's fine. Apple makes fine hardware. If Apple opens it up so that other people can support, then that's good. If Apple stays "company down" on everything they do, then the market forces over time will render them into the kind of niche we've seen them in time and time again.

Is there much of a profit margin on digital downloads as opposed to selling subscriptions?

I understand the lure of going in that vertical direction. But Apple's already lost things like Adobe Premiere on its platform.
We think that the services model long term is a better deal for everyone...Our take on it is the business of selling tracks will be a low-margin business, with low barriers to entry and lots of people jumping in. The business model we've focused on with subscriptions as the center will have the best long-term economics.

At what level of subscribers does the business become really lucrative?
One of the delightful things about being a public company is I can say things that go forward one quarter or 10 years. In the middle, it gets a little bit tricky. I'll say this: We are focused on a long-term business. It'll be 10 years in February. And if I look back and ignore this financial bubble in '99 and 2000 and think about where we thought we'd be, we're ahead of schedule. In the 20 years in the information technology and Internet industries, I've never been associated with a legal, legitimate consumer product that had the kind of consumer excitement that Rhapsody has, so that's got to be worth something.

Is Real going to get into the portable business so that people can port their music collection around?
With RealOne, we support a couple dozen significant volume devices.

In terms of the economics (of the subscription model), that's still a model in which you have to pay 99 cents a track. If you look at all the excitement about the iPod, the content on the iPod is (largely) not purchased by either CD or download by the recipient. That business has been living off the afterglow of pirate services.

Yes, that category of product is a great product. The primary action is in support that's based on personal use content, where people ripped their own content. We've got great support for that. In terms of tying it into Rhapsody, it's the early days yet.

Has the RealOne subscription business flattened outside of Rhapsody?
No...we had overall growth. Because we broke out music for the first time we didn't explain to people what the number for music subscribers would have been if you rolled the clock back, other than to say that music was up 46 percent (quarter to quarter).

You cautioned investors, in your conference call, about the Major League Baseball contract--is there heated competition for its hand in streaming ball games? What do you stand to lose, and how will you make up for it if that happens?
As you may know, I'm a tiny percent minority owner of the Seattle Mariners baseball team. I've been associated with them for 10 years and it's been terrific. So I've been around the block a bit with...the economics of baseball. We're trying to tell the folks that follow our business that we're not going to do something uneconomic when it comes time to renew our relationship with MLB.

Long-term, video is going to be more important than audio in aggregate.

It's been a terrific relationship from the standpoint of fans. Baseball has been one of the most exciting ways to enjoy the Internet...I was in Berlin for the seventh (playoff) game between the Red Sox and the Yankees, up to the wee hours of the morning watching that amazing game. It's clear that it's a core part of the culture...but we're just telling people, "Don't expect us to do something irrational just for the love of the game."

How will you compensate if you lose it?
It represents less than 2 percent of our revenue. Depending on the circumstances, we could end up more profitable than we are today. Baseball has been a great relationship, and it would be great if it could continue.

Momentum is building for original video programming (such as AOL's new sports show) and movie services online. Where's Real going to get its next wave of subscribers on this front?
(Laughs) I appreciate the question--this is in a context in which we just announced 46 percent quarter on quarter growth in our fast-growing content area, so I don't think that the biggest question I lose sleep about is what wave is going to drive this forward now. We have several waves driving this forward now, music most prominently.

In other words, how committed are you to video streaming?
Long-term, video is going to be more important than audio in aggregate. By working with the industry, we cleared more than 400,000 unique pieces of content in music that we're able to offer consumers a lot of flexibility on. They can stream it; they can purchase it.

The biggest thing that has to happen from the scale that music is at is to get the content flowing--be it old TV archives, be it movies. Folks at services such as Movielink are off to a nice start. But if you look at the number of movies Movielink has, and you compare it to the number of tracks of music, Movielink is sort of where music services were in 1999 or 2000. Maybe a little bit ahead of that.

The big message we put to all these content industries is: "Look, the lesson of the music industry is if you don't get ahead of the curve and make your content available for legitimate services, consumers will find a ways to get it, anyway, to your detriment." As I've discussed with guys such as Jack Valenti, the danger is that they'll move too slowly.

Does Real have any plans in the offline world, such as in digital cinema, as does Microsoft?
The digital cinema initiatives today are mostly stunts. Every once in a while, we'll do a marketing stunt. But long term, digital distribution will impact everything, be it taking HD (high-definition)-quality content and flowing it out to cinemas and not having to make and ship 35mm prints.

I've had a number of fun conversations with my buddy (Dallas Mavericks owner) Mark Cuban, and on that front, he's a big believer--so much so that he bought a theater chain to experiment in that world. That world's going to come, and we'll always be happy to have our platforms and technologies used in that area. But in terms of that being a primary business in the next year or two, I think that it's still the early days yet for that business. We'd rather just let people build technologies and services with our technology rather than get involved with it first-person.

As the market changes, are there pieces Real is missing? Are there other potential acquisitions on the horizon?
We will be active but selective. I look at what we did with Rhapsody--best product in the business--and under-distributed. In that case, we had the opportunity for the perfect fit. When there will be opportunities like that, we will be active. There will be situations in which there will be an ingredient piece, something we can add to other things we're working on that will scale things up. But I don't think we'll be like the old Computer Associates International, for which acquisition is the fundamental growth strategy.