Commentary: RealNetworks lobs another grenade

By Josh Bernoff, Vice President and Principal Analyst

RealNetworks on Tuesday unveiled its "Freedom of Choice" marketing push, featuring 49-cent singles, $4.99 albums and a message that it has the only music store compatible with both iPods and portable devices based on Windows Media. The result: a major challenge to Apple Computer, a boost for Windows Media, and a new imperative for music labels to back Apple rivals to break down compatibility barriers.

		Related story RealNetworks cuts song prices Company offers 49-cent tunes and releases Harmony, the software that irks Apple.

On July 26, RealNetworks announced Harmony, a technology that allows the RealPlayer software to support iPods and portables based on Windows Media.

Apple fired back, claiming RealNetworks' reverse-engineering proved that it has the "ethics of a hacker" and pointing out that Apple could revise the software downloaded to its music players and stop Harmony from working. Now RealNetworks CEO Rob Glaser is on the warpath.

"Apple's iTunes strategy is pernicious; consumers didn't know they were getting locked in," Glaser told Forrester. "Now we're launching the biggest music sale in history" to draw attention to the issue.

That said, what happens next?

•  The RealPlayer Music Store will vault ahead. By launching with loss-leader pricing in the midst of a publicity firestorm, RealNetworks will stimulate masses of consumers to sample its music between now and Labor Day. We expect the company to come from nowhere to take second place in downloads, passing Napster. Sign-ups for its subscription service, Rhapsody, will get a halo effect from all the traffic. But the customer acquisition comes at a cost. Real could lose $2 million on below-cost music sales and now must continually engineer fixes to get around Apple's latest software downloads.

		Related story Can Glaser, Jobs find harmony? Real's CEO has big plans for his company's new technology, Apple lawsuit or no.

•  Apple gets a black eye. Apple has defended its market share by refusing to license its FairPlay digital rights management (DRM) system to others. Most consumers haven't yet realized that by choosing an iPod and iTunes, they and their music are locked into Apple technology for the future. Now, thanks to RealNetworks, they will. Apple's happy, shiny image will get tarnished and iPod sales could ultimately drop, as consumers question whether lock-in is a good idea.

•  RealNetworks slows MSN's Music Store launch, but boosts its format. MSN must wait to launch its rumored digital music store--launching during the RealNetworks promotion would be suicidal. But Microsoft's media format will benefit because RealNetworks supports music in secure Windows Media format and portable music players that use it.

•  Labels will keep pushing for compatible music and diverse distribution. Apple saved the music industry from its piracy-induced death spiral, but there's a cost--Apple calls the tunes in digital music. Labels must get firmly behind RealNetworks and Microsoft as a bulwark against Apple's overwhelming market share, while pumping up other distribution venues like downloads to mobile phones. Only competitive pressure will bring Apple to the negotiating table for FairPlay licensing and break open the format incompatibility that threatens the whole digital music market.