May 30, 2001 3:00 PM PDT

Deal concerns batter RealNetworks

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Once again, RealNetworks is fighting off news of its imminent demise.

The online streaming-media company has been written off numerous times in its long-standing battle with Microsoft for market share. Its stock tumbled nearly 20 percent Tuesday on speculation that AOL Time Warner's America Online, the world's largest Internet service provider, is poised to dump an exclusive deal with the company and open the door for Microsoft to replace RealNetworks' technology as media player of choice for some 29 million subscribers.

The pummeling prompted RealNetworks Chief Executive Rob Glaser to go on a media blitz to defend the stock. In an interview on CNBC, he characterized the AOL relationship as strong and called on investors to ignore "hot air" and focus on the company's recent key technology deals.

AOL also stepped in to effectively deny the speculation. A spokesman refused to comment specifically on the terms of the company's contracts but told CNET News.com that RealNetworks is "a good partner, and we look forward to continuing to work with them."

Microsoft declined to comment. RealNetworks' shares recovered slightly Wednesday, gaining 68 cents to $11.30 by the 1 p.m. PDT close of regular trading.

Analysts agreed that AOL is unlikely to dump RealNetworks anytime soon. But some also acknowledged that there are signs that it may be more receptive to increasing support for Microsoft streaming technology as it seeks to renew a key co-distribution deal within Microsoft's new Windows XP operating system.

If those talks result in a deal that carves out a bigger place for Microsoft's Windows Media Player on AOL, it won't in itself spell the end of RealNetworks. But it could complicate RealNetworks' alliance with AOL and perhaps force it to cooperate more closely with its longtime enemy in new markets such as online music distribution.

"AOL recognizes that there is a lot more momentum behind Microsoft's digital media technology now than there was even six months ago," said John Corcoran, Internet/digital new media analyst at CIBC World Markets. "AOL is very respectful of that."

Sources familiar with the AOL-RealNetworks deal said an exclusivity clause is set to expire in mid-July. Nevertheless, RealNetworks vigorously denied that the relationship is in danger.

RealNetworks spokesman David Brotherton said the company's overall deal is multiyear and will not expire in 2001.

Swimming with sharks Analysts agreed that RealNetworks holds an important strategic place for AOL in its rivalry with Microsoft, which competes with it in numerous markets. As such, most said that AOL has a vested interest in helping keep RealNetworks healthy.

RealNetworks claims that 85 percent of streaming content on the Internet is formatted for its software. It also says its media player has been downloaded by 140 million Net users worldwide.

Despite a downturn in the Internet streaming market that has seen many of its customers go out of business, RealNetworks has recently inked several important deals that could help position itself against continued pressure from Microsoft.

It has struck a deal with Sony to have its streaming media technology integrated with the PlayStation 2 game console.

In addition, RealNetworks has signed Internet content-distribution deals to stream audio broadcasts of Major League Baseball and National Basketball Association games as part of its GoldPass subscription service.

RealNetworks is also a 40 percent investor in MusicNet, a partnership with three major record labels, including AOL Time Warner, aimed at creating a new commercial digital-music service based on RealNetworks technology.

Nevertheless, Microsoft has proven itself a relentless competitor, offering significant improvements to its Windows Media technology in recent months. In a sign of Microsoft's growing confidence, the latest full-function version of its media player will not be offered as a standalone download, but will come exclusively bundled as part of Windows XP.

Microsoft's focus on digital media has also won big converts from the record labels for its Windows Media codecs--underlying mathematical codes that compress large audio files into smaller packages that can be streamed or downloaded efficiently over the Internet without damaging audio quality.

RealNetworks has already licensed Window Media for use in its RealJukebox software, which allows people to organize digital music files for playback on a personal computer.

RealNetworks would like to keep Microsoft at bay through new initiatives such as MusicNet. But the business goals of RealNetworks and MusicNet do not neatly overlap. If Microsoft's digital technology is in demand by the markets, MusicNet may well find a way to use it, according to analysts.

"I don't think RealNetworks is going to draw a line in the sand," CIBC's Corcoran said. "Microsoft has taken some big steps forward, and they would be taking a big risk to insist on their own formats only for MusicNet."

Complicating the fight for RealNetworks is AOL Time Warner's delicate relationship with Microsoft.

The two companies have been wrestling over a recently ended deal that had made Microsoft's Internet Explorer the default Web browser on the AOL service--a deal that continued even after AOL Time Warner purchased rival browser maker Netscape Communications.

AOL has been developing Netscape technology, dubbed Komodo, to provide support for alternative browsers within its service, although those efforts are still early.

Microsoft, meanwhile, long ago won the browser wars, but appears reluctant to cut its ties from AOL.

"AOL and Microsoft are negotiating a lot of things because of the ways they compete," Corcoran said. "They're jockeying for position to make sure each keeps a finger in each other's pie...Nobody is ceding its strength to the other."

 

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