December 18, 2003 5:12 PM PST

It's all in the timing for Real

There's been little love lost between RealNetworks and Microsoft over the years, but analysts were still surprised Thursday to have the differences come to a head in an antitrust suit.


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Real sues Microsoft

Analysts said there were a number of reasons Real may have decided that now was the time to act, including the European Union's investigation of Microsoft. The focus of that investigation has included complaints about Windows Media Player that are similar to Real's accusations.

"This is a very interesting time, in that RealNetworks has gotten a front-row view in Europe, and there's a sentiment that Microsoft is really exposed over there," said Jacob Kaldenbaugh, senior analyst at Harvest Equity Research. "The case has already been vetted in Europe."

Real was likely hoping for action by federal antitrust regulators in the United States, Kaldenbaugh said, but the current pro-business attitude of the U.S. Department of Justice and lingering anti-European attitudes make such intervention increasingly unlikely.

"I think Real probably was hoping U.S. authorities would watch the E.U. activities and hopefully piggyback on their efforts," he said. "But a strong statement by the E.U. may actually have the opposite effect. There is a lot of competition between European regulators and Americans on how (to) view competition and how to regulate the market."

Matt Rosoff, an analyst for research firm Directions on Microsoft, agreed that Real is hoping to build on the European case. "They may be looking at it and suspecting it's not going to go far enough to suit them," he said.

At least as significant, however, may be Microsoft's decision to enter the increasingly crowded online music business, with an online store similar to Apple Computers' iTunes and Real's Rhapsody.

"I think MSN's announcement that it was going to get into the content-downloading business in a serious way was probably viewed as a significant threat by Real," Rosoff said.

Rosoff and other analysts discounted the effect of recent decisions by America Online to support Microsoft's Windows Media format in addition to Real's format, part of the legal settlement AOL and Microsoft reached earlier this year. Rosoff said that if anything, the AOL settlement may simply have given Real some inspiration.

"Real probably looked at what AOL got, said Microsoft has used a lot of the same tactics against them and decided they could get a similar settlement," he said.

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Kevin Foreman, general manager of RealNetworks' Helix
Microsoft's upcoming update of Windows XP, its current PC operating system, may be another factor in Real's timing, said Richard Doherty, president of research company The Envisioneering Group. Microsoft released a test version Wednesday of the second service pack (SP2) for Windows XP, a collection of patches and updates that includes many significant security-related changes to the operating system. Some of those changes could easily be to the detriment of Real and other streaming-media companies, Doherty said.

"Maybe Real has seen something in the beta code, and they don't want to see the playing field tilted unfairly," he said. "Imagine if SP2 were to decide in the name of security that a RealNetworks stream or a QuickTime stream was suspect, and Windows needed to inspect it every couple of minutes. That would probably degrade the experience significantly" for people using those formats.

Video compression company On2 Technologies, which competes with Microsoft, said the RealNetworks lawsuit could bring sweeping changes to the streaming media industry.

Over the next year, current and prospective customers of Windows Media servers, players and audio may be hesitant to make purchases, given the uncertainty of what the courts may require Microsoft to do, On2 CEO Douglas McIntyre said.

RealNetworks' lawsuit may find its easiest path to travel is its allegations of predatory pricing, McIntyre said.

"Any company that is in the business to lose money in order to gain market share is undertaking predatory pricing," McIntyre said. "This area is their best chance to win."

McIntyre added that it's unlikely the court will require Microsoft to unbundle its media player from the operating system. However, it may order Microsoft to add other media players to the OS.

"The $1 billion RealNetworks is seeking is not the train here. It's the caboose. The train is the potential to enjoin Microsoft from a number of their behavior patterns," McIntyre said.

 

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