April 15, 2004 1:47 PM PDT

Real's scramble points to isolation

RealNetworks' overtures to Apple Computer underscore the digital media pioneer's growing sense of isolation in a market that it once dominated.

RealNetworks CEO Rob Glaser in recent months has repeatedly pressed Apple to open its hit iPod music player to rival music services, including an overture in a private e-mail he sent last week to Apple CEO Steve Jobs. According to The New York Times, the leaked message hinted that Glaser might be forced to consider joining forces with Microsoft should his offer of a technology alliance be rebuffed.

A RealNetworks representative confirmed Thursday that Glaser had recently communicated privately with Jobs, asking--as he has in public forums--that Apple open up the iPod. The representative said RealNetworks had not seen the reported e-mail and could not comment on its content or whether RealNetworks might consider striking a deal with Microsoft. An Apple representative declined to comment.


Special report
Real's reality
Microsoft's rivalry is only one
of RealNetworks' hardships.


Inferences drawn from a single e-mail may not portend an imminent deal between Microsoft and RealNetworks--enemies that have crossed swords in business and the courts for years. But Glaser's efforts to recruit a high-level digital media partner highlight RealNetworks' deepening danger in the face of clear strides forward by both Apple and Microsoft.

The last year has seen scores of digital device makers support Microsoft's technology, with few doing the same for RealNetworks. Perhaps even more frustrating for Real, Microsoft has begun winning the support of big-name content companies, from record labels to Major League Baseball, Walt Disney and Time Warner, in large part because of content-protection guarantees that RealNetworks hasn't been able to match.

Musical chairs
"Glaser's rationale (for approaching Apple) is legitimate. He's concerned, and he should be," said Tim Bajarin, an analyst at Creative Strategies. "More and more (content companies) are looking at the digital rights management (DRM) architecture at Microsoft and backing it. All of those things are indications there is a belief, at least by the movie community, that Microsoft's DRM technology is rock solid."

Whatever the details of Glaser's approach to Jobs, RealNetworks is facing a critical juncture as its media and technology divisions each face strengthening opposition from larger companies.

The digital music business has finally reached the mainstream and shows promise of breaking into billions of dollars in revenue over time. RealNetworks launched a decade ago as the first commercial Net audio tool. With its digital music jukebox still one of the most widely used pieces of multimedia software, the company should be well-poised to take advantage of this trend.

But separate initiatives from both Apple and Microsoft have made this difficult.

Apple shines
Apple has established its iPod music player as the unrivaled leader in the market for hard drive-based MP3 players, selling more than 800,000 units last quarter alone. Its iTunes Music Store has far outstripped song sales at rival services such as the new Napster and RealNetworks' own download store.

Actual sales of Microsoft-formatted music remain relatively low compared with iTunes, but the software company's copy-protected format is supported on more than 60 different portable devices, giving it a clear shot at becoming a de facto standard for digital music. Real, by contrast, is supported by only a few.

Caught between these twin growth spurts--and with other powerful companies such as Sony and Virgin coming into the digital music market later this year--RealNetworks is well advised to look for alliances on one side or the other, analysts said.

"This was normal business negotiations," said Richard Doherty, president of research firm Envisioneering Group. "There aren't that many players, and the iPod is the most successful music product of all time--and is fast becoming the most successful consumer product. It's in Real's interest to explore a partnership."

RealNetworks has not been without its own successes in the past year. Growth of its subscription-based Rhapsody music service has been strong. The company said Thursday that music subscription products as a whole, including a cheaper Net radio-only service, have passed the 450,000 subscriber mark. The company added 100,000 people last quarter alone.

But there is some irony to that, too. Purchased nearly a year ago from creators Listen.com, the Rhapsody service continues to use Microsoft's Windows Media music format, and the company has declined to say when, if ever, it will switch over.

The technology underlying Rhapsody "is much less of a strategic issue than what's operationally working," said Dave Williams, RealNetworks' general manager of music services. "The download market is a little different."

Switching technology could carry some pain. Microsoft is getting close to releasing a newer version of its digital rights management software, called Janus, that will help subscription-based services bring their music to portable players. Previously, copy-protection issues and music label fears have kept subscription services tied closely to the PC.

RealNetworks, too, is "developing technology around portable subscriptions," Williams said, although he declined to say how close that technology might resemble Microsoft's Janus. RealNetworks' digital rights management is dubbed Helix and is used to protect the music sold in its online store.

Some harmony ahead?
Some analysts were skeptical of any solid grounds for a closer RealNetworks-Microsoft relationship. But the Rhapsody music service does show some possible room for collaboration.

RealNetworks could license the Windows Media format, including the Janus portable device component, and continue using it inside Rhapsody. Alternatively, it could also use the WMA format for its own download store, allowing access to a much wider variety of portable devices.

Any rapprochement with Microsoft would have to clear away decades of mistrust, barbed rhetoric and ongoing legal action, however.

In U.S. courts, and in front of regulators in the European Union, RealNetworks has argued vociferously that Microsoft's market abuses have made it difficult for the smaller company to compete in the PC-based digital music business. The company's complaints helped lead to a fine of more than $600 million levied against Microsoft by the European Union last month. Last year, RealNetworks sued Microsoft for $1 billion on antitrust grounds.

Microsoft has shown its recent willingness to settle quarrels with old enemies, however. This month alone, it struck a surprise $1.95 billion deal with bitter antagonist Sun Microsystems and settled a three-year patent infringement lawsuit with InterTrust Technologies for $440 million.

The leaked e-mail, by exposing some of RealNetwork's deepening desire for partnerships, could undermine future settlement talks, if that does indeed wind up being the direction the company takes, analysts said.

"It might hurt their negotiating position," said Matt Rosoff, an analyst at market researcher Directions on Microsoft. But "I would assume that Microsoft's legal team is talking to Real, just based on the drive they've had to settle these other cases."

CNET News.com's Stefanie Olsen and Ina Fried contributed to this report.

2 comments

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Rhapsody's only hope
Rhapsody is already the best music service out there. And with a recording program like Replay Music (www.replay-music.com), who needs iTunes or anything Microsoft comes out with?

Who wants to pay $4000 to iTunes to fill up their iPod. And people want to "own" their music -- the concept of "renting" MP3s will take a while to catch on.
Posted by applian (13 comments )
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concept of "renting" MP3s
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