RealNetworks Sues Microsoft

Saying that Microsoft Corp. continues to illegally eat away at its share of the market for digital entertainment software, RealNetworks Inc. on Thursday filed a $1-billion antitrust suit against the software giant.

The suit, in federal court in San Jose, accuses Microsoft of illegally bundling its Media Player with its dominant Windows operating systems. It contends that Microsoft improperly protected its operating system monopoly from a potential RealNetworks threat and tried to monopolize the media software market.

In addition to financial penalties, the suit seeks an injunction that effectively bars Microsoft from shipping Media Player bundled with Windows.

Microsoft and RealNetworks are bitter rivals in the market for technology to deliver music and video via the Internet. The market is still in its infancy, but the Internet is expected to become a leading distribution pipeline for the record labels, Hollywood studios and other entertainment companies.

After years of threatening personal computer makers that wanted to install Real’s player at the factory and using other strong-arm tactics, Microsoft now “poses a dangerous probability of creating a monopoly in the digital media markets,” the suit claims.

Although both companies are based in Washington state, the maker of the RealOne Player said it sued in Silicon Valley because many witnesses live in the area. There’s also a strong anti-Microsoft sentiment in the region, which is home to Microsoft’s competitors. At least for pretrial proceedings, however, the case probably will be consolidated with existing Microsoft antitrust cases in Baltimore.

Legal experts said RealNetworks’ case wasn’t as strong as similar antitrust suits filed against Microsoft by Time Warner Inc. and Sun Microsystems Inc.

Those cases built on the work of the Justice Department, which won court rulings that Microsoft had unfairly hobbled Time Warner’s Netscape Internet browser and Sun’s Java programming language. Microsoft settled the Time Warner suit for $750 million; Sun’s case, which seeks more than $1 billion, is pending.

Microsoft’s conduct against RealNetworks was introduced in the government case but played a peripheral role, in part because the market was still developing at the time.

“RealNetworks wasn’t on the radar,” said Randal Picker, a University of Chicago law professor.

Legally, RealNetworks’ claim is similar to Netscape’s. After the browser wars, the government successfully argued that Microsoft used predatory practices to dominate the market that Netscape pioneered. But the damage to RealNetworks has been less severe, and legal experts said it was harder to argue that RealNetworks posed as much of a threat to Microsoft’s monopoly.

RealNetworks has lost money in seven of its eight years as a publicly traded company, and confirmed Thursday that it would lose money in fiscal 2003 as well. The company announced the filing of its suit after the markets closed.

In after-hours trading Thursday, Microsoft fell to $27.34 after closing at $27.40, up 36 cents. RealNetworks was unchanged from a close of $5.34, up 43 cents. Both trade on Nasdaq.

The Justice Department settled with Microsoft after the company agreed to modest changes in how much it discloses to competitors and how it treats computer makers. The settlement has complex rules that allow Microsoft to wield less power over which digital media software programs computer makers such as Dell Inc. and Hewlett-Packard Co. offer consumers.

“Computer manufacturers are free to install and promote any media player on new PCs,” said Microsoft spokesman Jim Desler, calling the suit a rehash of the already-settled government antitrust case. “Consumers are free to use any media player -- and many consumers use several different media players. It’s hard to reconcile Real’s own statements on their market success with today’s lawsuit.”

RealNetworks Chief Executive Rob Glaser, a onetime Microsoft executive, said the case may take years and would cost about $12 million in 2004 alone.

“Government intervention alone has not been sufficient,” said Glaser, adding that Microsoft continues to effectively bar consumers from removing Media Player. “Settlements won’t alter Microsoft’s predatory behavior.”

Thursday’s suit represents a sharp tactical turn for RealNetworks. In the early stages of federal inquiries, Glaser complained bitterly about Microsoft, then watched as RealNetworks’ stock was pummeled. He said later he had learned to keep his mouth shut.

The urgent reality of the marketplace turned Glaser around, analysts said.

“The media player is becoming much more central to the individual’s music, video and entertainment experience,” said consultant Tim Bajarin of Creative Strategies Inc. in Campbell, Calif. “Microsoft is clearly the No. 1 media player to date.”

RealNetworks once had a commanding lead in the market for streaming media technology, supplying software not only for most of the servers that transmitted audio and video through the Internet, but also most of the personal computers that played those streams.

That lead evaporated in recent years as Microsoft, which does not charge extra for its streaming-media technology, gobbled up market share.

By mid-2002, RealNetworks’ software for personal computers was in a dead heat with Microsoft’s Windows Media Player. Windows Media Player has built a growing lead over Real since then, and it now attracts 50% more users than its rival, according to market research firm Nielsen/NetRatings.