Microsoft, Real Settle Antitrust Lawsuit
RealNetworks Inc. said Tuesday that it settled its antitrust case against Microsoft Corp., a deal that allows the digital media firm to promote its music subscription service to much of Microsoft’s vast audience.
The arrangement, worth an estimated $761 million to Real, ends the largest remaining antitrust case against Microsoft.
The deal will make it easier for each company’s computer-based programs to play audio and video recordings encoded with the other’s technology. The agreement by the onetime bitter rivals underscores how much the basic businesses and competitors of both firms have changed.
In particular, Real needs help in catching up to Apple Computer Inc.’s iTunes music download service and in pulling away from rivals in charging monthly fees to listen to songs, notably Napster Inc.
Microsoft, for its part, recently broke off negotiations with the major record labels to add its own subscription service to a pay-per-download plan. As it seeks to challenge surging search engine powerhouse Google Inc., Microsoft is adding Real to a list of rivals-turned-allies that may soon include Time Warner Inc.’s America Online. Microsoft and AOL are negotiating to join forces for their free e-mail and portal pages.
Real’s investors cheered the pact, sending the company’s stock up $1.96, or 34%, to $7.70.
“He could have settled just for cash but hung in there to negotiate as broad a business relationship as possible,” Real shareholder and former Listen.com Chief Executive Sean Ryan wrote on his personal website, referring to RealNetworks CEO Rob Glaser.
Under a set of agreements lasting from 18 months to perpetuity, Microsoft will promote RealNetworks’ Rhapsody subscription service to its own music customers and to users of its MSN Messenger instant-messaging service and MSN Search.
In a demonstration Tuesday by Microsoft Chairman Bill Gates and Glaser, his onetime lieutenant, a search on MSN for Rolling Stones gave users the option of hearing a free song as part of a Real service designed to bring in Rhapsody subscribers. A similar plan for video is “on the road map,” said RealNetworks Senior Vice President Michael Schutzler.
Real will promote MSN Search and get $460 million in cash, more than doubling its tangible assets. Real will receive additional payments of as much as $301 million in the next year and a half, with Microsoft subtracting an undisclosed bounty for each new subscriber it sends to Real.
Real’s smaller games division also will get exposure on Microsoft’s sites and its Xbox gaming system.
In the next version of Windows, users who try to play a Real media file without the right player installed will be steered to a site for downloading one. Real will advertise on MSN and promote Windows portable players for its Rhapsody to Go service.
The deal all but closes an era of antitrust litigation that began when competitors complained to U.S. government officials about Microsoft almost a decade ago.
Although the Redmond, Wash.-based software giant continues to joust with European authorities over their rulings against it, the company has now paid out more than $5 billion to resolve the major private claims from Real, Sun Microsystems, Time Warner, Novell and others. Microsoft shares dipped 5 cents Tuesday to $24.41.
The latest settlement began coming together a little more than a year ago, when Glaser called his former boss of 10 years.
Microsoft had initially invested in Glaser’s pioneering technology for audio and video streaming, but the two became bitter enemies when Glaser testified to Congress in 1998 that Microsoft’s media player disabled Real’s software.
In its lawsuit filed in December 2003 in U.S. District Court in San Jose, Real asked for $1 billion in damages to make up for Microsoft’s bundling its own player with Windows.
Real’s stock was badly punished for the public rift, and the company shifted business strategies instead of waiting for a court-ordered bailout.
As it moved to selling content and bought Rhapsody owner Listen.com Inc., however, many faulted Real for betting on subscriptions instead of the permanent music downloads made popular by file-sharing services and made legal and profitable by Apple.
Real began clashing with the maker of the wildly successful iPod, most recently creating software that enabled Real’s more than 1 million songs to play on some versions of the Apple portable devices.
After that, Glaser said Tuesday, he called Gates -- another victim of Apple’s success -- to see what it would take to get Real’s music to work over Microsoft’s services and on players using Microsoft’s digital-rights system. A year of back-and-forth produced the agreements outlined Tuesday.
Real has reported net income in the last two quarters after losing money in each of the previous eight. Sales and the number of subscribers to Real’s various services have been growing steadily, now topping 1 million for music packages alone.
With increased distribution, the Rhapsody to Go plan that allows consumers to move songs onto portable players -- along with a similar Napster service -- has the potential to convert users from Apple’s sales model, said analyst Phil Leigh of Inside Digital Media Inc.
“If Rhapsody and Microsoft and the manufacturers can get Rhapsody to Go and Napster to Go to work reliably and smoothly, we could see that subscriptions gain market share,” Leigh said.
