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Challenge for Real Networks
Real Networks has been the only subscription-based video business on the Net. But here comes Yahoo!.
February 19, 2003: 3:43 PM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - On Aug. 18, 1937, the size of the broadcast radio world effectively doubled. That's when the nascent Federal Communications Commission granted a construction permit to W1XOJ, the first FM radio station, which operated from a small town 55 miles west of Boston.

Before W1XOJ came along, radio listeners could tune in to only AM signals. But within eight years, 229 FM stations sprang up. AM radio had enjoyed a 17-year run as the only broadcast option, but the introduction of FM offered listeners more choice and, ultimately, stereo reception to boot.

Fast-forward to 2003.

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Sometime before April 9 of this year (when Yahoo!'s current fiscal quarter ends), the world of subscription-based online video content will effectively double. Since August 2000, Real Networks has been the only company to offer a stand-alone premium media service, called Real One Superpass.

For $9.95 a month, Superpass subscribers gain exclusive access to video from around the Web that's not available to nonsubscribers -- content such as sports programming, news, and music. But at an analyst meeting last week, Yahoo! CEO Terry Semel announced that his company will offer its own subscription-based media offering, called Yahoo! Platinum, sometime this quarter.

Real Networks has some thinking to do

I look back to 1937 because the announcement by Yahoo! (YHOO: down $0.19 to $19.30, Research, Estimates) marks a similar kind of market shift -- a move that's also akin to the more recent proliferation of cable television channels and providers. Soon Internet users will have more than one online video option, and that should help the overall market to grow.

Yet at the same time, it will also create a tremendous challenge for Real Networks (RNWK: up $0.26 to $4.13, Research, Estimates), at a moment when the company desperately needs to shore up its revenue base.

Thus far Real's Superpass has been a hit, with more than 900,000 paying subscribers and revenue of $75.5 million last year, up from $28.2 million in 2001. Content partners include ABC News, FoxSports, Major League Baseball, Nascar, and many others.

Most important of all, the service is profitable.

But here's the rub for Real: Many of its 13 content partnerships aren't exclusive, which opens the door for Yahoo! to compete on price and possibly -- given Yahoo!'s tremendous traffic levels -- on volume.

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"We have exclusivity in contracts where it makes sense," a Real spokesperson says, pointing out that Real's relationship with the Professional Golfers' Association, for example, is exclusive, while its agreement with CNN (a subsidiary of AOL Time Warner, as is CNN/Money) is not.

At the analyst meeting where Yahoo provided a demo of its Platinum product, American Idol outtakes were the only content shown. Clearly, Yahoo! will need a better lineup if it is to compete with Real. A Yahoo! spokesperson refused to comment on the company's future content strategy.

Nevertheless it's probably safe to assume that Yahoo! has plenty of content partnerships in the works. "If I was at Real, I'd be concerned," says Phil Leigh, an analyst with Raymond James & Associates, which owns no Real or Yahoo! stock and has no banking relationship with either company. "Yahoo! has made it clear that subscription revenue is a high priority," Leigh says. "They have a ton of traffic, and overcoming Real's 900,000 subscriber number isn't that big of a gap."

In fairness, Real deserves a lot of credit for having created a market for subscription-based online video and for growing it to its current levels. "It's been tough, but we've done a good job," the company spokesperson says. "We welcome other players to the market."

Alas, that's a familiar refrain. Time and again, the technology industry has shown that being first to market is no guarantee of success.

I couldn't find any record of how AM radio execs responded to the creation of W1XOJ. But I do remember when IBM entered the computer business. On Aug. 12, 1981, Apple -- which had been the only major player since 1976 -- took out full-page ads welcoming IBM to the market, asking, "What took you so long?"

In hindsight, maybe Apple shouldn't have been so glib.


Eric Hellweg is a contributing writer at Business 2.0.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.