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Real Networks at a crossroads
Real's software isn't changing anytime soon. But can the company win in content distribution?
December 10, 2002: 5:45 PM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Real Networks is at a crossroads. One path before it is well-lit and paved, and the other is dark and uncharted. Unfortunately, with its bifurcated business model, the company must travel both roads at the same time.

Two recent announcements illustrate the two paths the company is following, so let's handicap the company's odds for completing its journey unscathed.

One possible path

First, the darkened path: Today, Real Networks CEO Rob Glaser will announce that he's releasing another batch of source code for Helix Producer software, one of Real's core product suites.

The move comes a little more than a month after the company released its first batch of source code in an attempt get out from under the growing shadow cast by Microsoft (MSFT: Research, Estimates) in the streaming-media business. With Microsoft giving away its streaming-media software, gratis, in Windows (sound familiar, Netscape fans?), Real is turning to the developer and partner community to encourage the creation of new applications and markets.

"There's a lot of manufacturers of embedded devices, camcorders, and cell phones who want to integrate digital media into products. But doing so has been complicated," says Dan Sheeran, Real's vice president for media systems. "They need the source code to do optimized implementations, and we want to get into hundreds of devices. This allows us to do that."

So far, Real is pleased with the response the company's open-source efforts have generated in the developer community. Sheeran points to the 5,000 developers who have signed up for access to the code -- though he admits that the company likely won't see new products stemming from the effort until the second half of next year.

But Stacey Quandt, an analyst with Giga Information Group, says Real's efforts are "a desperate strategy" and don't provide much real value to anyone in the developer community -- apart from Real's existing partners, such as Cisco (CSCO: Research, Estimates), Nokia (NOK: Research, Estimates), Oracle (ORCL: Research, Estimates), and Texas Instruments (TXN: Research, Estimates). "I doubt Real's source will become an enabler for significant broader community development," Quandt says. "This won't stop the Microsoft encroachment."

The Tech Investor verdict: How much longer can Real Networks count on significant revenue from its systems division (which sells server and client software)? Though the group's margins are higher than the consumer division's, revenues are dwindling.

In Real's most recent filing, revenues for the systems division decreased from $17.1 million to $15.5 million, and the business "remained challenging," according to Glaser. I don't see the move to open-source bringing in many new revenue opportunities, so I suspect the company will de-emphasize this strategy -- and possibly the division -- by this time next year.

The other path

Real's second road -- its consumer division, home to the RealOne player and the subscription services -- is much smoother. The number of total subscribers has jumped from 400,000 to 850,000 since last year, and third-quarter revenues increased from $25 million to $28.2 million. Subscribers pay anywhere from $10 per month to $28 per quarter to listen to and watch Real's streaming sports, news, and entertainment features.

Last week the company announced a partnership with the cable channel Starz, a division of Liberty Media. The partnership would allow RealOne subscribers to watch the same movies showing on Starz On Demand for an additional monthly fee.

Unfortunately, as is the case with most version 1.0 agreements between entertainment companies and online firms, this deal is riddled with obstacles. First and foremost, RealOne subscribers must also be Starz television subscribers (which costs another $12 per month), and they must pay an additional fee on top of their RealOne subscription.

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That said, the deal portends good things for the consumer division. Real's content offerings are strong in sports and news, but entertainment has been a conspicuous hole. Opening the door to companies such as Starz places Real in an early leadership position, and when the licensing snafus are eventually resolved, Real will possess some valuable partnerships.

"We know that there's a robust market for movies online -- look at the file-sharing activity," says Scott Ehrlich, vice president for Real's consumer division. "A subscription-based movie service has a tremendous opportunity." He's right, even if Real, in its current incarnation, isn't ready to capitalize on that opportunity.

The Tech Investor verdict: Though the margins are tighter in Real's consumer division, it's clear that this is the area that will lead the company in the future. As with its earlier partnership with MusicNet, Real has shown that it's not afraid to get ahead of the curve by offering entertainment packages that might not be quite ready for prime time.

"They have to get into the game somehow," says Gale Daikoku, research director with Gartner/G2.

Hats off to Real for its efforts on the Starz deal -- if not for the deal itself. I'll be watching with great interest to see if Real Networks can become the Internet's first true multimedia behemoth in the next year.


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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: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. 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 2018 and/or its affiliates.