For RealNetworks, Catalyst Could Be A Buyer

Last October I wrote that shares of RealNetworks had become a bargain after falling below $20.

Since then, RNWK’s price has slowly drifted down into the single-digits – shares closed up 1% to $8.34 on Monday – ostensibly creating an even more enticing buy opportunity for believers in the streaming-multimedia software market leader.

But anyone climbing on board the RealNetworks’ bandwagon these days had better be patient, for the company is in a period of transition during a time of economic uncertainty. Not exactly ideal ingredients for a rally.

At best, expect RealNetworks’ shares to tread water in coming weeks and months as the market awaits more data indicating the direction of the economy.

At worst, despite appearing to have hit a bottom just above $7 per share last week, RealNetworks could fall below its 52-week low price of $5.19 set just two months ago. If that happens, and if the economy shows signs of getting worse, don’t count on RNWK reaching $10 per share in the foreseeable future. Which could raise the possibility of a large media company buying RealNetworks.

One excellent candidate is AOL Time Warner, which already uses RealNetworks’ audio and video streaming software in its servers and distributes RNWK software to its subscribers. Besides a working relationship that goes back to 1998, the two companies share a common competitor – Microsoft, which finally is making a serious run at RealNetworks’ lead in streaming multimedia technology usage.

Data from Jupiter Media Metrix suggests that usage of RNWK software dropped 10% in the last two quarters of 2000, while usage of Microsoft’s Windows Media Player grew by 30%. This isn’t merely a case of slower growth; RealNetworks is losing users to Microsoft. Jupiter surveys show that in November, RNWK’s RealPlayer was deployed by 28% of home users listening to music or watching videos on their computers, versus 22% using Microsoft’s player.

That’s not the market dominance RealNetworks has always touted, and the reason its lead – built by giving away free software since the mid-1990s – has eroded is because home users really don’t care what streaming media software they use, as long as it works. Indeed, the Jupiter report draws that very conclusion, noting that consumers had no brand loyalty to any streaming software product and use the two players interchangeably. This, of course, makes it even harder for RealNetworks to execute its original strategy of persuading users of the free software to pay for upgraded versions. Why pay for software when you can use something else for free?

RealNetworks knows this, which is why the company has been trying to grow other revenue streams. One of those is online advertising, but that has turned out to be a double-edged sword. While RNWK has built online advertising to about 20% of total revenue, shares have been battered as the company in recent months downgraded ad sales forecasts for upcoming quarters.

In addition, RealNetworks last summer launched a service that allows users to play music, video and other multimedia Internet content for a monthly subscription fee. The service so far has attracted 150,000 subscribers paying $9.95 per month, which is worth about $18 million in annual revenue for the company. That’s a good additional revenue stream, though still well under 10% of RealNetworks’ projected (and downwardly revised) revenue of $240 million to $260 million this year.

It’s hard to define RealNetworks these days. The company has been positioning itself as a digital distributor and provider of content, not a media company, but in the past few months it has hired executives from media companies. This confusing profile isn’t likely to attract investors, especially with gnawing doubts about both the economy and RealNetworks’ ability to resume growth. But a media company such as AOL Time Warner could be a different story.

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