Microsoft, Real Gear Up to Battle Apple

Microsoft’s multi-billion dollar checklist is just about done.

Yesterday’s antitrust settlement with RealNetworks was the last major item on the software giant’s list of companies and controversies it hopes to put behind it.

Microsoft had previously settled similar cases with Sun, Time Warner (Netscape), IBM and Novell for billions of dollars total. The RealNetworks settlement doesn’t end anti-competition complaints by the European Union and South Korean trade regulators, but it’s a safe bet Microsoft hopes the Real deal will influence those cases in its favor.

“The settlement with Real helps Microsoft in a couple of ways, starting with getting these troublesome lawsuits behind it,” Joe Wilcox, analyst with Jupiter Research told internetnews.com. “Secondly, Microsoft picks up a search partner which is good since they are almost desperate to get third parties to use its MSN search service.”

Still, Real’s CEO Rob Glaser said in a press briefing that his company will continue its relationship with Google even as it moves to integrate MSN.

Another motivation for both companies to work together can be found in the saying, “The enemy of my enemy is my friend.” Apple holds a commanding lead in digital music services with its family of iPod players, and iTunes music store. The combination or at least cooperation between Microsoft and Real in providing digital music services could be a more formidable threat to Apple than the companies could have generated individually.

Although he was a Microsoft manager for many years and the two companies are both based in Washington state, Microsoft wasn’t necessarily Glaser’s first choice of a partner. Real’s CEO tried last year to get Apple head Steve Jobs to discuss an alliance that would include support for Real’s digital music format on the iPod. He was rebuffed. If prospects weren’t already nil, Real’s collaboration with Microsoft should end any hope of any Real and Apple agreements any time soon.

“Merely tying services together or promoting each other isn’t enough, they have to create something that steals users away from iTunes and is a good alternative to the a la carte service Apple provides,” said Mike McGuire, research director for media at Gartner. “That Real is going to start showing up in MSN is important because increasingly in the online world you see search is the center of the universe.”

Analyst Wilcox said there is nothing in the agreement to cause Apple concern in the near term. “But we’re at a very early stage of the digital music market. And you have to remember that for at least the next five years, online music purchases will continue to represent a fraction of larger music spending on physical media like CDs.”

Also, time might be on the side of companies such as Real that offer a subscription service. Wilcox points out that adults in their late twenties and older have always had the perspective of owning their music on CDs, rather than renting them on a subscription music service.

“Our research shows that younger people are more willing to subscribe than download music. It’s just like file sharing, except you pay a little bit each month. They haven’t made the investments in CDs that older people have so they don’t have as much attachment to owning their music.”

Analysts said that while Real is the most obvious and immediate beneficiary in the settlement (which includes a $460 million up-front cash settlement to resolve all of Real’s antitrust complaints worldwide and $361 million in cash and services over the next 18 months) both companies stand to gain. Microsoft benefits by getting its legal issues versus Real resolved as well as from the cross-promotional collaborative elements of the deal.

Although dwarfed by the music announcement, another important aspect of the deal is an agreement to collaborate on the fast-growing category of so-called casual games. These are typically downloadable games that are easily understood and serve as light entertainment and brain-teasers played for minutes versus more immersive CD-based games that can take hours, days or months to master.

Real, a leader in casual games, plans to create a new subscription service to be offered on the MSN Games site and develop a series of casual games for Microsoft’s new Xbox 360 console due out later next month. “This is good for Microsoft which is always interested in more content for the Xbox,” said computer industry consultant Amy Wohl, president of Wohl Associates.

Susan Kuchinskas contributed to this story.