RealNetworks, Media Giants Air Music Services Plan

In what many industry watchers have knighted as a historic event for the
distribution of online music, Real Networks Inc. confirmed Monday that it
has embarked on a venture with media giants AOL Time Warner Inc.,
Bertelsmann AG and EMI Group plc to create a platform for online music
subscription services.

Fittingly dubbed MusicNet, the service will provide a bank of downloadable
and streaming music, which will pervade across a number of networks,
including Real Networks and AOL.

Specific financial terms of the deal were not disclosed, but RealNetworks,
EMI, Bertelsmann and AOL Time Warner will each own a minority stake in
MusicNet, which will function as a separate company. Picture it as an online
version of Columbia House or BMG, but one that offers catalogs of online music instead of CDs and cassettes.

As part of its business model, MusicNet will license its platform to
companies seeking to sell music subscription services under their own
brands. This includes extending its offerings to controversial file-swapping
outlet Napster, whose very existence could be threatened by such services if
they become successful. Ostensibly, MusicNet seeks to be the guiding light
for the future of legal music services over the Web.

However, all parties involved have made it abundantly clear that none of the
distribution deals with MusicNet are exclusive. That is to say, AOL, EMI Recorded Music,
Warner Music Group, and BMG Entertainment all intend to continue to offer
their music to other online subscription and other platforms in the future. Moreover, Real Networks has said that it would consider partnering with independent labels beyond the scope of the Big 5 record companies for the venture.

Real Networks Chief Executive Officer and Chairman Rob Glaser will serve in
the same capacity at MusicNet until somebody else can be installed.

“Looking ahead, we hope that all the major and independent labels will join
MusicNet to create one-stop music subscription offerings with unbeatable
consumer momentum,” Glaser said in a press statement Monday. “We look
forward to working with the entire industry to make music subscription
services a reality.”

In a conference call, Glaser expressed optimism in what he believes is a service that will work to serve businesses, and ultimately consumers. Glaser, who said MusicNet has been in incubation for a year and currently consists of 50 employees, is was confident that the security of either streaming or downloaded music would be kept intact by the technology, which will depend on its Real IQ security technology and its industry-leading RealPlayer application. Further details about that technology platform are forthcoming.

Amid fielding myriad questions about MusicNet’s security, Glaser said he would not snub any company that would like to distribute the MusicNet’s catalog, including Microsoft, whose own Windows Media player plays second fiddle to Real Networks’ tool.

Glaser also welcomed the opportunity to work with Napster, rather than go against them. Although the very fact that Real Networks has said it will work with Bertelsmann, which had already committed a loan to Napster and agreed to join it in a joint music subscription service, calls the file-swapping firm’s future into question. Will Napster’s music subscription service, slated for a summer kick-off, leave the barn without a hitch? That remains to be seen.

One analyst said it would behoove Napster greatly to get cozy with Real Networks for the simple fact that Napster’s strength is its PC-based users, and in order to survive the evolving online music market, which seems to be heading toward taking tunes to personal digital assistants, cell phones and set-top boxes (and even MP3 players in cars), the file-swapping firm must embrace distributors like Real Networks, thereby increasing Real’s value in the online music community.

Bryan Landers, a business intelligence analyst for Motorola’s Multimedia Systems Division, told Monday that Real could become the standard in not only PC applications but non-PC
applications to provide a ubiquitous service.

“The business model for these applications is rather easier than PC applications since these devices
have very little way in terms of memory (e.g. hard drive space),” Landers said.

Landers also proposed the following scenario for consideration:

“Let’s look five years down the road for a minute. You’re walking down to the
parking garage listening to music off of your cell phone/PDA (there is a
great deal of convergence in this area). The database of music is provided
via wireless Internet radio or a music service that is charged to your cell
phone bill for a nominal (let’s say a $3-per-month fee). You plug your hands-free cell phone into your smart car; the cell phone tuning is tranferred to internal automotive
controls. The signal is received via vehicular antenna and the audio output
is played through the car’s speaker system,” Landers said.

“You arrive at home, plug your cell phone into your TV or set-top box (via
broadband connection) without any loss of signal and without audio performance degradation.”

Accordingly, because Real Networks is investing heavily in these technologies, Napster, with its strictly-PC dominance, could help itself by taking the MusicNet ride.

Landers noted that while Microsoft, too, is investing heavily in mobile
applications as well Microsoft TV and the pending “Stinger” middleware for
PDAs and cell phones, “these software
packages have gained little ground outside of the PC.”

As for how the deal will affect Real Networks, whose investment in MusicNet is tops in the field of investors at a 40-percent stake, CIBC WorldMarkets analyst John Corcoran told On24 that the deal is a
smart move to boost Real Networks’ business.

“They’re taking a shot to improve their business,” Corcoran said. “The stock
has been hit very, very hard. Their core business is under attack.
Microsoft is gaining steam.”

Corcoran said the strategic move could pay dividends in the long term, but
would not significantly affect Real Networks for a year or two. He also Real
Networks’ success would go as far as consumers who pick up broadband
Internet access, as the firm’s streaming technology requires a lot of

Overall, peer-to-peer file sharing is looked upon favorably, particularly
among the enterprise sector. Gartner Research Director Joe Sweeney said
businesses that need to give users access to distributed content should
consider peer-to-peer management solutions.

“As this new model of content distribution matures, organizations will find
that the flexibility of peer-to-peer solutions provides greater efficiency,”
Sweeney said.

Real Networks’ stock price took a decent pop Friday with
the MusicNet news and closed up 11 percent. Shares Monday hovered at the
$7.19 mark in Monday morning trading.

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