RealNetworks’ Real Strength

It may not be reflected yet in its stock price, but the deal announced
Monday between streaming multimedia software maker RealNetworks Inc. and
music industry powerhouse Time Warner should considerably strengthen
RealNetworks’ already commanding leadership position in the Internet
music software market.

Starting next month, users can download individual songs from Warner
artists such as Jewel, Vitamin C and Edwin McCain, and then play the
songs using RealNetworks’ RealJukebox software.

The goal for Warner is to use the free downloads to entice customers to
buy an entire CD. The goal for RealNetworks is the same as its always
been: To make the Seattle-based company’s software the de facto choice
for customers and businesses using multimedia over the Internet.

RealNetworks claims that 85% of all Web sites offering audio and video
content use its RealPlayer software. In the past year the number of
registered users of RealNetworks’ products has nearly triple, going from
27 million to 70 million.

Founded in 1994 by former Microsoft Corp. executive Rob Glaser, has continued
its successful campaign to seed the vast Internet user community with
its software. In July the company made a deal with PC maker Gateway Inc. that will bundle RealPlayer G2 in the personal
computers it ships. (IBM already includes RealPlayer G2 in its PCs.)

Now the company is working the other end of the product pipeline with
Time Warner’s Warner Music Group, which along with EMI, Sony, Universal
Music and BMG controls more than 80% of the global music market.

Whereas last year the major music companies saw the Internet as a threat
– especially the MP3 digital format, which the industry feared would
cost it millions through pirated music – this year they are tentatively
embracing the ‘Net.

In June EMI bought a 50% stake in Web site and contracted
digital music technology company Liquid Audio to encode music for
download. And Sony now allows visitors to retail music stores to
download songs from a kiosk.

The online music industry, slow to start mostly due to knee-jerk
paranoia on the part of the companies that own the content, is just now
entering a high-growth phase. By building market share and brand name
over the past four years, and by embracing multiple formats such as
Liquid Audio and MP3, I believe RealNetworks is perfectly positioned to
ride the wave.

Shares of RNWK barely moved on Monday’s news, rising only 63 cents to
close at $67.63. But the market is gripped by a strong selloff that may
continue until Alan Greenspan gives the word on interest rates in two
weeks. I expect RealNetworks to bounce back stronger than most Internet stocks when the market turns.

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