RealNetworks Relationship with AOL Likely to Remain Strong

RealNetworks Inc. stock plummeted 19 percent Tuesday on
speculation that a deal being hammered together between AOL Time Warner and Microsoft Corp.
will leave it in the dust.

Analysts and RealNetworks Chief Executive Officer Rob Glaser have said such
an outcome is unlikely.

Last Friday, reports surfaced that AOL was in talks with Microsoft in an
effort to reach an agreement over bundling the AOL client with Microsoft’s
new Windows XP OS. The AOL client has long had a home bundled with Windows,
but the original agreement ended Jan. 1, 2001 and the two companies failed
to reach a compromise that would have extended the agreement.

But that bundling is a primary distribution point for AOL, and AOL
representatives were invited to Redmond for a three-week integration session
at the end of May with the goal of including Steppenwolf — the
XP-compatible version of AOL 6.0 — in the October release of Windows XP.

Steppenwolf is reportedly the same as AOL’s current 6.0 release, but must
meet strict XP requirements for compatibility and size. This is where
RealNetworks comes in.

AOL requested about 84MB of CD space for its various client languages, while
Microsoft only has 70MB available. To overcome that dilemma, the two
companies were reportedly exploring ways of reducing the size, including
removal of the RealPlayer component. Additionally, the exclusivity agreement
between RealNetworks and AOL ends mid-July, and it is likely AOL will
integrate Windows Media Player (WMP) — Microsoft’s answer to RealNetworks’
RealPlayer — with Steppenwolf. Windows Media Player already comes bundled
with the Windows OS.

But Goldman Sachs & Co. analyst Michael Parekh said AOL and RealNetworks
were far too intertwined for AOL to write off the relationship casually.

“We do believe it is possible that AOL could enter into an agreement related
to media delivery software with Microsoft (the companies appear to be
speaking on a number of issues related to the bundling of software as well
as the IE browser),” Parekh wrote in research released Wednesday. “However,
we do not believe that such a deal would threaten to end (or significantly
damage) the AOL-Real relationship for three reasons: 1) RealSystem has been
deeply integrated throughout AOL’s network and it would be difficult to
strip the software out of AOL’s primarily UNIX-based architecture, 2) AOL,
along with partners are moving forward developing and deploying a robust
music subscription service platform with Real (formalized through the
MusicNet venture in April 2001), and 3) AOL and Microsoft continue to have
long-term competitive interests.”

To emphasize his last point, Parekh noted Microsoft’s announcement Tuesday
that its MSN ISP was launching a $50
million campaign
to lure users away from AOL.

Parekh also said bundling Windows Media Player with AOL is not likely to
give the WMP a big advantage over RealPlayer.

“We would note that despite the already widespread availability of both the
Real and Windows Media client software, Real has 200 million unique
registered users of RealPlayer, 85 percent of market share of streaming
content in its formats, and 2x the U.S. market share of Windows Media
formats,” Parekh said.

Glaser appeared on CNBC Tuesday to defend his company, urging investors to
ignore “hot air.” He said investors should focus on recent wins, like a deal
with Sony earlier this month that will see RealPlayer 8 and other
RealNetworks client technologies embedded on Sony’s PlayStation 2 console
and its Software Development Kit. The company has also signed content
distribution deals with Major League Baseball and the National Basketball

In related news, RealNetworks scored a victory Wednesday with an agreement with Intel Corp.

Intel will distribute RealNetworks’ media management software with two new Intel PC desktop boards, the D815EEA2 and D815EFV. Intel said the new boards support the latest and fastest Intel Pentium III and Celeron processors.

According to RealNetworks, the deal will make integration of the RealPlayer and RealJukebox software “simple and easy” for PC manufacturers as well as end-users.

“We are excited to extend our relationship with Intel to include new distribution channels for RealPlayer and RealJukebox,” said Richard Cohen, senior vice president, Consumer Products, RealNetworks. “The inclusion of RealNetworks software with Intel motherboards will enable PC manufacturers and end-users to quickly install and begin using the world’s most popular Internet media management applications.”

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