Goldman Sachs Conference: RealNetworks Goes for Gold

It's appropriate that Internet video company RealNetworks (RNWK Quote) is among the companies leading off the investment beauty contest at the Goldman Sachs Technology Investment Symposium.

That's because the Victoria's Secret fashion show -- which was conducted before a different bunch of attentive viewers -- illustrates how this technology company's fortunes are driven by the demand for online audio and video content.

For RealNetworks, whose video technology was used to transmit the Victoria's Secret fashion show live, the success wasn't in proving to the world that -- surprise! -- you can get a lot of people to come to your Web site by showing pictures of models in their underwear. No, what was more important was that the Feb. 3 event motivated 250,000 people in a single day to download the RealNetworks software, which viewers can use to watch the video. That number was 100,000 more than RealNetwork's daily average.

This isn't exactly where the money is, since RealNetworks gives away much of the software for viewing streaming video and audio on the Web. ("Streaming" means that viewers can watch a video clip or listen to an audio clip without waiting for a large file to be transferred to their computer.) But these free players do increase the market for the software and tools that companies can use to display streaming media on their Web sites.

That's one of the reasons that investors such as Alan Loewenstein, co-portfolio manager of the John Hancock (NTTFX Quote)Global Technology Fund, are enthusiastic about RealNetworks' prospects. "All you need is one event every quarter, and it basically gives the company such publicity," he says.

So far, in the fight for market share, RealNetworks appears to be well ahead of all rivals. According to an October 1998 study by Paul Kagan Associates, 97% of streaming media files on the Web used RealNetworks' software, leaving competing systems like Microsoft's (MSFT Quote) NetShow in the dust. A year earlier, RealNetworks controlled 88% of the market.

"I look at them ... as a leader in their field," Loewenstein says, a blessing he similarly bestows on Internet companies including America Online (AOL Quote), DoubleClick (DCLK Quote) and Exodus Communications (EXDS Quote).

So far, RealNetworks' market share hasn't translated into profits. The company lost $16.4 million in 1998 on revenue of $64.8 million, compared to a year-earlier loss of $11.2 million on revenue of $32.7 million.

Though 95% of the company's 1998 revenue came from selling software and services, analyst Rob Martin of Friedman Billings Ramsey says calling RealNetworks a software or technology company paints an incomplete view of the company, similar to having called America Online a "connectivity" company two years ago.

"This is a media company," he says, "because we can advertise over this platform." (Martin, whose firm does no underwriting for RealNetworks, rates the company a buy and has a price target of 75 on the stock.)

Martin points to a deal in which RealNetworks helped the JAMTV/Rolling Stone Network create a specially branded version of the latest version of the RealNetworks player. RealNetworks could share in the revenue generated by advertising on this player and the e-commerce opportunities to which it links, Martin says.

Tom Frank, a television and advertising veteran whom RealNetworks recently hired as senior vice president, media publishing and programming, says, "I think there are all different kinds of economic models we're looking at now, frankly."

Despite RealNetworks' successes, the shadow of Microsoft, the alma mater of RealNetworks CEO Rob Glaser, looms large. The Redmond, Wash., giant competes through its rival NetShow format, but is also paying licensing revenue to the company. Microsoft acquired a minority stake in June 1997, but it started selling off its shares last year.

With NetShow, Microsoft presents RealNetworks with a situation awfully similar to that of Netscape Communications (NSCP Quote), which had a commanding lead in the browser software market before Microsoft came in.

"You never write off Microsoft as a competitor," acknowledges Jupiter Communications' senior analyst David Card. But, he thinks, the company has less to worry about from Microsoft than Netscape. "I think the browser is more critical to Microsoft's overall strategy than streaming media is, so Netscape was a much bigger target in Microsoft's bull's-eye than RealNetworks is."

At Tuesday's session, John Hancock's Loewenstein says he'll be paying attention to how successful RealNetworks is in getting its media players accepted by Internet users. But that's not all.

"The other thing I'm looking for," he says, "is who's in the meeting. In the past, it would be technology specialists. Now, you're getting a lot of portfolio managers who are looking at Internet stocks and trying to figure out where they'll get in." He adds, "It'll be interesting to see if RealNetworks is attracting a lot of potential investors."

For a listing of the presentations at the Goldman Sachs Technology Investment Symposium, please see our schedule.