Updated from 3:57 p.m. EDTMicrosoft ( MSFT) and RealNetworks ( RNWK) announced a $761 million deal Tuesday to settle their antitrust case and create a new partnership to distribute Real's music and digital-game services through the MSN network. Real's shares soared 35% before the market opened, on reports that the companies were near a settlement of Real's 2003 antitrust suit. Shares of Real were recently trading up $1.91 at $7.65, while shares of Microsoft shed 9 cents to $24.37. The new partnership gives Real a broader audience for its Rhapsody subscription music service and fills out Microsoft's music offerings. It teams the two former rivals against Apple ( APPL), the leader in the online music space with its popular iTunes music service and iPod music player. But at the same time, Microsoft and Real will continue to offer competing online music players. "Two players like this banding together -- that definitely represents a challenge" against Apple, says Michael McGuire, research director in Gartner's media group. "It's interesting to see the stated level of integration they're going to work toward." But even together, Microsoft and Real still face the challenge of convincing consumers to pay a monthly fee for access to music instead of downloading and keeping it forever, the preferred method of getting digital music today. "Maybe two teams working on this can come up with some compelling scenarios that they can present to consumers to make the subscription model more exciting to more people," McGuire says. Under the agreement, Microsoft will pay Real a $460 million up-front cash payment to resolve all damages claims and give Real expanded access and long-term licenses to a wide range of Windows Media and securities technologies. Under separate music and games agreements, Microsoft is scheduled to pay Real an additional $301 million in cash and provide services for 18 months in support of Real's product development, distribution and promotional activities.
Microsoft will promote Real's Rhapsody service on MSN Web sites and offer RealNetworks' digital games through MSN Games and Xbox Live Arcade for Xbox 360. Microsoft will earn credits toward the $301 million for subscribers that MSN delivers to Real.
Real's' suit piggybacked a similar antitrust in the European Union, which has required Microsoft to sell versions of its Windows OS without its media player. Microsoft is appealing the EU ruling, which could take years to resolve. Whether a settlement with Real will affect the EU case remains unclear. "The people in governments will make up their own minds," says Microsoft's General Counsel Brad Smith.
Real offers unlimited access to more than 1 million songs, and CD-burning and transfer to 100 devices for a fixed monthly fee, but it also recently launched a free service that lets users listen to up to 25 songs per month. The company also sells music downloads at a cost of 89 cents per song and $8.99 for most albums. Apple's iTunes music store -- the only music store that works with the company's wildly successful iPod music players -- sells downloads for 99 cents a month. Apple has traded barbs with Real over whether consumers want to buy music downloads or a subscription to listen to songs. Over time, Glaser and Gates maintain, consumers ultimately will prefer an open system vs. Apple's proprietary technology. "These are early days in not just digital music but in the digital-entertainment space," Gates said. Senior writer Jonathan Berr contributed to this report.