Updated from 3:57 p.m. EDT

Microsoft ( 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.

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