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As viewers demand more from their television sets, will they demand less from the Internet? That's a question RealNetworks (RNWK) - Get RealNetworks, Inc. Report must ponder.

Little by little, TV viewers are gaining access to entertainment on demand, both in the form of video on demand distributed via cable operators, and hard-drive-equipped set-top boxes distributed by cablers, satellite broadcasters and consumer electronics retailers.

That trend raises the question of whether -- and if so, how soon -- media consumers will turn away from what has appeared to be an increasingly popular platform for VOD: services from RealNetworks,

Yahoo!

(YHOO)

and

AOL Time Warner's

(AOL)

America Online that deliver video clips on demand to PC screens.

Certainly, a clear vision of RealNetworks' role in the world of on-demand entertainment might improve the outlook for the stock. Once RealNetworks' shares came down from their 2000 dot-com peak, they've budged little over the past two-and-a-half years. While revenue grew year over year in the first half of 2003, the company's loss expanded from $4 million in the first half of 2002 to $11.5 million in the first six months of 2003. RealNetworks stock, which has ranged from $2.68 to $9.29 over the past year, fell 24 cents Wednesday to close at $6.94.

Evolving

RealNetworks, which launched its online subscription media services more than three years ago, says it will have an important role to play in aggregating on-demand entertainment -- including video, music and games -- as the distribution landscape shifts.

But others aren't so sure.

In a recent report surveying how the Internet has changed the entertainment landscape over the past five years, technology research firm Forrester Research forecasts that entertainment lovers -- who have been driven to the Internet by the growth of broadband and the shortage of TV-delivered video on demand -- will migrate back to TV. "Beneficiaries like RealNetworks have seen their finest days," according to the Forrester report, authored by analyst Chris Charron.

Charron cites several reasons for the migration: cable firms deploying more video on demand, the increasing popularity of personal video recorders (the set-top boxes also known as digital video recorders, of which

TiVo

(TIVO) - Get TiVo Corp. Report

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is the best-known brand) and the rise of affordable high-definition television, a nondemand form of entertainment that can't be duplicated on a PC screen.

Indeed,

Comcast

(CMCSA) - Get Comcast Corporation Class A Report

, the nation's largest operator of cable systems, has started rolling out 1,500 hours of on-demand programming, about half of which is available at no extra cost to digital video customers. On top of that, the company plans to roll out a digital video recorder service to its customers throughout 2004. Satellite operators are already energetically rolling out DVRs as an adjunct to their video services, with

EchoStar

(DISH) - Get DISH Network Corporation Class A Report

recently announcing a promotional DVR giveaway.

Zero Sum?

Meanwhile, while individuals have enthusiastically accepted the Internet and their PCs as a source for music -- both legal and illegal -- their continued interest in video over the PC is less clear. Since launching its subscription services in August 2000, RealNetworks had reported subscriber counts that grew steadily quarter by quarter -- until the second quarter of this year, when CEO Rob Glaser reported an 8% sequential revenue increase but a flat subscriber count. Part of that, said Glaser, was due to baseball-related seasonality -- one of several sports for which RealNetworks offers on-demand packages -- and part was how some baseball subscriptions were counted.

Sean Ryan, vice president for music services, says the issue is more complicated than saying that increased TV-based VOD means less demand for RealNetworks' services.

First, says Ryan, on-demand content will ultimately be delivered through a variety of sources. At home, for example, he says he listens to RealNetworks' Rhapsody music service via his home theater system, though it's delivered via a high-speed DSL modem. Because TV set-top boxes are, by design, simpler than computers, they won't be the platform for all applications. And the PC, he says, will remain the primary technology for users to manage content, such as playlists and libraries. History has demonstrated that such tasks can't be handled via TV screens, he says: "You want to avoid having a keyboard in the living room. We've figured that much out."

Separately, says Ryan, RealNetworks sees itself as a partner with cable operators, not a competitor. Putting together programming services has traditionally required expertise in choosing content, packaging it and handling customer service, and cable operators have turned to outside programmers to do all those tasks. "We believe strongly they will partner with outside partners such as ourselves," says Ryan.

It's a little too early to tell exactly what the on-demand landscape will look like, says Ryan. "We just know we're going to be a leading supplier of those kinds of services," he says.

One outsider also agrees that cablers' move toward on-demand programming won't freeze out RealNetworks. Theoretically, cable operators could do what RealNetworks is doing, says Bill Niemeyer, an analyst with the DiMA Group, a digital media consulting firm. But they tend to leave content aggregation to outsiders. RealNetworks' experience in this area "counts for something," he says.

Or maybe it doesn't.

Dana Serman, an analyst at JHC Capital, says that as on-demand programming becomes more prevalent among cable operators, the only companies able to collect any money will be cable operators, the manufacturers of DVR-equipped set-top boxes and current programmers. Using a baseball example, that means the ESPN sports channel is the winner, not RealNetworks, since ESPN is already aggregating the relevant content. The operator, box manufacturer and -- in this example -- ESPN "are the only three beneficiaries I see in the equation." Serman's firm doesn't hold any RealNetworks stock, but is a holder of cable-equipment manufacturer

Scientific-Atlanta

(SFA)

.