Skip to main content

Getting

Microsoft

(MSFT) - Get Microsoft Corporation Report

to open its checkbook is one challenge facing

RealNetworks

(RNWK) - Get RealNetworks, Inc. Report

, which launched an antitrust suit against the software giant Thursday.

Fending off competition from the Redmond Menace might be a bigger one.

"RealNetworks wants more than cash from Microsoft," said Mark Ostrau, who heads the antitrust practice of Fenwick & West, a Silicon Valley law firm. "They want to stay in business, and that's really what the suit is about."

Perhaps that's a bit overstated. But when Microsoft launched the browser wars in the 1990s, almost no one thought that it would ultimately make Netscape an also-ran. And although there is some dispute about the exact market share of streaming media held by RealNetworks and Microsoft, there is agreement that Microsoft is catching up.

According to Wintergreen Research of Lexington, Mass., RealNetworks' share of streaming-media revenue (including licenses, ads and services) was 67.4% in 2000, compared to Microsoft's share of 8.7%. By 2002, RealNetworks' share slipped to 51.8% while Microsoft's grew to 22.7%.

Over the first three quarters of 2003, Microsoft moved into first place with a share of 44% vs. RealNetworks' 35.6%, said Wintergreen's President Susan Eustic.

Meanwhile, despite its well-known brand, RealNetworks hasn't turned an annual profit since 1999, and annual revenue declined from $241.5 million at the height of the boom in 2000, to $188.9 million in 2001, and $182.6 million in 2002. This year, analysts polled by Thomson First Call expect the company to lose 10 cents a share on sales of $203.3 million.

Moreover, RealNetworks, whose stock once traded as high as $96 a share in 2000, closed Friday at $5.31 and has lagged the performance of many single-digit tech stocks this year.

With market share slipping, RealNetworks knows that it must keep its RealPlayer software on as many desktops as possible. That's because companies that give away browsers or media players depend on the sale of media servers to corporate customers and developers for most of their revenue.

While RealNetworks distributes its media player at no charge, it collects revenue from content offered via the player. At the end of the third quarter, RealNetworks reported more than 1.15 million subscribers to its paid content, including 250,000 to digital music.

TheStreet Recommends

If use of the player drops, less content is developed for it, and fewer people buy the server. Breaking out of this cycle of declining market share is the major goal of the suit RealNetworks filed against Microsoft Thursday -- although a $1 billion victory would certainly help the Seattle-based company, said Ostrau.

In its

suit, RealNetworks charges that Microsoft is abusing its power as a monopoly to unfairly dominate the market for media players. RealNetworks is seeking damages that it said could well exceed $1 billion -- more than its market cap -- in addition to injunctive relief to prevent future illegal conduct by Microsoft.

Microsoft, RealNetworks alleges, has restricted how PC makers install competing media players, while forcing every user of the Windows operating system to take the Microsoft media player.

"Microsoft's settlement

with the U.S. Justice Department does nothing to remedy the harm it's doing to RealNetworks," Robert Kimball, the company's general counsel, said Friday in an interview on

CNBC

. Although his company dominated the market for years, Kimball claims that without Microsoft's allegedly illegal interference, it would have done even better.

Microsoft replies that it makes no sense for a successful company to claim that it can't compete without intervention by the courts. "Real claims to be the No. 1 provider of digital media solutions, with massive distribution of its software and more than 1 million player downloads a week," Microsoft said in a press release. "Thus, this is a case where a leading firm is seeking to use the antitrust laws to protect and increase its marketplace share and to limit the competition it must face."

But Ostrau says the suit is strikingly similar to litigation against Microsoft by Netscape, once the leader in the browser market, but long since absorbed by AOL. "You could practically file the suit by going through the old Netscape claim and using your search-and-replace function," he joked.

The serious issue, though, is the threat to replace RealPlayer with Microsoft's Media Player on millions of desktops and thus undermine the loyalty of the developer community and other corporate customers.

The number of people using the RealNetworks player is of crucial importance, in much the same way the number of people using Netscape's free browser was of critical importance, says Ostrau. (Fenwick & West represented Listen.com when it was being acquired by RealNetworks.)

Ultimately, Netscape's once commanding lead in the marketplace evaporated under the assault of Microsoft's Internet Explorer and the company became acquisition bait. Netscape sued and the suit was finally settled for $750 million.

And now, history could be repeating itself.

As Victor Raisys, who follows Microsoft for SoundView Technology Group, surmised in the title of a note to clients last week: "Here We Go Again."

But not everyone agrees that Microsoft is the villain here.

"It's not clear to me where the billion dollars of unspecified damages came from," said Sanford C. Bernstein software analyst Charlie Di Bona, who questioned whether Microsoft actually controls which media player is used, as Real Networks suggests. "Fundamentally, I think it's content providers who dictate the use," Di Bona said. Di Bona has an outperform rating on Microsoft and his firm doesn't do investment banking, but its parent,

Alliance Capital

, holds Microsoft shares.

Both companies were off fractionally on Friday; RealNetworks dropped 3 cents to close at $5.31, while MSFT shed 8 cents to $27.28.