RealNetworks Unveils New Weapon

In the streaming media war, the company has the market share. RealJukebox is its latest innovation.
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SAN FRANCISCO -- You've heard of the browser wars. Well, it's time to get ready for the Net's next big battle: the streaming media war.

Like the browser wars, the streaming media battle is a David-and-Goliath story, pitting software colossus

Microsoft

(MSFT) - Get Report

against underdog

RealNetworks

(RNWK) - Get Report

, which was founded by ex-Microsoft executive Rob Glaser. The two companies have been slugging it out for a few years now, but recent events suggest that the battle is really beginning to heat up.

The most recent salvo: On Monday RealNetworks will unveil the beta version of its new streaming media software, to be called the

RealJukebox

. That comes a few days after Microsoft stepped up its commitment to the streaming media business, announcing on April 28 the formation of a streaming media division to be headed up by Senior Vice President Jim Allchin. And on April 13, two weeks before that, Microsoft rolled out the beta version of its new streaming software,

Windows Media Player 4.0

.

Those announcements by Microsoft would leave most Internet companies quaking, but analysts and investors say RealJukebox puts RealNetworks in a good position to maintain its leadership position in the streaming media market. Just as importantly, the RealJukebox marks a new strategic direction for the company by setting it up as a leading player in the emerging market for digital downloading of music.

"RealNetworks has never been in a better spot," says Michael Wallace, an analyst with

Warburg Dillon Read

, which has done no underwriting for the company. "They've kept their market share and are moving into the music business."

The RealJukebox looks like a mini-browser with three main frames. On the left hand side is a navigational strip, on top is the control panel and in the middle is a big area that lets users do one of three things: First, they can play and record music (while listening to it) in all of the most popular digital formats, including

MP3

files. Second, they can manage their music collection in Real's "music library," creating personalized playlists of songs and organizing their sound files in folders by artist, album or genre. And third, they can search for music on the "get music" screen, which points users to pages that sell or provide music for free.

The streaming media war, like its predecessor, is also a battle for market share. So far, RealNetworks says it has been able to maintain its lead in the market with 85%. That's the single biggest reason why developers and companies have been willing to fork out tens of thousands of dollars for RealNetwork's server technology, which is necessary if they want to reach the majority of the streaming media audience. By contrast, Microsoft has been giving away its streaming media server technology for free, though developers must license Microsoft's

Windows NT

operating system to use the Media Player.

"I'm hedging my bets and going both ways," says Jon Fox, technology director of

Webcast Solutions

, a 5-year-old streaming media company. "But if I had to choose one, I'd go with Real because they have the penetration."

To be sure, analysts say it's unlikely that RealNetworks will be able to maintain that lead forever.

"You can't ignore Microsoft," says Wallace. "Over time they will increase their market share and presence in the market."

That's why RealNetworks has been making a strong push into the digital download market, which has a huge potential. Some analysts say the market could eventually exceed the size of the $35 billion packaged-music business. So far, the download market has been dominated by MP3 files, a controversial compression format that allows for easy downloading of music files onto a PC hard drive or portable MP3 player.

The music industry has been trying to clamp down on MP3 because it is a bootlegger's fantasy come true with no copyright protections. But MP3 has been embraced as a renegade distribution channel by thousands of aspiring artists and several high-profile musicians.

Until the introduction of the RealJukebox, RealNetworks had focused on developing products that streamed audio and video. Now, with the Jukebox, they are entering the download market for the first time. This move was anticipated after RealNetworks acquired

Xing Technologies

in April, a software company that develops software to encode and decode MP3 files.

But Real, like its developers, is hedging its bets. In April the company also announced a partnership with

IBM

(IBM) - Get Report

to develop a secure digital music standard. IBM will use the RealNetworks player in its

Electronic Music Management System

, or EMMS. The five major music labels (

BMG

,

Sony Music

,

Universal Music

and

Warner Music

) have lined up behind this standard, agreeing to market a trial of this system in the summer.

"This basically puts RealNetworks in a position to capitalize on both the secure and the MP3 digital download markets," says Wallace.

In addition to signaling a change in strategic direction, the Jukebox also opens up new sources of revenue for RealNetworks by transforming the player into electronic commerce vehicle. On the "get music" screen, RealNetworks will allow listeners to purchase single songs or entire CDs. RealNetworks says electronic retailers will pay them a commission for facilitating these transactions. Also, RealNetworks will continue to monetize the player through advertising and sponsorship opportunities.

Jukebox partnerships will also be announced with musicians, hardware vendors, e-commerce companies, security solutions and music portal sites. For example, RealNetworks will announce a security partnership with

AT&T's

(T) - Get Report

secure music technology, as well as an alliance with

RCA/Thompson

, which has developed a portable player called the

Lyra

that plays MP3 and other audio files.

"They have to stay two steps ahead of Microsoft," says

Monument Internet Fund

portfolio manager Alex Cheung, who has made RealNetworks one of his top five holdings. "There's no other way for them."