Microsoft

(MSFT) - Get Report

cranked up the volume Tuesday with a demo that could turn out to be a real pain for one of its competitors.

As part of Microsoft's ongoing efforts to wrest the streaming video software market from

RealNetworks

(RNWK) - Get Report

, the Colossus of Codes premiered a new version of its Windows Media system that it says will be able to stream DVD-quality audio and video to homes with high-speed Internet connections sometime next year.

Assuming that movie studios are cooperative and some programmer comes up with an acceptable business plan, Microsoft's next-generation streaming media technology appears to be an attractive medium for transmitting a home-theater-caliber video to people's houses over the Internet.

Who Let the Dogs Out?

Microsoft's new technology, for which the company demonstrated multiple business applications as well, is also a threat to RealNetworks, which sells competing software and services for streaming audio and video over the Internet. Like Microsoft, RealNetworks sees great opportunity in distributing home entertainment over the Internet; as an example of that, RealNetworks introduced its version of the online music subscription service MusicNet last week.

On Tuesday, Microsoft's shares closed up 26 cents to $67.32, while RealNetworks was down 16 cents to $6.69.

Showing a clip from

The Mummy Returns

in its presentation at the

Internet World Fall 2001 trade show in New York, Microsoft demonstrated two striking elements of its forthcoming streaming software, which is code-named Corona. (Streaming, in online parlance, involves watching a video or listening to audio while it is being transmitted to one's computer over the Internet, rather than playing the content back from a file saved on one's PC.)

One, the video clip was projected onto a video screen in high-definition video. And two, the audio for the clip was played back in what is known as a 5.1 format. That translates into five separate audio tracks piped to an audience from different parts of a theater or living room: from the left and right of the screen, directly from the picture, and from the back left and back right of the room. Underlying these speakers is a subwoofer feed that provides room-shaking rumbles.

Another feature of the software that Microsoft highlighted was instant-on streaming, in contrast to the usual delay of a few seconds that streaming media audiences have to wait after clicking on a feed for streamed audio or video.

Snow Falling on Tweeters

As is often the case with Microsoft's announcements of new software, however, the timetable for commercial introduction is hard to pin down. Introducing only the server-side technology on Tuesday, Microsoft says the rest of the necessary software, including a new Windows Media Player, is "scheduled to be available for beta testing early next year."

Today's announcement is only slightly bad news for RealNetworks, says David Bench, an analyst with Arnhold & S. Bleichroeder, since RealNetworks is focusing less on software revenues than on building subscription revenue for content. "It's less of a negative than it would have been a year ago or even six months ago," says Bench, who has an attractive rating on RealNetworks. (His firm hasn't done underwriting for the company.)

But the announcement also illustrates a shift in Microsoft's and RealNetworks' positioning for technology developments. "What's always happened in the past was, Microsoft was playing catch-up with RealNetworks," Bench says. "Now Real Networks is behind the curve, and they have to catch up to Microsoft."