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RealNetworks and Microsoft Settle, Present New Unified Front

The moral of last week’s settlement agreement between RealNetworks and Microsoft is apparently that if you continue a lawsuit long enough against the Redmond software giant, they pay you off – in this case, to the (pun-intended) tune of $761 million.

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That’s not to say that ex-Microsoftie and RealNetworks founder Rob Glaser’s complaints about Microsoft’s past predatory practices were invalid. On the contrary, Microsoft clearly engaged in activities designed to make it harder for Windows users to use RealNetworks’s audio and video products reliably. Whether these points were illegal in a criminal or civil standpoint had not yet been proven; Microsoft had been found to violate anti-trust laws in 2000 (see our coverage in TidBITS-525).


The $761 million that RealNetworks will receive comes in two pieces. The first installment of $460 million, paid up front, is intended to resolve all Real’s claims for damages worldwide. Real also gets long-term access and licenses for Microsoft’s Windows Media technology. Microsoft will also let RealNetworks integrate its player much more fully into Windows, let users more easily choose which media player to use, and allow companies like Dell to pre-install RealPlayer without crying foul or imposing sanctions.

The second chunk, $301 million, is actually credit against services. Microsoft will market Rhapsody, RealNetworks’s subscription Windows-only streaming service, through MSN, and RealNetworks gets the right to buy ads on MSN to promote Rhapsody. In turn, RealNetworks will incorporate MSN Search within RealPlayer and will commit to using Microsoft technology for some services.

How does this affect Apple? Microsoft isn’t buying RealNetworks, so we still have three large competing formats:Windows Media, RealAudio/RealVideo, and QuickTime. The market will remain in three pieces. In fact, it’s clear that both RealNetworks and Microsoft are committed to developing their own formats further. But the disturbing part for Apple is that the two companies will work to make their digital rights management (DRM) schemes interoperable, which could create more unified competition for Apple’s iTunes/iPod/iTunes Music Store troika, in which content is protected by Apple’s closely held FairPlay DRM.

In recent years, RealNetworks has transformed itself from its roots as a server software company that gave away a free player. Now the company is increasingly a premium subscription services firm that licenses content and distributes it through its RealPlayer Gold service, which handles video, and its Rhapsody music subscription service, which streams an unlimited number of different tunes to a PC for a monthly fee.

Real’s stock surged upwards by 36 percent following the announcement, closing at nearly $8 per share. The stock, adjusted for splits, hit its all-time high of nearly $100 per share in 2000. In the last two years, the stock has gyrated between bands of about $5 and $7. The first payment of $460 million will bring the company’s cash on hand from $260 million to $720 million.

(Disclosure: I own a very small number of RealNetworks shares because of the purchase eight years ago of a company I helped out in its early days. I never worked for RealNetworks, and my material benefit is not significant in terms of overall holdings.)

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