Alliance settles antitrust lawsuit

Microsoft to partner with RealNetworks on digital entertainment

October 12, 2005|By SAN JOSE MERCURY-NEWS

SAN JOSE, Calif. -- Ending its last major private antitrust case, Microsoft Corp. will pay $761 million to settle a lawsuit with RealNetworks Inc. and create a multipronged partnership to collaborate in digital entertainment.

Under the deal, Microsoft will pay cash or the equivalent in free marketing services to Seattle-based RealNetworks, which will end its antitrust litigation on a global basis and support Microsoft with music services that will help the Redmond, Wash., software giant compete with rivals such as Apple Computer Inc. and Google Inc.

Microsoft Chairman Bill Gates and RealNetworks Chief Executive Officer Rob Glaser joined one another on stage at a news conference yesterday to announce the settlement and said the deal will lead to more choice for consumers on how to access digital entertainment.

"We're ending one chapter and starting another in our relationship with Microsoft," said Glaser, who worked at Microsoft for a decade before founding Real in 1995.

Glaser said he has long admired Gates as a businessman and philanthropist.

Gates, calling Glaser a "good friend," said, "This goes beyond a settlement. We see this as just the beginning."

Both said they needed to make their products work together to take advantage of the explosion of digital music, with the unsaid subtext that rivals are doing a better job exploiting demand from consumers.

"Both companies are seeing digital media explode and recognize it's in our interests to have interoperable services so that we can give consumers the most choice," said Dan Sheeran, senior vice president of consumer services, in an interview.

The two companies have been working for weeks on integrating RealNetworks' Real music player into Microsoft's own software. The companies are also integrating Real's Rhapsody subscription music service so that it can be promoted through Microsoft's search software, its MSN Web site and its MSN Instant Messenger service.

Real will provide games and other entertainment for Microsoft's Web sites as well as its upcoming Xbox Live Arcade online gaming service for the Microsoft Xbox 360 video game console.

Real will throw its support behind Microsoft's digital rights management technology, which is key to Real's efforts to expand beyond PCs and cell phones to other portable devices. With Microsoft's DRM, it is much easier for Real's music subscribers to move their music to any device, whether it supports Real or Microsoft formats.

Microsoft will pay Real $301 million in cash and provide services over 18 months in support of Real's entertainment products.

For every customer who originates from Microsoft's Web sites and signs up for Real's subscription service, Microsoft gets credits toward the $301 million. Also, Microsoft will pay $460 million in cash for damages related to the antitrust claims.

RealNetworks filed the antitrust lawsuit in 2003, alleging that Microsoft used its Windows operating system monopoly to favor its own Windows Media Player, which was available for free with Windows, to freeze out RealNetworks' competing Real media player technology. But Real's business has been evolving. The company launched its music subscription service, Rhapsody, two years ago and now music, games and other subscriptions are 60 percent of its business.

Consumers will start seeing the benefits of the alliance in the fourth quarter and through the first half of next year, Glaser said.

"Clearly, this is a coordinated attack against Apple's dominance in the digital music arena," said Aram Sinnreich, an analyst at Radar Research.

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