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Much of the buzz at this year's Consumer Electronics Show in Las Vegas centered on RealNetworks (RNWK
). On Jan. 7, the Seattle-based digital-media delivery company announced a flurry of deals with cutting-edge entertainment companies, including the maker of personal video recorders, Tivo, and Moxi Digital, the new all-in-one home entertainment center that is the brainchild of WebTV founder Steve Perlman.
Those deals, in addition to previous ones with Nokia and Sony, integrate Real's streaming-audio and -video technology into every conceivable new digital device. Real's CEO Rob Glaser, it seems, is following through on his promises to move far beyond the PC -- and out of the long, dark shadow of archrival, Microsoft (MSFT
) (see BW e.biz, 9/2/01, "Rob Glaser Is Racing Upstream").
Founded in the mid '90s, Real has always been a trailblazer. But while analysts applaud the company for its vision, many wonder just what its first-mover advantage is really worth. The company all but invented the streaming-media industry back in 1995. Now, it wants to be the Internet's "cable operator," an aggregator of digital programming for which consumers pay a monthly fee.
CLEAR VISION. The early January announcements apparently have convinced investors that Real is on track: The stock is up on the news, from $6.05 on Jan. 7 to $7.25 a share at close on Jan. 16. "It's clear that Real sees the market opportunity -- and even sees it more clearly than Microsoft," says Phil Leigh, a new-media analyst at investment firm Raymond James.
Leigh is quick to add, however, that first-mover advantage isn't always that important, pointing to a litany of early players that ultimately fell by the wayside. Eckert Mauchly Computer Corp. manufactured the first computer in 1946. Yet it was sold to Unisys in 1950. Now-defunct Philco Electronics brought the first transistorized computer to market. And RCA made the first computer with integrated circuits, the RCA Spectra 70. Yet RCA exited the computer business in 1971.
Another example, of course, might be Real itself. Glaser & Co. failed to hold onto its original core market. Sales of software that allows corporate customers to encode and stream digital audio and video fell 24.5%, to $84.4 million, for the nine months ended Sept. 30, down from $111.8 million for the same period in 2000.
SLACK DEMAND. Those declining numbers, analysts say, are a direct result of Microsoft's aggressive entry into Real's territory: The Colossus of Redmond includes its competitive software as part of its corporate server software -- and you don't have to pay as you go. Real, in contrast, charges customers based on how much content they encode and stream.
Real has more than history to overcome. Slack demand for the company's software coupled with a fall-off in advertising on Real's Web site continues to take a toll on finances. Revenues are expected to decline 22% in 2001, from $241.5 million to $188.2 million, according to Thomson Financial First Call. For the first three quarters of 2001, Real's net income showed a loss of $62.9 million. Net margins, too, will slip, as Real completes its transition from a software company to a consumer-services outfit that sells content subscriptions, such as its flagship RealOne Music service.
Instead of relying on lucrative corporate license fees for every audio and video encoded, Real is turning to monthly fees from consumers to cover its technology costs and the royalty fees it pays for streaming music. Average net margin for 2001 will be 80%, vs. 84% in 2000, according to John Corcoran, an Internet analyst at CIBC World Markets. All of which makes some analysts think Real's stock is overpriced right now.
NO LOCK. Can Real make a rapid return to growth? Its quest to turn free-spirited Web surfers into paying subscribers makes for a great press release, but it's not clear the strategy will work. Unlike many cable operators, which enjoy geographic monopolies, Real has no lock on its subscribers. For now, it's relying on exclusive content deals with brand-name media companies such as ABC News, the NBA, and reality TV show Survivor.
As digital media become more mainstream, content owners will likely want to sell their programming to all available distributors to ensure the largest possible audience. Witness digital-music upstart Listen.com's January deals with music labels EMI and BMG. Listen's Rhapsody subscription service is a competitor to Real's MusicNet service in which both EMI and BMG are investors.
Even with exclusive deals, however, Real will be hard pressed to maintain its early momentum in signing up subscribers, skeptical analysts believe. At the end of the September quarter, RealOne, previously called GoldPass, had more than 400,000 paying subscribers. But Real has stayed uncharacteristically mum on the latest quarterly numbers. It also has refused to break out "churn" numbers, which indicate how many subscribers are quitting the service.
LIVING-ROOM WARFARE. Such figures are standard fare in the cable industry and allow analysts to judge how well aggregators are serving customers. "Show us you can grow beyond a niche into a mass-market medium. Only then will you be valued like a cable operator," says Aleksandar Zorovic, an analyst at Robertson Stephens in San Francisco. For Zorovic, mass market means at least 1 million subscribers -- who are logging on from home, not just at work when the boss is looking the other way.
Real's future most likely will be decided in the intensifying war between AOL and Microsoft, which are battling for control of the digital living room (see BW Online, 6/26/01: "A Cold War in Cyberspace?"). AOL bundles the RealOne Player into its new version 7.0 software, giving Real access to its 30 million-strong subscriber base. AOL also signed on as a partner for MusicNet, for which Real provides the technology and owns a 60% stake.
For AOL, Real's existence is important because it blocks Microsoft's road to digital dominance. Without Real, Gates & Co.'s streaming software would soon become the de facto standard, since it's bundled on every new Windows PC. The battle has been joined, and Real's top brass is optimistic about the outcome. Says Real's President and COO Larry Jacobson: "There are a bunch of companies that prefer to be with us rather than Microsoft simply for strategic reasons."
Jacobson believes that Real's value will prove to be more than strategic over the long term. "We're not only the pioneer, but we have a collective experience in creating and packaging digital media that would be difficult to beat," he says. Perhaps. But for now, Real will need more than innovation and courage to thrive. A profitable bottom line sure wouldn't hurt.
Black covers technology for BusinessWeek Online in New York Edited by Beth Belton
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Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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