Microsoft, RealNetworks settle for US$761 million

Microsoft Corp. and RealNetworks Inc. announced Tuesday that they have settled their antitrust case and forged a partnership to promote digital music and games in three agreements worth US$761 million, the companies said.

The settlement marks the resolution of the last major private antitrust case against Microsoft in the U.S., and RealNetworks’ withdrawal of an antitrust case against the software vendor still pending in the European Union.

Microsoft will pay Real Networks $460 million up front to resolve all damages and claims in the suit, and the companies are agreeing to a series of technology licenses and commitments that will give RealNetworks long-term access to Windows Media technologies to enhance its own media software, according to the companies.

Under the terms of the deals, the companies have resolved their antitrust suit worldwide and will jointly promote and market RealNetworks’ music subscription service, Rhapsody, on Microsoft MSN. In addition, Microsoft will offer RealNetworks’ digital games through MSN Games and Xbox Live Arcade for XBox 360.

Additionally, Microsoft, which is based in Redmond, Washington, will pay RealNetworks $301 million in cash and provide services over 18 months to support RealNetworks’ product development, distribution and marketing under the music and game agreements. At the same time, RealNetworks will support MSN Search, and the two companies together will promote the use of Windows Media technologies with RealNetworks’ Rhapsody to Go service, according to the companies.

Microsoft Chairman and Chief Architect Bill Gates said that the settlement spells an opportunity for Microsoft and RealNetworks to collaborate on innovative ways to deliver digital media to consumers on a variety of devices.

Microsoft and RealNetworks have a common enemy in Apple Computer Inc., which has had tremendous success with its iPod hardware and iTunes software and music-download service.

“Digital entertainment is just at the beginning [of its adoption],” Gates said. “This is a new foundation we’ve built here that will be beneficial not just to the companies but to the people working with music.”

In addition to the three agreements, RealNetworks also will support Microsoft’s Windows Media DRM (digital rights management) format in its RealPlayer media software, a move that helps Microsoft evolve Windows as the platform for a digital media hub, said Matt Rosoff, an analyst with Directions on Microsoft.

“Microsoft doesn’t necessarily care if you use the Windows Media Player — it’s the Windows Media format [it cares about],” Rosoff said. “Microsoft just wants consumers to use their PC as their digital entertainment hub, and anything that gets in the way of user experience hurts that [aim].”

At the press conference, RealNetworks Chief Executive Officer Rob Glazer and Gates outlined some of the ways the companies will integrate their technologies to present a better user experience for customers who want to search for, download and share music.

As part of the joint agreement to market Rhapsody, the companies plan to integrate the service in MSN Search so that when users search for an artist, they can play entire songs from that artist in MSN Search. Glazer demonstrated the service by playing “Start Me Up” by The Rolling Stones during the press conference.

Microsoft also will add a Rhapsody tab in MSN Messenger so users can see the songs the friends they are chatting with are listening to, and also can send playlists to friends, the executives said.

Gates said Microsoft will continue to have MSN Music, its own music service that enables users to download songs. MSN Music does not have a subscription service like RealNetworks’ Rhapsody, however, and Gates said Microsoft is not planning to roll out one at this time, but is focused on promoting Rhapsody.

Analyst Rosoff said that the settlement likely means Microsoft’s MSN division will put MSN Music on the back burner for now. At the moment, the division is focused more intently on competing with Google Inc. on search and other services than on its music-download service, he said.

“[Microsoft] won’t scrap MSN Music but they will keep it on hold,” Rosoff predicted. “For Microsoft, [digital media] is a platform play. They don’t want to sell downloads because it’s a low-margin business.”

RealNetworks, which is based in Seattle, filed an antitrust lawsuit against Microsoft in December 2003, initially claiming damages in excess of $1 billion. The company alleged that Microsoft used its Windows OS dominance to restrict RealNetworks’ position in the market for digital media software for the PC.

The lawsuit claimed that Microsoft forced PC manufacturers to include its Windows Media Player while at the same time placing restrictions on how competing players may be installed.

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