UPDATE: Microsoft to reveal APIs, DRM technology to RealNetworks

Posted by Scott M. Fulton, III

 

UPDATE 11 October 2005 - 6:15 pm CT:

In a conference call to investors late this afternoon, RealNetworks chief financial officer Roy Kimball revealed that Microsoft had agreed to disclose key elements of Windows technology. More on what Microsoft has agreed to reveal, in the next segment.

Seattle (WA) - Effectively putting to an end a decade-long rivalry that at times took "bitter" to new extremes, Microsoft and Real Networks announced this afternoon they are now allies. The two companies will now work together to provide digital music services, beginning immediately with MSN Search featuring full song download capabilities from Real's Rhapsody service.

In a joint announcement and press conference, the two companies revealed they have entered into three agreements, the first of which settles all antitrust disputes that Real has issued against Microsoft over the years, in the US, Europe, and South Korea. Microsoft has agreed to pay Real $460 million in cash, in exchange for Real dropping all proceedings against Microsoft.

In a second agreement, Microsoft will compensate Real in service, support, and incentives toward technological development, valued at $301 million over an 18-month period. This second figure, Microsoft officials said today, will be earned by Microsoft through the generation of new Real customers through MSN, as well as through promotions appearing in Windows Media Player and elsewhere. Some of Real's casual games, for example, will appear on MSN Search and other Microsoft services soon. The third agreement concerns joint promotion of services, including Microsoft's promotion of Real's Rhapsody to Go mobile tunes service, and Real's promotion of MSN Search.

One of the more interesting moments in this afternoon's press conference came when RealNetworks CEO Rob Glaser explained how he and Microsoft Chairman Bill Gates - his former boss - began the process which led to their disposal of mutual disputes. "From a personal standpoint," Glaser told reporters, "I've always had an immense admiration for Bill as a business person, as a technologist, as a strategist, and over the last 10 years, as a philanthropist and social activist...What started this process was, a little over a year ago...when we came out with our Harmony technology, which allowed a form of digital rights interoperability. I contacted Bill and said, 'Hey, I think this is a good thing for consumers, [who] want openness, interoperability, choice.' And it began a dialogue that was the antecedent to the discussions that led to today's announcement."

In July 2004, RealNetworks introduced Harmony as a digital rights management translation system, enabling a customer who purchases a song through one service - such as, for instance, Apple's iTunes - to translate that song to a device that would not normally support its DRM scheme, or that the tune's embedded DRM would not support for itself. Real's continual effort to break the FairPlay scheme used for music downloaded to iPods, has given Apple no end of headaches since that summer.

"Real has agreed to support strong interoperability with the digital rights format that we provide, the Windows DRM format," stated Gates this afternoon. "We're really trying to drive that to critical mass, both for music and video, and [Real's] support will make a big difference there." Today's announcement may be perceived as the beginning of Real's and Microsoft's mutual effort to compete with Apple; and for his own part, Gates acknowledged Apple's presence as a competitor in their market, though would not elaborate further.

Late in the conference, RealNetworks senior vice president Dan Sheeran told reporters that Real's DRM collaboration with Microsoft may have an impact on Helix, the company's open-source, Linux-based media player project. "I think, as Bill and Rob explained, a lot of this agreement is about interoperability, about making our technologies work better together," said Sheeran. "Certainly Helix, which is a technology that already allows us to move from our DRM environment into the Windows Media environment, is going to be expanded through this relationship, so that we can do that on more types of devices, we can do that in more flexible ways. That will really enable the world that Rob and Bill were talking about, where we can put devices into the automobile, we can enable music on cell phones; and the problem the consumer faces of being locked into a particular device, because they happen to buy a song from a particular service provider a year ago, will go away, as that proliferates into the market." Sheeran did not name the "particular device," though perhaps he didn't have to.

In another revelation that was almost buried in the kiss-and-make-up language of the day, Gates stated that Microsoft has agreed to develop Windows Media Player using standardized Microsoft frameworks, including what is called OCX. This is the type of executable file that Microsoft proposed as a standard for interoperability a decade ago, as ActiveX. An OCX executable is addressable using a lexicon that is enrolled in the Windows System Registry, as a type library. Addressing an executable program by its OCX type library enables all developers, including Real, to conceivably create services and extensions for that program, without even Microsoft's direct involvement or help.

"We've agreed on the Windows front to make our platform as effective as possible for Real; that is, to design the components in what we sometimes call an OCX," stated Gates, "so that they're available for their software to call, so both in terms of ease of engineering for them, and the ease of use for the end user, it's more advantageous than it might have been before." What this could allude to is a future version of Windows Media Player - perhaps even different than the one whose beta premieres with the next internal build of Windows Vista - that returns to Windows Media's original ActiveX-oriented design architecture. This may be good news for "skinners" and others who like to "embrace and extend" technology in their own way.


$478 million in cash expected by next week

Elaborating on information revealed earlier today, Real CEO Rob Glaser and CFO Roy Kimball clarified the extent of what their company is receiving in the deal: Microsoft is to pay RealNetworks $460 million USD to settle the antitrust claims, in a lump sum that the company expects to receive within five business days. This amount is expected to show up on the company's financial statement as a "negative operating expense," in a single line item, marked "antitrust settlement."

Over the next 18 months, Real is scheduled to receive $300 million additional as part of its music collaboration agreement with Microsoft. An $18 million "down payment" toward an installment plan is expected over the next five business days. The remainder of the agreement amount would be payable quarterly, in installments of $40 M, $58 M, $62 M, $61 M, and $61 million in the first quarter of 2007. However, any amount that Microsoft would have to pay in cash may be offset by bounties that Microsoft would earn through the generation of new RealNetworks customers through services such as MSN. The net value of customers gained through these services will be ascertained, Glaser said, using the same formula Real uses to assess new customer bounties for its other partners. Theoretically, Microsoft could erase this part of its debt over time if it were to generate 7.5 million new customers for Real.

In the joint news conference earlier today, Microsoft's Bill Gates was asked if this deal affected Microsoft's own plans to launch a music service in the future. In an attempt to decline specific comment, Gates stated now was not the time for such an announcement from Microsoft, leaving open the door for creating its own music download service in the future. The agreement had earlier been characterized as promising Real prominent placement for Rhapsody in MSN Search and other services. However, in response to a reporter's question during the conference call later that afternoon, Real's Roy Kimball opened the door for Microsoft a crack wider: "Parity is the situation for the next 18 months," referring to the relative placement of a Microsoft-based service alongside Rhapsody in Microsoft promotions. "If they did launch a service," he added, "it wouldn't have to be less prominent than Real's; it would have to be at, at least, parity."

Earlier in the conference call, Kimball told reporters that, in what may be an unprecedented move by Microsoft, it has agreed to give Real assurances regarding the operating system behavior of Windows, and the company's own business practices, as well as opening up APIs for Real's own research. "For example, Real will have access to a variety of Windows Media, security, and operating system technologies," said Kimball, "that will enable Real to build services and software that enhance consumers' experience with Real's products and services on Windows. For example, Microsoft will open new APIs into its media infrastructure in the operating system, and will open APIs to enable Real to get direct access to the Windows protected media path for our digital rights management and content." Collaboration with Microsoft, said Kimball, will enable a new level of interoperability between Real and Windows' DRM, allowing RealPlayer to access more types of content.

Real's Rob Glaser closed by characterizing his company's three agreements with Microsoft, including the antitrust settlement, as follows: "This by far exceeds the expectations that I personally had, as to the kind of outcome we'd have, both in terms of the economics that we achieved in a zero-risk way, in a timely way, and also in terms of the opportunity for leverage that comes out of the business relationship."