Settlement puts RealNetworks, Microsoft in tune

RealNetworks has settled its two-year-old antitrust suit against Microsoft in exchange for $761 million and a new alliance aimed at challenging Apple’s iTunes in the digital music market.

Three-part settlement ends Real’s antitrust claims against Microsoft worldwide, lines up Microsoft backing for Real’s Rhapsody music service and guarantees Microsoft will promote and support Real’s games.

“It’s important for us for you to see that this (relationship) goes beyond the settlement,” Microsoft chairman Bill Gates told a Seattle news conference Tuesday. “We think this is just the beginning.”

Microsoft will pay Real $460 million upfront and an additional $301 million in cash and services over the next 18 months.

The alliances, especially in music, rep the more far-reaching aspect of the agreement. Neither Real nor Microsoft alone has been able to mount a serious challenge to Apple Computer’s iTunes Music Store and iPod.

Microsoft will push Real’s subscription music service, Rhapsody, on its MSN Web sites and will offer RealNetworks’ digital games via MSN Games Xbox and Live Arcade for Xbox 360.

Microsoft can earn credits toward the $301 million portion of the settlement by delivering subscribers to Real.

Real also gets long-term licenses to use Microsoft’s software technologies, including Windows Media and security software.

Real will offer Microsoft’s MSN Search as part of its RealPlayer software, and MSN Search will include Rhapsody links on music-related searches.

“We already had a great service but needed to get it in front of more people, so we get the distribution and promotion from MSN, which is massive,” said Dan Sheeran, senior VP of consumer services for Real.

Sheeran promised, “We’re going to create services that no one else has, like the ability to send a playlist to a friend for him to listen to for free. It’s creating new experiences that are very different than the entire Apple model.”

Real is already seeking an alliance with a hardware maker so it can offer an end-to-end music service to compete with Apple, Sheeran said.

Rhapsody is a subscription service that offers unlimited access to a 1.3 million-song library in exchange for a monthly flat fee.

Apple’s iTunes, a download service, charges 99¢ per song, but consumers own the tracks permanently.

Sheeran said the subscription model is better for consumers who want to explore new music and new artists, since they can hear entire tracks, not just 30-second samples.

Microsoft offers a download music service and had been widely expected to launch its own subscription service. Now it will throw its weight behind Real and Rhapsody.

Sheeran said the partnership between Real and Microsoft also raises the bar of entry in digital music so high that it’s unlikely other companies, such as Yahoo!, will be able to compete.

“The investment required to create these products is huge,” Sheeran said. “Add in that the labels need to get paid. And you need tremendous scale to have marketability.”

Settlement also helps Microsoft fend off inroads by Internet search giant Google, which has expanded its offerings rapidly in recent months. Google pioneered paid search and is the leader in that business, leaving rivals Yahoo! and MSN playing catch-up.

Google is already partnered with RealNetworks, but MSN Search will get more exposure through Rhapsody.

Also, as part of the antitrust settlement, RealNetworks agrees to use Microsoft’s Digital Rights Management tools. That strengthens the position of Microsoft’s Windows Media file format and the company’s PC-centric vision of home entertainment.

Both Apple and Microsoft want to make the personal computer the hub for digital home entertainment systems. Microsoft is determined to make Windows-based PCs that hub.

Google’s free Web-based services weaken consumers’ reliance on the PC software that has been the linchpin of Microsoft’s success.

Real’s suit against Microsoft was the last major antitrust action in the U.S. against the Redmond, Wash.-based software giant.

Seattle-based Real also ends its active participation in antitrust litigation against Microsoft worldwide, though the European Union has already said it will press on with its case against Microsoft regardless.

Real filed its antitrust suit in December 2003, claiming Microsoft used its dominance in computer operating systems to limit competish in multimedia software. Suit asked for damages that could have topped $1 billion.

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