Apple Is Tough Foe for Microsoft and Real, Analysts Say

Settlement will add clout to Real's Rhapsody music subscription service but won't necessarily threaten Apple.

Microsoft Corp.s deal with RealNetworks may strengthen its position against close competitors, but analysts say the company still faces major hurdles if it wants a slice of Apple Computers market dominance.

As part of a legal settlement over antitrust issues, Microsoft will pay RealNetworks $460 million in cash and give the company another $301 million in services that include promotion on Microsoft Web sites. But observers have noted that the deal will do more than smooth some of Microsofts antitrust woes: It will also provide a potential partnership for competing against Apples iTunes in online audio and video. As part of the settlement, Microsoft extended a licensing agreement to support Reals Rhapsody digital music subscription service on its MSN Web network properties.

"It cuts down on some of the clutter in the music space," said Yankee Group analyst Mike Goodman. "It puts some of Microsofts clout behind Rhapsody."

The deal should strengthen Reals offering and put it somewhat ahead of competitors like Virgin Music, MusicMatch, AOL Music and Yahoo Music.

"It should accelerate subscriber adoption of Rhapsody and could hasten the adoption of WMA-based music services in general," Goodman noted.

Despite having more power through the partnership to compete against close competitors, Microsoft will find it difficult to gain even a portion of Apples market share, said Jupiter Research analyst Michael Gartenberg.

"Microsoft has been in a position where theyve been licensing the technology, but it hasnt taken off," he said. "They have the steak but not the sizzle."

In targeting Apple, Microsoft will have to deal with new challenges, he added. Most notably, it will have to balance the needs of multiple partners. "When youre in the business of licensing, youll have several partners, and you have to be careful not to show favorites," Gartenberg said. "Apple isnt partnering with anyone or licensing their technology, so they have an advantage."

/zimages/3/28571.gifSprint and RealNetworks team up on mobile music and podcasts. Click here to read more.

Microsoft may be able to hold its ground in battling Apples Quicktime, said IDC analyst Dan Kusnetzky. Windows holds approximately 94 percent of the worldwide shipments of client operating environment software in 2005, With Linux at about 3 percent, and Mac OS at 2 percent.

"The distinction may come from the number of content developers that support this format," said Kusnetzky.

Beyond having an impact on its position in the music market, Microsoft may hope that the Real arrangement could have significant effect on the antitrust charges it has tried to smooth over with the European Commission.

As part of the deal, Real is going to withdraw its complaint against Microsoft in the EU, and although IBM, Oracle and Nokia have urged the EU to defend its position, some intellectual property advocates are suggesting that the Commission take a new direction as a result.

"The Commission should look for an exit strategy from its antitrust charge before it makes itself even more ridiculous than it already has," said Florian Mueller, founder of the campaign, and a major IP leader in Europe. "What theyve been doing so far is just counterproductive. It doesnt benefit Europe."

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