Microsoft Corp. and RealNetworks Inc. announced a settlement in their long-running antitrust suit Tuesday, with the two companies agreeing to collaborate in the multimedia software and content space.
Under the terms of the deal, through which the companies said they have settled all antitrust litigation worldwide, Microsoft agreed to pay Real $460 million in cash to resolve the antitrust claim, and an additional $301 million in cash to provide the company with product development, distribution and promotional services.
Redmond, Wash.-based Microsoft also extended a licensing agreement to the multimedia software maker to support Reals Rhapsody digital music subscription service on its MSN Web network properties, and agreed to offer the Seattle-based multimedia specialists digital video games through its MSN Games and Xbox Live Arcade services.
As part of the announcement, the companies said that Microsoft will earn credits at a predetermined rate to be applied to the $301 million portion of the payout, in return for attracting subscribers to Reals digital content services.
The firms estimated the total value of the agreement at approximately $761 million.
Rob Glaser, chief executive of Real, and former Microsoft employee, said he was eager to begin working more closely with the software giant again.
“Were ending one chapter, and opening a new chapter and relationship between RealNetworks and Microsoft,” said Glaser. “By allowing our products to compete on their merits and have greater interoperability, customers can choose which media player technology and which products work best from them.
“Weve laid the foundation to bring our two companies together around entertainment areas that allow consumers to get what they want, where they want it, when they want it, and how they want it.”
Microsoft Chairman Bill Gates said the new partnership should yield future opportunities for both firms.
“Its important for us for you to see that this [relationship] goes beyond the settlement,” said Gates. “Theres some innovation in terms of the ways that were integrating Reals services into Windows and MSN software, and we think this is just the beginning.
“There are a lot of things here that can be beneficial not only to these two companies, but [to other] people working with music.”
For its part, Real said it will support MSN Search in its products, while the two companies will jointly promote use of Microsofts Windows Media technologies with Reals Rhapsody to Go music download service.
The companies said they would collaborate in the so-called “casual games” arena, which includes digital versions of low-tech games such as Scrabble and Solitaire, with Real agreeing to create a new subscription service for those games to be offered on MSN Games. Real will also build new games for distribution on Microsofts upcoming Xbox Live Arcade service.
As part of the antitrust portion of the settlement, the companies said they have resolved their disputes in the European Union and Korea, in addition to the United States, with Microsoft promising to open up its Windows operating system and Windows Media Player software to Real in order to help improve compatibility between the two companies technologies.
Microsoft also said it will work to build new interfaces between those products and pledged to offer Real broader access to its distribution channel of PC makers.
In addition, Microsoft said it would make it easier for Windows users to access Reals multimedia software from Windows, and to set preferences for usage of the firms respective applications on their computers.
Microsoft said that its next-generation version of Windows, known as Vista, will direct users to a Web page where they can download any needed Real software if they choose to access a file that demands those programs.
Microsoft also said it would “enhance” interoperability between its Windows Media DRM (Digital Rights Management) system and Reals Helix DRM offering and allow Real to facilitate playback of digital content on non-Windows portable devices and personal computers using Windows Media DRM.
In its suit, first filed in December 2003, Real claimed that Microsoft had used its dominant position in the operating system software market to impede competition in the multimedia applications sector.
Real has also claimed that Microsoft established deals with a number of computer makers that restricted the manner in which those hardware manufacturers could install its own programs. Real had sought $1 billion in related damages in the claim.
In addition to its U.S. suit, Real was also the only opponent left in Microsofts antitrust case with the European Union, which ordered the software giant to begin offering a version of its Windows OS that did not include Windows Media Player in 2004.
In its ruling, the European Union also slapped Microsoft with $597 million in related fines and ordered the company to share some of its Windows source code.
Microsoft has said previously that it plans to appeal the ruling, but the European Unions Court of First Instance has yet to set a date for those hearings.
Prior to settling with Real, Microsoft shelled out several billion dollars in antitrust settlement payments to other companies filing legal cases with similar claims of anticompetitive behavior.
Among those deals were settlements with Time Warner Inc. for $750 million and Sun Microsystems Inc. for $1.95 billion.
Microsoft has also reached settlements in recent years with Novell, Burst and the CCIA (Computer and Communications Industry Association).
Industry watchers praised the deal as a win for both Microsoft and Real, as the settlement clears up legal issues at both firms and allows the two companies to expand their respective product plans.
Industry analysts observed that with Real taken care of, the European Unions case, and any future antitrust claims, will carry less of a threat.
“Real was the only protagonist left in the EU case, so the settlement should help with Microsofts appeal, since the problem involved appears to have been fixed,” said Joe Wilcox, analyst with New York-based Jupiter Research.
“In one sense [Microsoft] lost the war in granting all these settlements, but, theyve clearly moved to a policy of trying to get rid of these cases and move on.”
Wilcox said that for Real, there is a promising opportunity to work with Microsofts PC manufacturer channel and potentially create a new set of digital media applications that it could market through those companies.
The analyst observed that the deal also makes sense in that Real is already a consumer of a number of Microsoft technologies, as its RealPlayer software uses the companys Windows browsing engine, and the Rhapsody service employs Windows Media technologies.
Other market watchers agreed that the deal should help both firms compete more effectively against Apple Computer Inc. in the multimedia space, where the device makers iTunes music download service is considered the dominant player.
Ted Schadler, analyst with Forrester Research, in Cambridge, Mass., said that Microsoft finally gains access via Real to a music service for its MSN customers that can also potentially be tied into the software makers instant messenger offering.
“Microsoft didnt have anything to compete with Yahoo in the music subscription service for portals, and this gives them a better story, even if they are essentially passing the customers to Real,” Schadler said. “Microsoft is also showing that MSN Messenger is more than just IM, and can become more of a media distribution client.”
According to Schadlers latest research, MSN holds 21 percent of the U.S. portal audience, while Yahoo retains 40 percent. Market leader Google commands 48 percent of the sector.
In addition, the analyst said that the companys offer to open up its Windows source code to Real may help it make its APIs (applications protocol interfaces) available to other developers, and forward the software makers goal of becoming a central provider of technologies used by developers building new multimedia applications.
Jupiters Wilcox pointed out that, as evidenced by Microsofts latest settlement and its earlier deals with companies such as Sun, the company is increasingly cooperating with some of its biggest rivals.
However, he said the settlement provided no guarantee that Real will benefit immediately from aspects of the deal such as the new technology licensing terms.
“The reality is that most of Microsofts partners are also its closest competitors, but thats nothing new,” said Wilcox.
“Just because Real has been awarded the licenses doesnt mean that well see the companies working closely together anytime soon. For instance, AOL won a number of licenses in [Time Warners] settlement that it hasnt been able to take advantage of yet.”
Editors Note: This story was updated to include comments from Rob Glaser, chief executive of Real, Microsoft Chairman Bill Gates, and other analysts.