RE: PROJECT HUNT, RealNetworks, Inc. (RNWK)
Chaz and Thread:
I must preface this report by saying that this is my first attempt at such an analysis. Certainly there are things that I have missed and/or do not understand, and it is my hope that members of the thread will offer their input on the inevitable shortcomings of the following novice report. I have used StockHawk's model for Project Hunt for my presentation.
RealNetworks, Inc. (RNWK) 206.674.2700.
Sector: Technology
Industry: Software and Programming
Current Market Cap: ~13B (it was ~10B four weeks ago).
52 Week Range: $96 to 14 3/4
Shares outstanding: ~148M
Institutional Ownership: ~62 institutions owning ~29% of the common stock.
PART ONE, COMPANY OVERVIEW:
RNWK is a provider of media delivery and distribution solutions designed for the Internet.
RNWK is headquartered in Seattle, WA and employs over 600 people. RNWK has sales offices throughout the world including the UK, Tokyo, and Paris.
RNWK was incorporated in 1994 and went public in November 1997.
RNWK has almost 100 million unique registered users, and downloads exist at the rate of close to 175 thousand per day (According to Investor Relations, 1/17/2000).
RNWK, The Products: (Premium = $29.95)
 Real Player: provides streaming media to the Internet user (free download).
 Real Player Plus: a more recent and enhanced version of Real Player (available at a premium).
 Real JukeBox: intended to allow users of the product to acquire, record, play back and manage music for their personal use.
 Real JukeBox Plus: an enhanced version of the original Real JukeBox, (available at a premium).
 Real Slide Show: a solution for sharing photographs to communicate information and ideas.
The most recent version of all of the above products is referred to as RealSystems, G2 or Generation Two.
PART TWO, THE MARKET:
CUSTOMERS:
 The Internet user is one market for RNWK. Any Internet user who has the desire to have quality media play over his or her computer is a potential user of an RNWK product.
Example: If you wanted to watch the Mars Polar Lander via CNN's Web page, you would find a link to real.com and would be able to download a RNWK product from their site. RNWK provides a fee based tech support line for it's clients.
 Another part of RNWK's market is comprised of Server Licensing Agreements. Using the above example, CNN would pay RNWK a fee to have CNN's Web page visitors use RNWK's download.
 The last part of RNWK's market is advertising revenues generated from their web page.
COMPETITION:
I mentioned before that I am a new investor. Perhaps all 10Ks are filled with doom and gloom for legal purposes, but this particular report sure puts a negative spin on the potential demise of the company due to strong competition.
The list of competitors contains: Microsoft. Apple. Oracle. Cisco Systems / Precept Software. Yahoo. CMGI. Not to mention a few others.
RNWK's biggest concern regarding competition is MSFT. From the 10k, in bits and pieces:
"Microsoft is a principal competitor in the development and distribution of streaming media . . . and has announced its intent to compete in the market for digital distribution by . . . making the Widow Media Player (Similar to G2) available for download from MSFT web site for free and by bundling with its Window 98 operating system."
"We expect that by leveraging its dominant position in operating systems and tying streaming media into its operating system and its browser, Microsoft will distribute substantially more copies of the Windows Media Player in the future that it has in the past and may be able to attract more users to its streaming media products." . . . "As more companies enter the market with products that compete with our servers, players and tools, the competitive landscape could change rapidly to our disadvantage"
PART THREE, FINANCIAL INFORMATION:
Fiscal Year is December.
Software License fees were $24.1M for the quarter ended September 30, 1999, an increase of 88% from $12.8M in the comparable quarter of the prior year.
Software License Fees were $62.7M for the nine months ended September 30, 1999, an increase of 87% from $33.6M in the comparable period of the prior year.
It should be noted that Software license fees for the quarter ended 9/30/1999 and 1998 included a $2.6M and $2.4M, respectively, related to the MSFT license agreement RNWK entered into in June 1997. Software license fees for the nine months ended 9/30/1999 and 1998 included $7.7M and $7.3M, respectively, related to the MSFT License Agreement*.
Service Revenues were $6.7M for the quarter ended 9/30/1999 and increase of 68% from $4.0M in the comparable quarter of the prior year.
Service Revenues were $17.6M for the nine months ended 9/30/1999 an increase of 75% from $10.1M in the comparable period of the prior year.
Advertising Revenues were $4.1M for the quarter ended 9/30/1999 an increase of 388% from 0.8M in the comparable quarter of the prior year.
Advertising revenues were $7.5M for the nine months ended 9/30/1999 an increase of 261% from $2.1Min the comparable period of the prior year.
Geographic Revenues. Excluding revenues from the MSFT license agreement, international revenues represented 21% of total net revenues for the quarter-ended 9/30/1999 and 22%of total net revenues for the quarter ended 9/30/1999.
REVENUES:1998A 1999E 2000E
Q1 $12.50 $23.53A $42.0
Q2 $15.06 $28.05A $45.2
Q3 $17.24 $34.89A $43.8
Q4 $20.04 $38.5 $49.0
YEAR(DEC)$64.84 $125.0 $180.0
Prior Est.NM NM NM
P/R NA 84X 58X
EPS ($0.11) $0.09 $0.28
First Call,NM $0.10 $0.31
Revenue GrsMargin OpIncome NetIncome EPS
Q4:98A $20.04 81.3% ($1.64) ($1.10) ($0.02)
Q1:99A $23.53 81.8% ($1.71) ($0.74) ($0.01)
Q2:99A $28.05 81.9% ($1.56) ($0.27) $0.00
Q3:99A $34.89 81.9% $0.54 $4.41 $0.05
Q4:99 $38.50 81.9% $0.81 $4.56 $0.05
 *The Microsoft Licensing Agreement is an agreement between RNWK and MSFT, where RNWK would license it?s technology to MSFT for $30M payable over 3 years with an option to renew the agreement. MSFT has opted not to renew the agreement; moreover MSFT has sold all of the common stock it held in RNWK. The original, three year agreement was signed in June 1997.
The above overview of the MSFT Licensing Agreement was produced from a short conversation with Investor Relations. I tried (briefly) to locate the exact agreement but had very little luck with the leads that IR provided. If anyone cares to pursue the matter further, IR told me that the agreement was on page 27 of RNWK's 10K written 12/31/1998, filed 3/1/1999, like I said I looked but didn?t find it.
PART THREE G/K CHARACTERISTICS:
The technology offered by RNWK fits in because:
 The Internet is in its infancy.
 There is a strong desire for the Internet to be able to handle better quality video and audio presentations.
 A compelling argument for the success of RNWK is that eCommerce on the Web is currently limited to the white-collar office worker using a PC. Streaming video and audio with TV like quality will open up a huge market because of the mass appeal.
Is there a discontinuous innovation?
No, there is not. RNWK is offering a 'plug and play' continuous innovation which is the ongoing evolution of audio and video Internet content.
Is there proprietary open architecture?
In the case of RNWK, the architecture of their product line is not proprietary. This is so because of the similar products offered by competition. Since there is no proprietary architecture, whether it is open or not becomes a moot point. (I think).
One example supporting that RNWK has no proprietary architecture would be the following:
Say I use RNWK's RealPlayer and am very happy with it, but I get a new computer automatically loaded with Windows 2000. With that software, comes the Windows version of RealPlayer, and I decide that it is worth a shot since it is already loaded onto my new machine. I don't really notice the difference between the two and decide not to switch back to RNWK. In this instance driving on the other side of the road was not so difficult, hence RNWK has no control of the architecture in question and can not be a gorilla.
Does RNWK have the potential to grow into a mass-market phenomenon. . . ?
There is a strong possibility that Streaming Audio and Video will grow into a mass-market phenomenon, especially as the technology becomes better and better.
. . . and become a standard?
Due to its own admission of strong competition from experienced, well funded and long time technology players, it is doubtful that the products that RNWK offers will become THE prevailing standard.
Are there high barriers to entry . . .?
The barriers to entry would be defined by how hard competition would have to work and how much it would cost in order to release a product at the same level as, or better then, our candidate's.
Can RNWK up the ante by coming out with better and better products that will leave the competition constantly playing catch up? This would be left in the To Be Determined category.
. . . and high switching costs?
The above example of switching to another company's similar or better product for free would be an indication that high switching costs do not exist.
Have Value Chains Developed?
I do not recognize a value chain supporting and in fact contributing to the growth of RNWK.
Have they Crossed the Chasm?
The technology is probably crossing the chasm right now. However, without proprietary open architecture, this can only carry RNWK so far.
One big plus for RNWK is the fact that they have over 1M unique registered users. That means that 1M+ people have registered with RNWK by giving them an email address and other info, basically becoming clients. Note that all of the competition combined, according to RNWK IR, has only ~400k unique registered users for similar products.
In conclusion it seems that RNWK is not a gorilla, but rather perhaps a Prince that will do well as more and more people require streaming media over the Internet.
Thanks in advance to both those who take the time to read this and to those who respond.
Noah |
