RNWK TAKEOVER TARGET? READ THIS MORNINGS WSJ:
March 18, 1999
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Comments from the president of a key customer of RealNetworks sent its shares to record highs this week. But while investors rejoiced, RealNetworks made clear that it wasn't pleased.
Last Sunday, at an industry conference in Austin, Texas, Broadcast.com President Mark Cuban was predictably bullish on future growth of streaming media, which his company uses to transmit radio stations, shareholder meetings and other programs over the Internet. But he couldn't resist making a prediction about RealNetworks, the leading streaming-media software company. Within a year or so, he said, the Seattle company will be acquired, perhaps even by Broadcast.com itself.
Following Mr. Cuban's speech, RealNetworks' executives emphatically denied the company was up for sale.
But whether or not RealNetworks is on the block, Mr. Cuban's impolitic remarks highlighted the increasingly strained relationship between Broadcast.com and RealNetworks. RealNetworks has supplied Mr. Cuban's firm with software for years -- but now seems poised to compete with Broadcast as a hub for multimedia on the Internet.
As Mr. Cuban's comments from the South by Southwest Interactive festival trickled out to investors Monday, RealNetworks' stock shot up 26 1/8, or 27%, to an all-time high of 121 1/4 on more than twice its normal volume of 955,000 on the Nasdaq Stock Market. After slipping on Tuesday, RealNetworks jumped 6, or 5.2%, to 121 Wednesday on news that Microsoft would help promote a revamped version of RealGuide, the company's destination site for listing sources of streaming audio and video content.
But despite the sharp stock gains, RealNetworks executives bristled at the suggestion that their company was on the block.
"We are on the record denying categorically what Mark Cuban said," said Steve Haworth, vice president of communications at RealNetworks. Added Jay Wampold, director of communications at RealNetworks: "We are denying categorically that we are even in play."
The notion that RealNetworks would be an attractive acquisition target isn't absurd, according to some analysts. Robert Martin, an analyst at Friedman, Billings Ramsey & Co., said the company would be a "great takeout candidate." That's because RealNetworks is largely synonymous with audio and video streaming, a technique that allows a user to listen and watch multimedia content as it's being downloaded to their machines rather than after it's been downloaded.
In an interview, Mr. Cuban said he had no knowledge of acquisition talks between RealNetworks and other companies, saying his comments were meant to make a larger point about audio and video content on the Internet. "It's so important to the future of media that it would be shocking if someone didn't try to consolidate the industry," said Mr. Cuban, who confirmed that he'd aired similar thoughts about RealNetworks at a separate technology conference last week.
Still, it's clear Mr. Cuban's remarks -- and the discomfort they provoked at RealNetworks -- represent a new chapter in a relationship that's grown more tangled over time. Although RealNetworks started out as a software company, supplying firms like Broadcast.com with servers for streaming media over the Internet, the company has become a major publisher of Web sites in its own right, operating a collection of popular online destinations like RealGuide, Film.com and others that showcase multimedia clips. According to measurements from Media Metrix, RealNetworks sites' reached 7.8 million unique visitors in January, compared with 7.7 million for Broadcast.com.
As a result, RealNetworks is beginning to compete more with customers like Broadcast.com, who sell advertisements on sites that seek to aggregate sources of multimedia. Although RealNetworks maintains that it has strong ties to media companies on the Internet, it admits there are challenges to its relationship with Broadcast.com. "It is a complicated partnership," said Mr. Haworth. "At one and the same time, we are a premier streaming software provider and also a major aggregator of content."
Some estimates place RealNetworks' share of the streaming multimedia market at upwards of 80%, with Microsoft's NetShow a distant second. The company claims to have 54 million registered users of its RealPlayer software.
The one hitch in RealNetworks being acquired, according to Mr. Martin: RealNetworks' founder and CEO, Rob Glazer, appears fiercely committed to keeping the company independent. That may be because an acquisition by a bigger firm like America Online could aggravate some of its customers, particularly media firms that might compete with the likes of AOL. "You sort of have to say if someone buys Real, some of the breadth of Real's business opportunity is almost inevitably constrained," said John Powers, an analyst at BancBoston Robertson Stephens.
Friedman's Mr. Martin had his own pet theory for why Mr. Cuban would float the possibility that Broadcast.com might be a suitor for RealNetworks. It's Broadcast, not RealNetworks, that is "probably the one in play," he said, adding that Mr. Cuban "probably wants to inflate his own price so he can get a higher valuation on a takeout."
Broadcast.com, in fact, did see its share price surge 5% to 93 3/8 Monday.
For now, advertising on RealNetworks' Web sites amounted to only 5% of its total 1998 revenues of $64.8 million. But some analysts are expecting more of its sales to come from advertising in the near future, particularly if the company gets more aggressive about streaming advertisements directly through its 54 million RealPlayers.
Optimism about that prospect prompted Friedman's Mr. Martin to raise his investment rating on the company to a "buy" in January. Mr. Martin predicted new advertising opportunities might add as much as $26.7 million to his current fiscal 1999 revenue estimate of $90.6 million for RealNetworks. By 2001, he believes advertising could add $46.2 million on top of his $192 million revenue estimate.
"They will definitely alienate some customers," said Mr. Martin. "But what they're trying to do is delicately build revenue streams that are additive. From that perspective, they have to walk a fine line."
That view is shared by Josh Felser, president of Spinner.com, a Burlingame, Calif., company that uses RealNetworks software to stream dozens of music channels to listeners over the Internet. While Spinner.com has benefited from promotions on RealNetworks' Web sites, Mr. Felser said the company would have to rethink its relationship with RealNetworks if it launched a competing service.
"There is a line they can cross but they haven't," Mr. Felser said.
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