Business Week on RNWK. With yesterday's higher low, I think RNWK may have stabilized here for now. A split announcement should be the next trigger for a major rise.
Can RealNetworks Keep Its Starring Role?
Despite a stumble on Apr. 14, its stock is soaring, and many analysts think the Web multimedia company is just beginning to click
Now that RealNetworks (RNWK) has become one of the darlings of the Internet world, it's worth remembering that only last summer it looked as though the tiny company was about to be slayed by Goliath. Founder and Chairman Rob Glaser had dared to testify against mighty Microsoft (MSFT) before a Senate committee, claiming Microsoft's competing multimedia player tampered with the functioning of RealNetwork's RealPlayer. By Sept. 1, RealNetworks was trading as low as 15 1/4. And three months later, Microsoft announced that it was selling its minority stake in RealNetworks.
Put in that context, the stock's 17% slide from $229 to 189 1/2 on Apr. 14 isn't much to complain about. In the past eight months, investors' concerns that Microsoft would obliterate RealNetworks have receded as they came to realize just how huge the market for audio and video on the Net really is. RealNetworks began 1999 trading at around $38, and by the end of March had more than tripled, to $122.
Then it really took off. Investors pushed it past $200 on Apr. 7, on excitement over Yahoo!'s (YHOO) purchase of a RealNetwork customer, Broadcast.com (BCST). They were guessing that the deal will fuel demand for streaming media (audio or video that's delivered across the Net in real time rather than having to be downloaded to be played) and eventually prompt a bigger player, such as America Online (AOL), to buy RealNetworks. Glaser has repeatedly stated his intention to keep his company independent, and some analysts believe he would be foolish to sell out at this early stage.
NO CONCERN. With barely a pause, RealNetwork's shares shot up to an intraday high of $263 3/4 on Apr. 13 (before closing at $229) thanks to two new deals that could give it a leading role in developing the market for downloading music over the Internet. Profit-taking is likely the culprit for the stock's Apr. 14 slip, which didn't concern analysts who have grown used to large swings.
"Of course the valuation is very high," says Alexander C. Cheung, portfolio manager of Monument Internet Fund, which has RealNetworks as a core holding. "Given the run of the past few months, a little bit of a correction is not out of the question. I'm not worried about three- to six-month price swings," he adds. "I'm looking at the next three to five years."
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RealNetworks "is the "ubiquitous, de facto standard audio/video player on the desktop"
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Cheung, like other RealNetworks fans, believes the company will play a leading role in bringing audio and video to the Net now that broadband access is becoming more common. Currently, only a small fraction of Web sites use multimedia. But eventually it will be on nearly every site, analysts say. "Audio will become even more important than it is now as a competitive tool to differentiate one site from another as the rollout of broadband continues," says Alan Harris, co-portfolio manager of the Munder NetNet fund.
Analysts estimate that RealNetworks has an 85% market share in streaming media players. It is the "ubiquitous, de facto standard audio/video player on the desktop," says Rob Martin, an analyst with Friedman, Billings, Ramsey & Co. Its software has an installed base of 58 million registered users, and more than 175,000 people download its free RealPlayer off the Internet everyday.
SECURE MUSIC SALES. That's just the streaming media side. On Apr. 12 and 13, RealNetworks announced deals for technology that make it possible to download and store music files -- a market Lehman Brothers estmates at $30 billion. First, it announced a partnership with IBM to develop software that will allow the secure sale of music by artists backed by major recording labels. The second announcement, a $75 million stock deal to acquire Xing Technology, a leading developer of popular MP3 software, gives RealNetworks a piece of the market among musicians who distribute their music over the Net without copyright protection.
RealNetworks, which had sales of only $65 million and a loss of $16 million in 1998, is in the early stages of turning its huge user base and important brand name into revenues, say analysts. It currently gets income from licensing agreements for its software, from the sale of servers that produce multimedia content, from upgrades from the free RealPlayer software to RealPlayer Plus, and from other fees. Analysts expect it to find new revenue streams that will feed off its huge installed base. For instance, they expect it to expand its audio and video Web portal, sell broadcast-hosting services to companies, and reap transaction fees from the sale of music.
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The deal with IBM prompted one analyst to raise his price target to $300 a share
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"At its core, RealNetworks hasn't even begun to scratch the surface of the potential market for streaming media technology," says Jae Kim, an analyst with media research firm Paul Kagan Associates. After the IBM announcement, Martin raised his price target to $300 from $200 a share. "Real's ability to generate advertising and commerce revenue represents a greater opportunity than our forecasts suggest," he wrote on Apr. 12.
So, what happened to the ogre of Redmond? "Microsoft is always going to be a threat," says Michael Wallace, an analyst with Warburg Dillon Read, who seems a bit bored with the question. Microsoft has been gaining market share, says Martin, although it isn't taking share away from RealPlayer, since people are using both players. Analysts seem O.K. with the idea that RealNetworks could lose some share to Microsoft as well as to other competitors, such as AT&T's (T) a2b music and Liquid Audio. "Ultimately, this market is far too big, the potential is far too great, for any one company, no matter who it is, to win entirely," says Kim.
REAL CHALLENGE. Not all investors agree. RealNetworks isn't a holding in the Munder NetNet fund because of the competitive threat from Microsoft, says Harris. But he concedes: "The growth in audio over the Internet could outweigh the Microsoft risk." John Robb, a principal at Gomez Advisers, says the threat, more than Microsoft, is that RealNetworks won't be able to realize all the potential it has now. "I think they are challenged more by themselves, by what they can do as an organization, than by an outside competitor."
Of course, the other big risk for RealNetworks' shareholders, as well as for holders of other Internet leaders, is that the volatile stocks could one day slide as steeply as they've run up if market conditions change. RealNetworks will report first-quarter results on Apr. 20 and is expected to show a loss of about three cents a share. Even if the company exceeds estimates, Internet stocks have a tendency to decline once earnings are out. RealNetworks may be a risky holding for the next few months. But if it can maintain its key role in building next-generation broadband sites, its next three to five years could be a really big show.
Amey Stone is an associate editor of Business Week Online
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