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Technology Stocks : RealNetworks (NASDAQ:RNWK)
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To: Nicholas Thompson who wrote (3078)5/4/1999 2:59:00 PM
From: Rick O'Donnell  Read Replies (9) of 5843
 
Real's move into the MP3 space has some significant implications to its corporate strategy.

Real has been somewhat torn by two considerations :
1. Not wanting to upset the record industry by supporting a movement that threatens it
2. Trying to ubiquitize its own proprietary format
Real has been fishing around in this area for some time. It put its support behind SuperPlanet's CD Streamer product which was a simple jukebox product supporting its own standard.

I believe that the final straw for Real was the existence of Nullsoft's ShoutCast. Here was a product that could use its mighty leverage amongst users to threaten Real's own domination of the streaming market. ShoutCast also built strong grass roots support for lowering the entry costs of becoming a broadcaster.

I think the threat of losing ground on Real's own heartland prompted them to push the limits of acceptability regarding the music industry. Real needed to finally acknowledge that MP3 was here to stay and that an "open" architecture could threaten dominance of their own markets, especially as bandwidth made these alternatives scalable and accessible.

As part of the move to counter the growing threat of MP3 as an alternative audio format, Real purchased Xing, who specialize in MP3 streaming. Xing has tended to be somewhat of a clueless company in its marketing past but it does have a name in the community and some presence in the corporate market. It provides Real with a vehicle to provide its own MP3 streaming solution.

Moreover, the money in MP3 software is proving to be in encoding and music management software. Player software is ubiquitous but its doesn't make much money. So the perfect vehicle for Real's entry was a product they could sell that could help to erode some of Nullsoft's dominance in the playing space before it became too much of a threat in the streaming field, and MusicMatch's and Xing's dominance of the encoding and music management field.

Real has finally accepted defending its proprietary format while ignoring MP3 is an uphill battle. Now it has to achieve dominance with its MP3 encoding, playing and streaming products and adjust its corporate strategy somewhat to address the peculiarities of supporting an open standard.

As a litmus test to these conclusions, I predict that we will see an MP3 streaming solution being offered with their Jukebox product some time in the future.

Rick
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