C Y B E R S T O C K
AOL, RealNetworks: A Good
Match
April 9, 1999
By Matthew W. Ragas, Editor
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Ragas Speaks for the Week
The Internet rumor mill in the past few months has unsurfaced
a variety of potential acquisitions for America Online (AOL),
ranging from Chancellor Media, one of the largest radio
station owners in the U.S., to PAX TV, the nation's seventh
and newest broadcast television network. In addition, The Los
Angeles Times recently reported that AOL was close to
reaching an agreement with video technology firm Gemstar for
an interactive television guide. Then the doozy of all rumors
broke Monday when reports indicated AOL was in discussions
to purchase CBS (CBS). So what does this all mean?
First of all, I have my doubts about CBS ever becoming a
subsidiary of AOL, and I can't imagine CBS chief Mel
Karmazin ever agreeing to become a mere sideshow in the
fast-moving AOL circus. All the recent rumors surrounding AOL
and other media companies indicate that AOL is making
progress and finalizing plans for the launch of AOL TV, a
subscription Internet television service that is believed to be
similar to Microsoft's Web TV.
Last May, AOL acquired failed WebTV competitor NetChannel
for $29 million with plans to use NetChannel's engineers and
technology to help advance its "AOL Anywhere" strategy. It
would make sense then that AOL is trying to roll out the set
top box product in time for this year's Christmas shopping
season. Could AOL's talks with CBS indicate that both
companies are exploring the possibility of CBS in the future
carrying TCP/IP signals within their broadcast signals? After
all, WebTV demonstrated a set-top prototype back in 1997 with
an RF tuner that uses cable or broadcast television signals to
download digital data. We'll have to wait and see.
REALNETWORKS' SUCCESS REFLECTED IN STOCK
PRICE
RealNetworks (RNWK) founder and Chief Executive Rob
Glaser must be in a chipper mood these days. And why
shouldn't he? After all, it was only last July that Glaser, a
former Microsoft (MSFT) executive, testified before a Senate
judiciary committee that Microsoft's Windows Media Player
"breaks" his company's RealPlayer software. Not surprisingly,
the Street took this news as a negative sign and RealNetworks'
stock began a nasty decline.
Only a few months later, Microsoft announced they would
begin selling off their 10% minority stake in RealNetworks. Talk
about a double whammy. The news added more fuel to the fire
and RealNetworks' stock price took another hit.
By the end of last year, however, RealNetworks' shares had
risen almost 100% from the company's Sept. 1 low.
Apparently, the Street quickly got over its fears that Microsoft
would almost overnight take over the streaming media market
from Glaser & Co.
While RealNetworks' near-100% recovery in stock price from
last September to December was nice, the gain paled in
comparison to the company's blistering run since Jan. 4 of this
year. Since then the company's stock has risen more than
400% and its market cap has swelled to almost $7 billion in
the process. Yahoo's acquisition last week of streaming media
content aggregator and distributor broadcast.com (BCST) for
$5.7 billion of stock once again thrust RealNetworks to the
center of attention - and with good reason.
The stats backing up RealNetworks are definitely impressive.
The company's software maintains an incredible 85% market
share for streaming media. To date, there are more than 57
million registered users of the company's RealPlayer software.
In addition, RealNetworks' web site, Real.com, attracts 8.5
million unique visitors each month.
REALNETWORKS SHOULD SEEK AN ACQUIRER
Although Glaser continues to tell the media he plans for his
company to remain independent and he is not actively seeking
a larger acquirer, I believe Glaser realizes that he needs
RealNetworks to be swallowed up by a large media company,
portal or telco by the end of the year.
The U.S. Department of Justice anti-trust case against
Microsoft will not go on forever. RealNetworks and the
streaming media marketplace will become a prime focus of
Microsoft when the case ends. Already Microsoft is bundling
its competing Windows MediaPlayer as an option in copies of
its new Internet Explorer 5.0 browser. Clearly, RealNetworks'
85% market share will not hold up since Microsoft already
controls more than 50% of the browser market.
In addition, Microsoft plans to launch the newest version of its
Windows Media Player on April 14 at the Internet World
convention in Los Angeles. The new player is believed to
provide twice the fidelity of the previous Player in a much
smaller file size. More importantly, Microsoft is expected to
unveil MS Audio 4.0, a new audio format which will include a
security feature to protect copyright holders of the music and
video being streamed.
Microsoft is also believed to be working with Launch.com, a
popular music site, to reach contracts with a number of major
label artists who will use the new MS Audio 4.0 encryption
format. I believe some of the encryption technology in the new
Windows Media Player will be supplied by Reciprocal, a digital
rights management company in which Microsoft recently
invested.
It remains to be seen if the new Audio 4.0 format has any
chance of becoming the "MP3 killer", but it is likely that
Microsoft will have the clout to line up support from a number of
the Big Five record labels. I think we'll also see the web sites of
numerous entertainment and media companies like Universal,
Bertelsmann, Time Warner (TWX and others gravitating
toward offering content available via the Windows Media Player.
Without a doubt, offering more name-brand content through the
Windows Media Player will stimulate downloads of Microsoft's
software by Web surfers. RealPlayer's market share will begin
to erode then, if the process hasn't begun already.
All is not lost for Glaser. Right now, RealNetworks is the king
of the streaming media world and the darling of the Street. It is
likely that the Street won't notice any chinks in RealNetworks'
armor (i.e. a loss in streaming media player market share) for
at least the next three months. The key for RealNetworks is to
continue finding numerous distribution outlets for their software
and to line up an acquirer. Wisely, RealNetworks enjoys
distribution pacts with both Netscape and AOL.
WHY DOESN'T AOL SCOOP UP REALNETWORKS?
In my opinion, AOL would be an ideal acquirer for
RealNetworks. As part of a joint distribution agreement reached
last October, AOL already distributes RealPlayer on millions of
copies of AOL's 4.0 CD-ROMs. RealPlayer is also available for
download on AOL.com. RealNetworks also distributes a
co-branded version of AOL's Instant Messenger in copies of
RealPlayer. In other words, the distribution relationships are
already in place for AOL to swallow RealNetworks entirely and
for AOL to fully monetize the distribution channels they have
created.
For example, the newest update of the RealPlayer G2 software
allows users of AOL Instant Messenger to send and receive
links to on-demand RealAudio and RealVideo in instant
messages via RealPlayer. RealNetworks also enjoys a similar
distribution relationship with AOL subsidiary Netscape on its
Netcenter site and Communicator browser.
So how hard would it be to turn a wide-ranging partnership like
this into an actual acquisition? Not very, I would assume -
regardless of Rob Glaser's "we're remaining independent"
statements. With a $165 billion market cap, AOL can buy
whomever its little heart desires.
Does anyone really think Rob Glaser would turn down AOL's
golden stock if Steve Case came calling? Not a chance.
An AOL acquisition of RealNetworks would give Glaser & Co. a
much larger "godfather" to combat the assaults of Microsoft
and would give his company a fair shot at remaining the
streaming media leader.
On the other side, Steve Case and AOL would gain yet another
lucrative desktop portal application (similar to AOL aps like
AOL Instant Messenger and ICQ) that can be integrated into
his rapidly expanding universe of Web properties. AOL could
also use the sales team from their recently formed Sun-AOL
e-commerce solutions alliance to peddle RealNetworks' servers
to customers.
AOL vs. Microsoft - The battle's already been waged once, with
Microsoft's MSN Internet service going up against AOL's online
service, and AOL coming out the victor in the skirmish. Will
Steve Case eventually take the streaming media plunge and
once again go head to head with Microsoft?
Microsoft's Media Player versus an AOL-owned RealNetworks
RealPlayer. It's a heavyweight match-up that would leave even
a windbag like Don King breathless.
Quote of the Week
"The time is right for BMG and Universal to create the most
compelling online music communities, build strong bridges
between artists and music lovers, and make music available to
consumers with a simple click of the mouse."
-- Comments made this week by Strauss Zelnick, president
and CEO of BMG Entertainment, in a statement announcing a
significant online partnership between BMG Entertainment and
Universal to launch getmusic.com, a joint e-commerce venture,
and related music sites.
Weekly Public Company Internet Market News
-- MSN Internet Announces Deal with broadcast.com
-- FlashNet and Lycos in Partnership
-- Netscape and FedEx Announce Plans for Shipping Portal
-- BMG and Universal Announce Online Music Partnership
-- CyberCash Raises $5 Mil. in Private Placement
-- Yahoo! in Distribution Deal with Micron
-- Micron and Earthlink to Offer Free Internet Access
-- theglobe.com Acquires Attitude Network
-- AOL Acquires When.com
-- Amazon.com, Kleiner Perkins, drugstore.com and Wal-Mart
Announce Settlement
-- Yahoo! Partners with Online Anywhere
Weekly Private Company Internet News
-- Tribune Ventures Takes Stake in SuperMarkets Online
-- Netcentives Raises $24 Mil. in New Funding
-- BeFree Completes $25 Mil. Second Round
-- Salon.com Acquires the Well
-- Bondnetwork.com Receives $5 Mil. Investment
-- Tropica Acquires Liszt
-- E-greetings Receives $25 Mil. in VC Backing
-- Tickets.com Merges with TicketsLive and Raises $30 Mil. in
Financing
-- FreeRide Receives $10 Mil. Investment
Weekly IPO Filings and Analyst Ratings
News Links of the Week
#####
- Talk Back: Chat with Author Matt Ragas:.
mp3.com founder michael robertson hinted of a pos
#436, By DV-IN-C on Friday, 9 Apr 1999 at 10:04 PM EDT
Banyan/Switchboard, does anyone know what is goin
#435, By TBEAR on Friday, 9 Apr 1999 at 10:00 PM EDT
bpowell,
#434, By djb52 on Thursday, 8 Apr 1999 at 3:06 PM EDT
I know of no direct way to invest in MP3 however,
#433, By Atomist on Wednesday, 7 Apr 1999 at 8:47 AM EDT
www.phon-net.com symbol (pnet)....guys check out
#432, By research on Monday, 5 Apr 1999 at 10:05 PM EDT
- MORE Posts
COMMENTS: We want to hear from you- To send praise,
disgust, death threats, M&A whispers, love notes, manifestos,
conspiracy theories or related propaganda, please email
CyberStock Investor Report's Editor, Matt Ragas at
InvestMWR@aol.com. Ragas is avail. to the press for quotes
and comments on Internet stocks upon request.
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