Rob Glaser: New Harmonies for RealNetworks
The CEO talks about his Net music software, RealJukebox, and his strategy of creating an "ecosystem" for streaming media with wide-ranging cyber partnerships
A lot can happen to an Internet company in 10 months. Just ask RealNetworks CEO Rob Glaser. Last July, he squirmed under the media's microscopic gaze after he testified before the Senate Judiciary Committee that Microsoft Corp. -- his company's main rival and his former employer -- was trying to muscle in on the multimedia market with its own streaming audio and video products.
Glaser didn't complain about the competition but contended that Microsoft was modifying its own products so that RealNetworks (RNWK) software didn't work well with them. RealNetworks' stock price plummeted in the days after his testimony, and investors began to worry that the company's 80% share of the market for streaming audio and video players was in jeopardy.
Today, Glaser is in the media spotlight once more, only now he's back in favor. Since August, he has penned a number of strategic licensing deals with Web portals, Internet service providers, and community sites for his company's latest product, RealSystems, a next-generation streaming media player.
He also forged a partnership with cable-TV Net-access provider @Home to help create a broadband multimedia delivery platform. His company's stock recovered, then soared as analysts decided that RealNetworks was positioning itself to take advantage of the coming age of broadband. Then in March, when Yahoo! announced its plans to buy Broadcast.com, all eyes focused on Glaser and RealNetworks as the next big acquisition target. Rather than court suitors, the company bought Xing Technologies -- a developer of MP3 software for downloading music from the Internet -- for $75 million in stock. At the same time it announced an alliance with IBM to help create a secure universal standard for sending music over the Internet.
Glaser followed that with the May 3 launch of RealJukebox, software that allows for the recording and playing of music on the Web. In a conversation with Business Week Online reporter Stefani Eads, Glaser explained how his new software works and what his strategy is for maintaining his lead in the streaming media market.
Q: What's the idea behind RealJukebox?
A: It is the first product that addresses all of consumers' needs for experiencing digital music. We think it's the first product that makes an Internet PC the best way to listen to music. We looked at all the ways you'd want to organize and find music and put them in one product. We've also made it much, much easier than it has ever been before to build your digital collection. You just stick a music CD in your computer, and while it's playing, we're recording it in a compressed fashion to your hard drive. So in the time it takes to listen to about three songs, you've recorded the entire album to your hard drive. You can do everything you could want to do in terms of organizing and customizing your music.
We take that to a couple of other levels by also integrating downloads, either free downloads or secure, purchased downloads, from over the Internet and putting them all in one place. You can also export those to a portable device like a Rio or a new device from RCA called the Lyra, which plays multiple formats. We also announced with Intel a home networking approach that will let you connect your PC throughout your house and deliver audio through standard telephone wiring. It also works with wireless networks.
Q: What is RealNetworks' relationship with Thomson Consumer Electronics (maker of RCA electronics) regarding its new portable digital music device?
A: They're licensing our RealJukebox software to include with the Lyra player. Thomson is also one of the two creators of the MP3 format, so [the player's technology is] integrated in a very tight way with Real JukeBox.
Q: Does this mean that RealNetworks is getting into the business of developing portable audio and video appliances?
A: When we first talked with Thomson/RCA, they were already looking to do work in this area, and many of the ideas in terms of a portable device with multiple formats were already there. We certainly collaborated with them, but I think it would be an overstatement to say that we're developing these products.
Q: Does that mean you won't be sharing in the revenues?
A: I'm not going to comment about how we structured our financial agreements with Thomson/RCA other than to say we're very happy with the arrangement. We think that each company independently and both companies together have a lot of opportunity for financial upside in terms of both selling and creating successful products and also in terms of providing and participating in the long term in some of the transactions that will come out of the digital distribution of music.
Q: What are the strengths of RealNetworks' new technology?
A: RealJukebox does a couple of things that have never been done before. One is combine all these different functions in one product. In the past, you had to lash four or five products together to get only some of the features.
Second, the RealJukebox is the first product to simultaneously play and record when you put a CD in, so it makes the process of building a collection as simple as just playing music.
And finally, we have a great advantage of getting RealJukebox to market through the 60 million users of the RealPlayer, about 35 million of whom have the [most recent version] RealPlayer G2. For them, it's a simple upgrade where we download the pieces of the RealJukebox that build on top of the RealPlayer system.
Q: A lot has changed for the company over the past 10 months. Can you go over the partnerships and acquisitions you've made and comment on where that positions RealNetworks in the age of broadband?
A: As we built our products, we focused on how we could drive the market forward, and not just with technology, but with collaborations, starting with the agreement we made with Intel [last August] to use their streaming Web video technology as a foundation for some of our next generation video work.
Then in the fall, we made an additional series of announcements with Lotus to integrate our RealSystems technology into its Notes and Domino software packages; with Netscape to have our RealPlayer bundled in with Netscape Navigator and Communicator; with AOL to have the RealPlayer be their standard streaming media player and the only one they ship with AOL 4.0; and later with @Home to use our software in their broadband network; and with GeoCities to create an automatic way for consumers to create multimedia home pages. We looked at the market and said to ourselves, 'How can we collaborate with people so that we're standing on each other's shoulders rather than on each other's feet?' I think if you look at RealJukebox and the system behind it, we've followed that approach.
For instance, with security [as it pertains to the protection of intellectual property and downloadable digital music], we announced a relationship three weeks ago with IBM, and that's very important because it's the first security system all five major record labels have put their support behind. And then today we announced a security relationship with AT&T's secure music system and with LiquidAudio, an Internet startup that focuses on secure digital music delivery. All told, we've got about 50 or 60 different partner announcements in relation to RealJukebox that range from portable devices to security systems to E-commerce to content and encoding services. Our philosophy has been to create a whole ecosystem around first the streaming media and now the digital distribution market, and I think that approach has served us well.
Q: Are your partnerships with IBM and AT&T exclusive?
A: No. Both relationships are collaborations where we do things in an integrated way, but there's nothing precluding anybody from working with other folks. But I think certainly there's a substantial, shared first-mover advantage.
Q: And Xing is the only acquisition the company has made?
A: The only one that passes the materiality threshold.
Q: What is the company's strategy going forward? Any plans for more acquisitions? Or is RealNetworks itself considering any buyout offers?
A: If you look at the opportunities in front of us, there may well be selective situations where we would look to integrate with other companies. But our goal is to grow our business, and if we meet companies along the way that can help us do that, that's great, but we're not going to get into the toaster business or something extraneous like that.
As far as collaborating, we've found that everything we want to do with other companies, whether they're our size or bigger, is usually done best through strategic licensing or product integration or those types of deals. We think we're so early in the value creation process and that the opportunities are so vast, that we don't have any plans to fold RealNetworks into another organization. We think the best way to capture value is as an independent company.
Q: In its most recent earnings report, RealNetworks reported that its first-quarter revenue nearly doubled, to $23.5 million, and that its net loss narrowed to around $700,000. Any forecast as to when the company might turn a profit? Will software continue to be the company's main revenue stream?
A: We see great opportunity ahead of us, and we're very comfortable with all the analysts' estimates. We've been a public company for six quarters and each quarter have beaten the analysts' consensus. The largest part of our money today comes from software licensing and the second largest is from services broadly defined, which includes our consulting operation, our RealBroadcast hosting business, and our upgrade and support revenue from software licenses. Advertising is also growing nicely; it was our fastest-growing segment in the first quarter, but it's still less than 10% of our revenues.
Q: What about E-commerce? I noticed that the RealJukebox also lets listeners purchase songs or CDs. Any plans to become an E-tailer?
A: We want to make it easy for consumers to have great experiences, and we think that if we're driving lots of consumers to these great experiences, there'll be opportunities for us to participate in those businesses. Our general philosophy is to have a small amount of revenue multiplied by a large number of customers.
Q: Do you plan on developing that component of the site?
A: There are certain products related to streaming audio and video that can be effective sellers. But I don't think you'll see us becoming a general-purpose E-tailer. That will be something we'll do in collaboration with other folks.
Q: Have there been any discussions with the Recording Industry Association of America [which is opposed to nonsecure distribution formats of digital music on the Internet]? Any idea of what it thinks of RealJukebox?
A: We talk to the major labels all the time, and we've been working closely with them for about four years. We're very active in the RIAA's Secure Digital Music Initiative (SDMI) process.
Q: How does the RealJukebox protect intellectual-property rights?
A: In a couple of ways. First, we focus a lot on integrating with secure E-commerce systems. Also, when consumers exercise their own personal-use rights to encode CDs they've already purchased, the music is "tethered" to the computer on which it's recorded. While consumers have the option to turn the tethering off, we use that as an opportunity to educate them on what their lawful rights and responsibilities are, and we're certainly going to do our best to put up guardrails to steer people in the right direction.
We also support the digital version of the Audio Home Recording Act, which basically states that consumers can make copies [only] for their own use. If and when consumers turn the tethering component off, they see a screen that explains what their legal liabilities and responsibilities are, and they're asked to affirm that they understand.
Q: Despite the widely publicized battles with Microsoft, RealNetworks has managed to capture 80% of the streaming media market. How do you plan on protecting this share as broadband becomes more popular and competition is sure to increase?
A: Our products and services are good in a narrowband world, but they really come into full bloom in a broadband world. Second, the area that we picked -- audio and video -- is an incredibly significant, powerful area. People spend an average of 34 hours a week listening to audio or watching video in some form. Finally, I think we've got a great team. We've really built the organization for the long haul and brought in people who take the view that the way you have impact long term is you create great products. And we've worked hard to create a market environment, an ecosystem if you will, where other partners can collaborate and succeed with us as well. I think that's really an important element to the overall approach.
Q: Five years from now, where will we see RealNetworks?
A: If we do a good job, I think streaming media and digital delivery of media will be a standard part of everyone's life, just as cable TV and the VCR have become a standard part of the vast majority of Americans' lives over the past 15 years. In five years, if we're not quite at that level of ubiquity and pervasiveness, we'll be pretty darn close.
Q: Do you think RealNetworks will still be the market leader?
A: If we continue to do a good job and keep the focus on creating great customer experiences and creating great technologies that can be integrated in with a broad set of work being done by other industry leaders, then yeah, I think it's certainly within our reach
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