Here's what the Microsoft-Real deal is all about

As news organizations including our own reported yesterday, RealNetworks and Microsoft have signed an agreement officially ending the legal acrimony between the two Seattle-area multimedia giants- RealNetworks, known for RealPlayer and the Rhapsody music service, and Microsoft of Windows Media Player fame.

As our Ina Fried reports:

"Under the deal, Microsoft will pay $460 million in cash to RealNetworks to settle antitrust claims. It will also pay $301 million in cash to support Real's music and game efforts, and Microsoft will promote Real's Rhapsody subscription music service on its MSN Web business. Microsoft can earn credits toward that $301 million by signing up subscribers via MSN."

But how did we all get here? Let's see how past battles have influenced current battle lines and alliances.

Back in December, 2003, Real sued Microsoft for $1 billion on the grounds that Microsoft had abused its "monopoly power to restrict how PC makers install competing media players while forcing every Windows user to take Microsoft's media player, whether they want it or not."

What many people don't know is the dispute actually dates back several years earlier. When I was writing a streaming media guidebook for Real in 1998 and 1999, I heard lots of corridor talk and second-pitcher snickers about Microsoft's tactics to strong-arm their way into this space.

The still relatively new "space" was streaming audio and video. Back around 1997, the landscape looked like this: consumer broadband was still relatively rare. At that time, Apple's QuickTime was mostly a download only product. Major content providers such as movie studios interested in streaming film trailers, opted for QuickTime downloads because they were justifiably skeptical of streaming video quality over dial-up.

Real, which was founded as Progressive Networks in 1995, saw the broadband future. Their codecs were jiggered to provide perfectly functional (though buffering) audio feeds. Enough of those made Mark Cuban a rich man. And Microsoft? They hadn't even released Windows Media Player yet. They had a precursor product called NetShow, which was small, buggy and had an interface that was not intuitive at all. OK, NetShow sucked.

As 1998 arrived, Microsoft got wise and churned out increasingly efficient versions of Windows Media Player. More notably, they began to use their distribution heft to appeal to a growing legion of streaming video content providers to feature their content on Windows Media Player, but not in a format intelligible to RealPlayer. These were the days when Real, Windows Media Player and QuickTime (which finally did equip itself for streaming) offered formats that were mutually unintelligible to each other. For example, you couldn't use Real's encoding tools of the time to make files that would play in Windows Media Player. 

Real execs and employees began to chafe about what they started to see as Microsoft's hardball tactics. Real's CEO Rob Glaser (a former Microsoft exec) testified in 1998 before a then technologically unknowledgeable Congress that "I believe Microsoft is taking actions that create obstacles to the freedom and openness of the Internet." Windows Media Player, he said, "breaks our product."

Glaser demonstrated to a Senate panel how attempts to call up RealVideo streams from a technology news publisher's site (not ours, by the way and RealAudio from NPR resulted ierror messages when the PC in question had both RealPlayer and Media Player running. "What Microsoft is doing is wrong and must be stopped," Glaser insisted.

Still there was no lawsuit. Not yet, anyway. The companies soldiered on, fighting a two-front battle that involved power-broker alliances with major content providers and a successive roll-out of newer players and better encoding tools with better compression algorithms and optimization than precursors.

And oh, yes, ignoring Apple's QuickTime as a peripheral competitor. Which- but for the exception of several niche markets such as film studio sites- it was.

More about Apple in a bit though. But first, let us not get ahead of ourselves, K?

Real cleverly fired back against Microsoft in 2002 when they released Helix, a suite of streaming media encoding tools that were reverse engineered so that Windows Media content could be developed on them. Of course, one company's "reverse-engineering" is another's "hacking," but Microsoft mainly fought that battle on the quite plausible grounds that a competitor's dev tool suite could not possibly be as quality a dev platform as a dev tool suite from the company whose media player you are developing those tools for streaming on.

You might wonder why this is so important? Well I will tell you.

Companies like Real don't make their profits on media players they distribute to you and me, but via servers and encoding utilities of varied sophistication. So if you are a streaming media content developer and feel the demographics of your users require you to develop content for both Real and Windows Media players and platforms, being able to use one set of encoding tools means you don't have to buy the competitor's product..

Here we are in 2005, and the competition for the streaming media player on the desktop is still fierce. But to a large extent - at least in the consumer space - the battle is now over revenue from legal music downloads. Apple, of course, has iTunes and iPod- a superbly integrated and wildly successful duo that Real, with its Rhapsody service and deals with second-tier portable music players, can only hope for. And Microsoft has never really aggressively fought in and for this space.

But now, with this settlement, things may be changing. Not because they ought to but because they have to. The competitive landscape has changed. Microsoft's main competitor is no longer Real, but Google. And Real's main competitor is no longer Microsoft, but Apple.

"It's one of those good deals for both companies," JupiterResearch analyst Michael Gartenberg said. "For Microsoft, it frees them up to focus on the competitors of the 21st century, like Google, or Apple (Computer) in the music space."

Real's Glaser says the deal is good for his company as well.

"Apple does great products and has done a number of them in the music (realm)," Glaser said. "At the end of the day, we think consumers want choice. We think consumers want openness...Over time--it won't happen overnight--I think 'open' will beat 'closed.'"

Time will tell.

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