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RealNetworks: Legal Threats from Microsoft, Apple Top Agenda

Streaming media pioneer RealNetworks is entering a crucial phase of its existence. Founded by Rob Glaser, an ex-Microsoft executive, RealNetworks has watched as companies such as Apple Computer, Microsoft and Napster have eaten into its core markets. So although the company just reported record revenues for the most recent quarter, its earnings are far outstripped by the cost of its legal battle with Microsoft and by an expected legal battle with Apple.

RealNetworks earned $4.7 million in the quarter ending June 30, on record revenues of $82.7 million, the latter of which is a 26 percent increase over the same quarter a year earlier. "With increased profitability, record revenue, and a base of more than 2 million paid subscribers, we continue to make solid progress," Glaser said, praising the results.

But troubles remain. RealNetworks is embroiled in an expensive legal battle, in which the company is accusing Microsoft of abusing its monopoly OS power. RealNetworks spent $11 million last year pursuing this claim against Microsoft, and it has already spent $8.4 million this year as well. Glaser predicts the company will spend at least another $8 million before the case ends. That's a tidy sum for a company that posted a net loss of $4.6 million in its previous fiscal year.

In a regulatory filing that accompanied its recent earnings release, RealNetworks also disclosed the risk it was taking by "hacking" Apple's proprietary iPod MP3 player so that songs purchased from RealNetworks' online music service could play on the device. "If Apple decides to commence litigation against us in order to prevent interoperation with its products, we may be forced to spend money defending their legal challenge, which could harm our operating results," the filing reads. RealNetworks also noted the technical challenge of supporting the iPod against Apple's will. Because Apple could continually change the iPod to make it incompatible with songs purchased from the RealNetworks service, RealNetworks could incur further costs reverse-engineering the device again.

In response to the company's precarious position, some financial analysts have urged investors to wait and see how the company performs over the next year. One positive possibility for RealNetworks is a Microsoft settlement. If the software giant chooses to settle the RealNetworks antitrust case out of court, as it has with so many of the other antitrust cases that arose in the wake of its federal antitrust conviction, RealNetworks could soon find itself rolling in money. And that, of course, is precisely the plan.

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