December 19, 2003

RealNetworks Sues Microsoft for Unfair Competition


RealNetworks said yesterday it’s suing longtime rival Microsoft, accusing the software titan of unfairly promoting its own software for playing audio and video on computers and over the Internet.

    In an antitrust complaint filed in federal court in San Jose, California, RealNetworks claimed that Microsoft "pursued a broad course of predatory conduct over a period of years by abusing its monopoly power, resulting in substantial lost revenue and business for RealNetworks." RealNetworks is seeking more than one billion dollars in damages and unspecified injunctive relief measures. "We believe that we have a very strong case against Microsoft," RealNetworks Chief Executive Rob Glaser told reporters on a conference call.

    Microsoft rejected RealNetworks claims, saying that there was "vibrant competition" in the digital media player marketplace and that it would respond forcefully to RealNetworks' allegations in court. "Real(Networks) claims to be the No. 1 provider of digital media solutions, with massive distribution of its software and more than 1 million player downloads a week," said Microsoft spokesman Jim Desler, "Thus, this is a case where a leading firm is seeking to use the antitrust laws to protect and increase its marketplace share and to limit the competition it must face."

    Seattle-based RealNetworks said that its lawsuit was complementary to an ongoing European Commission investigation into Microsoft's activity involving media-playing software and that it was cooperating with the EC. European Union regulators are wrapping up a five-year probe to determine whether Redmond, Washington-based Microsoft used its monopoly position to boost its share of the media player market. RealNetworks has testified in recent EC hearings.

    The two companies, based in the Seattle area, have met frequently in courtrooms over the last five years. Glaser, a former Microsoft executive, founded RealNetworks nearly a decade ago to sell software that allows users to listen to audio and video content on their personal computers.

    The two companies were once on good terms, with Microsoft making a $30 million investment in RealNetworks in 1997, but the relationship turned sour after Glaser testified against Microsoft in the U.S. government's antitrust case.

    In Thursday's filing, RealNetworks said Microsoft used its monopoly power, which was recognized by the U.S. courts, to force "every Windows user to take Microsoft's media player, whether they want it or not."

    RealNetworks, which has been branching out into online content subscription services, sells its media player as a downloadable software product or with a monthly subscription.

    RealNetworks said its its complaint that Microsoft went from having no presence in the streaming media business in 1997 to surpassing RealNetworks' digital media player market and usage in the United States in 2002.

    Bob Kimball, RealNetworks' vice president and general counsel, said his legal team chose to file its suit in San Jose, California, the heart of Silicon Valley where most of Microsoft's competitors are based, because many of the witnesses are nearby. RealNetworks said it had already spent more than $1.5 million on the litigation during the current quarter and expects to spend $12 million next year.

Meanwhile, Microsoft defended its business practices in the multimedia market:

    "There is vibrant competition in this marketplace and Real Networks' own reported growth shows that they have thrived on Windows and many other operating platforms," Microsoft said in a statement.

    Part of Real Networks' case is based on business conduct similar to what U.S. courts have declared illegal in other Microsoft antitrust cases, such as failure to disclose interface information and placing restrictions on PC manufacturers, said Bob Kimball, Real Networks vice president and general counsel, in the statement.

    Such antitrust litigation typically takes about three years with a trial, Real Networks said. Microsoft, for its part, said that computer makers can install and promote any media player on their PCs and that it does not restrict consumers from using any media player. The company called Real Networks' move "rear-view mirror litigation."

    "These issues are a rehash of the same issues that have already been the subject of extensive litigation and a tough but fair resolution of the government antitrust lawsuit," Microsoft said in the statement, in turn accusing Real Networks of using antitrust laws "to protect and increase its market share and limit the competition it must face."

    Attorneys who have been involved in other legal action against Microsoft said they could see Real Networks' lawsuit coming given its involvement in advising the Department of Justice and the various states in their antitrust cases against Microsoft. "It's not a surprise at all," said Richard Grossman, a partner at Townsend and Townsend and Crew LLP, in San Francisco, and co-lead counsel in a California class-action case that led to a $1.1 billion settlement with Microsoft. "Certainly Real Networks has been at the forefront of those concerned about Microsoft's anti-competitive conduct."

In browsing Real’s Web site today just to re-familiarize myself with a company that had, to be honest, dropped off my radar awhile ago, I found a solid explanation of their competitive advantage over Microsoft, which it seems to consider weaker in many areas than RealNetworks own products. That said, given such an unfair competitive advantage over Microsoft, it might leave some wondering what Real’s lawsuit is really arguing. Here's their top 10 list of advantages:


    RealNetworks® pioneered streaming media on the Internet in 1995 and has been the leader in technology and business innovations ever since. Today, thousands of the world's leading enterprises, infrastructure service providers, and media companies manage media creation, delivery, security and playback with RealNetworks' end-to-end systems technology.

    Why do these companies continue to select solutions from RealNetworks rather than using bundled media software from Microsoft? Review the facts below and decide for yourself whether RealNetworks or Microsoft creates more revenue and cost savings opportunities for your organization.

    1. RealNetworks Helix Universal Servers deliver four times more Windows Media streams than Windows Media Servers

    In June of 2002, RealNetworks contracted an independent testing facility to benchmark our Helix Universal Server against the Windows Media Technology 4.1 Server. The results were dramatic — Helix Universal Server serves Windows Media better than Windows Media Server. In addition, if you take into account Microsoft's claims regarding performance improvements in their Windows Media 9 Series Beta, RealNetworks Helix Universal Server still delivers nearly double the performance and is shipping commercially today.

    2. Is "free" really free?

    Because Windows Media is packaged with the Windows operating system, people mistakenly assume that it's free. To use "free" Windows Media software you have to be a paid customer of the Windows operating system. If you want to use the latest Windows Media features, and you have not paid for the latest operating system release, you're out of luck. And to build a robust distributed network for delivering Windows Media, you'll have to pay for expensive third party software or appliances.

    3. Helix Universal Server supports all major media formats on an open system, Windows Media is a proprietary, OS-based system.

    The RealNetworks Helix Universal Server offers full support for over 55 formats and datatypes - now including streaming Windows Media to Windows Media Players and QuickTime to QuickTime players and MPEG-4 to MPEG-4-enabled players, including the RealOne Player. These products also now offer native support for MPEG4 and MP3 audio.

    4. Helix Universal Server runs on 11 operating systems — Windows Media runs on one.

    Customers appreciate being able to make their own decision on operating system based on existing resources, skills or their best judgment around security and other issues. The latest version of Windows Media is available with Windows 2000 and Microsoft's upcoming Series 9 release is expected to be available only on the .NET server. This means that with the Helix Universal Server, you will be able to deliver RealMedia and Windows Media from more Windows-based operating systems that you can with Windows Media.

    5. Helix Universal Servers slash the cost to deliver both RealNetworks and Windows Media by more than 40%.

    Only RealNetworks allows companies to deliver RealMedia, Windows Media, QuickTime and MPEG 4 from a single delivery infrastructure.

    6. Helix Universal Server makes delivery of Windows Media reliable

    From encoder to server, from server to server or from server to player, the RealNetworks system can be configured redundantly to provide a fail-over feed in the event of a network or equipment outage. Windows Media simply does not have this capability.

    7. Consumers overwhelmingly prefer RealVideo 9 to Windows Media Video

    By a 16 to 1 Margin, Consumers Favor RealVideo® over Windows Media Video for Better Video Image Quality, Smoother Motion and Overall Viewer Preference — Key Labs, May 2002.

    8. How will you reach all platforms and consumer electronic devices?

    The Helix DNA Client is at the core of RealNetworks embedded devices strategy. Designed for non-PC devices with constrained footprints and requirements, the Helix DNA Client can support any codec and format. Since its launch in October 2002 the Helix DNA Client has had tremendous success in the market and is being used by tens of thousands of developers as the core media engine for their device or application. The Helix DNA Client, along with the RealAudio and RealVideo codecs, is being ported and optimized for a wide range of devices including mobile handsets, PDAs, set top boxes, home gateways, audio/video servers, and others. In addition, RealNetworks has many relationships with Consumer Electronics manufacturers, chipset / processor / DSP providers, 3rd party software developers, RTOS providers, and others. All are using the Helix DNA Client as their primary multi-format media engine.

    9. Can you buy a complete solution for content distribution from Microsoft?

    The Helix Universal Server and Helix Universal Gateway offer an integrated content distribution system. Now, from a uniform architecture, digital media can be propagated either proactively or as needed in real time to any place on the network. With Microsoft, you would have to purchase an expensive third party solution for distributed content delivery.

    10. How many security breaches can you live with?

    RealNetworks has the best security track record in the industry not only because our system has been designed to leverage the intrinsic reliability and security inherent in the most robust operating systems, but because we also offer the most secure digital rights management system available. The RealNetworks Helix Digital Rights Management uniquely offers native, end-to-end and renewable security to unique, tamper resistant playback clients. Because of Microsoft's dependence on the Windows operating system, any OS bugs or breaches will adversely affect the entire infrastructure, including their media server.

Sounds a lot like Netscape a few years ago, doesn't it?

- Arik

Posted by Arik Johnson at December 19, 2003 03:45 PM | TrackBack