RealNetworks is a digital media company focusing on expanding its core businesses of casual internet games and digital music distribution to emerging markets outside the United States. The company has been exposed to losses of potential revenue because of the iPod effect and rising rates of digital piracy. The recent release of the new Microsoft operating system, Windows Vista, is also a major threat to RealNetworks' profitability, as Vista is included with the newest version of RealPlayer's powerful competitor, Windows Media Player. The commoditization of PCs has beneficial effects for the company, however, since cheaper, more powerful computers will create new demand for RealNetworks' products. As a horizontally integrated corporation providing only software applications, the company faces heavy competition from vertically integrated goliaths like Microsoft and Apple; at the moment, however, RealNetworks seems to have carved out a solid niche for itself in the software world.
RealNetworks is an entertainment software company known for its RealPlayer program; in addition to its strong position as a digital music provider, RealNetworks has also become a top casual game company, with its well-known web game site, RealArcade. (RealArcade is now deprecated and the company offers games through its GameHouse brand.) The company was originally a media-software company, and had a similar strategy to companies like Adobe: it would distribute its media players to consumers for free, and charge developers for design tools. When Microsoft began packaging its Windows Media Player with all copies of Windows XP, RealNetworks lost its user-base advantage and was forced to move into the music distribution and online game businesses. The company is now the largest PC web game developer, and, after Apple with iTunes and eMusic.com, the third-largest (legal) digital music distributor. Its future expansion strategy is focusing on pulling in customers from outside the U.S., as well as on using its established user and tech base to increase domestic revenues.
|Technology Products and Solutions||45.1||61%||72.5|
|Media Software and Services||121.9||(7%)||113.5|
Source: Annual Report
While profitability has been around break-even status, RealNetworks won a 2005 antitrust suit against Microsoft, and so has over $570 million in its coffers. The company is also charitably active, donating 5% of profits as part of the RealNetworks Foundation.
Though the company runs a number of internet radio stations, RealNetworks' primary music service is Rhapsody.
In 2006, the company's telecom business saw tremendous growth.
Revenues for this sector were down in 2006, but the company attributes this to a production cycle slump that will rise as new products come to market in 2007.
The Games sector is the fastest growing sector at RealNetworks, with a 53% revenue increase between 2005 and 2006.
As a software company, RealNetworks is subject to industry trends that affect the hardware and software that interacts with its own software.
The Apple iPod has a 75% share of the mp3 player market, making it the most popular player available; Apple bundles every iPod with a copy of its iTunes music player software. iTunes, aside from being a well-proliferated media player, is also the most popular digital music distribution service on the market, because it is the only player compatible with the iPod. Rhapsody faces serious troubles from the iPod's prominence; its main draw is that users can listen to all the music licensed by RealNetworks for free, but if a user wants to move a song to a player or CD, he must buy it and then upload it onto iTunes. With iTunes' simple-to-use format and the fact that it comes free and is exclusively compatible with the iPod, it is easy to see that using Rhapsody would be inefficient for an iPod user.
Nowadays, PCs are quick; applications load instantly, many programs can be open at once, and all this technology is available on standard technology in both desktops and laptops. Because of this, users are finding less and less to differentiate between PCs; as nearly every general user program runs on the ubiquitous Microsoft Windows, hardware makers are now competing with each other on price - the PC market is becoming increasingly commoditized. RealNetworks stands to gain as falling hardware prices mean more consumers are able to buy more powerful computers. Today, 70% of U.S. consumers listen to music on their PCs, making digital music a hotter market than ever and creating new potential customers for RealNetworks.
Microsoft recently released its massive new operating system, Windows Vista. With an already installed 92% market share for its previous OS, Windows XP, Microsoft can be expected to once again dominate the market. Microsoft has also been aggressive in attempting to eliminate user interaction with third-party software developers, a strategy that could hurt RealNetworks. Vista comes prepacked with the powerful new Windows Media Player 11. With the ability to play WMA files that RealPlayer lacks and the pre-established user base of Windows Media Player 10, Microsoft's software has the potential to steal large numbers of users from RealPlayer, thereby also stealing the developers who pay RealNetworks for development tools. <<actually RealPlayer plays WMA files as well as RAX files>>.
RealNetworks is exclusively a software provider; software, however, needs hardware to run. Because of this, the company is dependent on hardware makers to create platforms for RealNetworks' applications. An example of this is the new SanDisk Rhapsody player, designed to play Rhapsody media exclusively. Content developers like Microsoft and Apple create their own hardware for their media (the Zune and iPod are respective examples), and can cut costs by ensuring compatibility; RealNetworks does not have this ability, and must ensure its software compatibility by making deals with hardware manufacturers.
Digital piracy is the illegal downloading of "intellectually copyrighted" material; in RealNetworks' case, digital piracy has the potential to affect music sales. As more people find that they can download the music that they want for free through peer-to-peer networks and off of different websites, they lose the incentive to pay a dollar per song. With digital rights management (coding that prevents piracy but makes music more difficult to move) being heavily protested by the public to the point where many digital distributors are removing it, piracy will continue to rise.
|Company||Revenue||Operating Income||Net Income|
Source: Google Finance
In competitive strength, RealNetworks is closer to software companies like Adobe because it is horizontally integrated; Real only produces software for specific uses, like Adobe, but does not build the hardware or operating system that the software is run on. This makes RealNetworks more of a niche company, giving it the ability to refine its products more than larger companies. It also makes RealNetworks dependent on inter-corporation negotiation, as it is essential that hardware and other types of software are created to be compatible with RealNetworks'.
Microsoft and Apple are vertically integrated, meaning that they produce almost everything needed for their own software to run. This gives both companies two advantages. The first is the increased profitability from saved negotiation costs; the second is the leverage that both have as hardware and platform manufacturers. RealNetworks must figure out how to adapt its software to both companies' operating systems, or negotiate to make the systems more compatible. Microsoft and Apple can design their software from the ground up to be compatible with and included in their operating systems. This advantage is illustrated by the chart below: Microsoft and Apple have more of their players installed all over the world because of the players' inclusions with the operating systems.
|Media Player||% PCs Worldwide with the Player Installed|
|Microsoft Windows Media Player||83.7|
Source: Adobe Systems (ADBE) Wikinvest article.
As more mobile phones become music-enabled, the iPod effect could begin to diminish, creating more opportunities for alternative digital music providers to distribute media to cellular carriers. As this market has begun to emerge, the two main players appear to be RealNetworks' Rhapsody and Napster's self-titled distribution service. Both companies are competing heavily to acquire the rights to distribute on the networks of carriers around the world; whichever company forms partnerships with the most lucrative carriers will win what industry analysts have deemed the mobile music arms race.
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