RealNetworks 10-Q filing details risks of disharmony with Apple Computer

“Real Networks has admitted its move to make tracks acquired through its US-only Rhapsody music service puts the company at risk of a legal suit by Apple,” Macworld UK reports.

From RealNetworks’ 10-Q, filed August 9, 2005:
Factors That May Affect Our Business, Future Operating Results and Financial Condition

Our consumer businesses face substantial competitive challenges that may prevent us from being successful in those businesses.
Music. Our online music service offerings face significant competition from traditional offline music distribution competitors and from other online digital music services. Some of these competing services have spent substantial amounts on marketing and have received significant media attention, including Napster’s music subscription services, and Apple’s iTunes music download service, which it markets closely with its extremely popular iPod line of portable digital audio players. Microsoft has also begun offering premium music services in conjunction with its Windows Media Player and MSN services, and we also expect increasing competition from online retailers such as Amazon.com and WalMart.com and from Internet portals like Yahoo!, which recently introduced its Yahoo! Unlimited music subscription service at a discounted price from our comparable service. Our current music service offerings may not be able to compete effectively in this highly competitive market.

Our online music services also face significant competition from “free” peer-to-peer services, which allow consumers to directly access an expansive array of free content without securing licenses from content providers.

Our Harmony Technology may not achieve consumer or market acceptance and may be subject to legal challenge.
We recently created a new digital rights management translation technology called Harmony. Our Harmony technology enables consumers to securely transfer purchased music to digital music devices, including certain versions of the market leading iPod line of digital music players made by Apple Computer, as well as certain devices that use Microsoft Windows Media DRM. Harmony is designed to enable consumers to transfer music purchased from our RealPlayer Music Store to a wide variety of portable music devices, rather than being restricted to a specific portable device. We do not know whether consumers will accept Harmony or whether it will lead to increased sales of any of our consumer products or services or increased usage of our media player products.

There are other risks associated with our Harmony technology, including the risk that Apple will continue to modify its technology to “break” the interoperability that Harmony provides to consumers, which Apple has done in connection with the release of certain new products. If Apple chooses to continue this course of action, Harmony may no longer work with Apple’s products, which could harm our business and reputation, or we may be forced to incur additional development costs to refine Harmony to make it interoperate again. Although we believe our Harmony technology is legal, there is no assurance that a court would agree with our position. 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.

RealNetworks, Inc. 10-Q form in full here.

Related articles:
PC World review gives Real’s Rhapsody music service 2 stars out of 5; ‘just didn’t work’ – May 06, 2005
Time Magazine article about RealNetworks’ Rhapsody makes no sense – April 27, 2005
RealNetworks says ‘Harmony’ hack once again compatible with all Apple iPods – April 26, 2005
The Motley Fool: RealNetworks’ new Rhapsody ‘is still largely on the sidelines of the music war’ – April 26, 2005
RealNetworks launches new Rhapsody services, gives away 25 songs per month – April 26, 2005
Apple iTunes Music Store killer? Real expected to add subscriptions to Rhapsody music service – April 26, 2005
Real CEO Glaser calls Apple ‘deceptive’ with iTunes Music Store – March 07, 2005
Real CEO pitches to half empty room at tech symposium; Apple draws standing-room-only crowd – February 25, 2005
RealNetworks’ CEO Rob Glaser grabs 3 of top 10 spots on ‘Dumbest Moments in Business 2005’ list – January 31, 2005
RealNetworks ‘Harmony’ stops working on iPods but nobody notices for a month and a half – December 15, 2004
Bono-Glaser photo caption contest now open – October 25, 2004
Real’s CEO Glaser: ‘Harmony’ hack legal, Mac lovers are very sensitive to Apple criticism, and more – September 14, 2004
Analyst: Rob Glaser’s ill-advised war against Apple ‘is going to bite RealNetworks on the ass’ – August 30, 2004
RealNetwork’s CEO Glaser crashes Apple’s music party – July 30, 2004
Real CEO Glaser: Steve Jobs’ comments on Real ‘not succeeding’ are ‘ridiculously humorous’ – April 29, 2004
NY Times: Real CEO Glaser was close to having ‘iPod’ before Apple, but let it ‘slip through his fingers – April 24, 2004
Real’s CEO Glaser: Apple’s iPod/iTunes combo ‘threatens to turn off consumers’ – April 20, 2004
Jobs to Glaser: go pound sand – April 16, 2004
Real CEO Glaser begs Apple to make iPod play nice with other music services – March 24, 2004
Real CEO Glaser: ‘iTunes is only going to be used for playing songs you bought using the iTunes store – January 16, 2004

22 Comments

  1. Real might consider making decent software rather than bloatware. They might also consider creating a killer-app in the hardware space (portable digital player) to compliment their software.

    They might also consider sticking to streaming porn as their primary revenue source.

  2. Real’s got the inferior product, but you mustn’t support Apple’s anti-competitive practices. Apple already refuses to allow tracks with other vendors’ DRM to play on the iPod. Should they also prevent other vendors from making their offerings compatible with the iPod?

    Apple – embrace the spirit of open source you’re always talking about. Either permit other DRM on your device, or license FairPlay. If you’re not going to do that, you should at least change its Orwellian up-is-down name.

  3. in the game for opening up iPods or Fairplay. Currently, downloads represent a small portion of music purchased. So in terms of music download services, allowing every DRM onto an iPod would be a major strategic misstep on their part. It is possible that their large lead evaporate in very short order under such circumstances. Now, if downloads were 60% of all sold music and iTMS maintained it’s current share of the download business, then I’d accept that.

    As for hardware, the majority on music on digital music players is ripped from CDs (or pirated). I would venture to guess that the percent of people that have >50% DRM music on their player is essentially 0. Therefore, I can’t really beleive that this is the factor hurting other music players.

    It really comes down to the superior design and user interface. Nothing is stopping the other hardware & software manufacturers except their own donkiness.

  4. PC Apologist,

    WHY should Apple license FairPlay to anyone else? Is not iTunes Music Store the only major store that runs on both platforms? I’d like to see your business case for Apple to license FairPlay. WHY should Apple do it – because it’s nice to share, because they want to decrease iTMS sales and increase their competitors sales? Because you think it would be nice if everybody held hands and danced in flowery meadows?

    Apple isn’t holding a gun to people’s heads to buy iPods. They can go buy any old also-ran digital music player and buy music from Real to their hearts’ content. But, the market has spoken. Apple made the best product combo and they are rightfully profiting from doing so.

    It’s called Capitalism, not Socialism. Apple should NEVER license FairPlay, unless they can make a profit from doing so.

  5. I agree with Johnny

    You are free to buy whatever music device you like. Apple does offer an option for both Windows and Macs users.

    I have over 70G of digital music and have never bought a song from i-Tunes. You can rip CDs (from on-line stores or retailers) to MP3s which i-Tunes can easily export to any model i-Pod.

  6. “If Apple chooses to continue this course of action, Harmony may no longer work with Apple’s products, which could harm our business and reputation, or we may be forced to incur additional development costs to refine Harmony to make it interoperate again.”

    Real has yet to design and release a content Producer that will run in OSX other than the plug-in to quicktime. Frankly, that plug-in is excellent … it works like a charm and does a good, fast job encoding files to .rm format (I use it once or twice a week to prepare audio sermons). But I would love to be able to stream live .rm broadcasts. We could do it under OS 9, but we can’t under OS X. GRRRRRRRR

  7. “You could always embrace the Podcast. Or you could employ a Quicktime
    Streaming Server if you have an OS X Server, or Darwin Streaming Server if
    you have just OS X Client. “

    1. I’ve been providing archived streaming .rm files of my sermons since 1998. I have over 350 of them active for download or streaming play. To convert them all would take a major staff and/or a great deal of money and time … I have neither (I’m a one man operation). Converting to mp3 for all future uploads is an option, but file size is an issue.

    2. I’ve researched podcasting. It’s not a live option, but that’s not a big deal. Online storage size is the issue. A 30 minute sermon is still about 30% larger than the equivalently sized .rm file. 48 sermons a year, not counting evening messages and mid-week Bible studies, adds up the MBs.

    3. Quicktime stream is an excellent option, but lots of Windows idiots can’t, won’t, or don’t want to tool to stream it. 80+% of my repeat visitors (about 7500 a month to my sermons section) are Windows based accesses.

    In short … I made a decision in 1998 to go with .rm to reach the broadest audience. It works well and I don’t see any reason to change the archives. I MIGHT change future uploads, etc., and leave the old files as-are. But the file-size (and, hence, bandwidth) is a problem.

  8. RevNeal,

    You’ll want to stop with the .rm files now. Just leave the old archives that way and switch ASAP to QuickTime Broadcaster. It is free and it does live streaming and also will archive to hard disk that you can use for downloads and for archiving.

    Info: http://www.apple.com/quicktime/broadcaster/

    Trust me on this – you’ll want to do it this way from now on. (I use it for a major broadcasting company, cannot disclose, and also for creating podcasts).

  9. “Trust me on this – you’ll want to do it this way from now on. (I use it for a major broadcasting company, cannot disclose, and also for creating podcasts).”

    Why?
    I’m serious. You use the imperatives here … but you don’t explain why.
    you can email me if you wish.

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