e.Digital Corporation (fka EDIG)

[Tinroad]

OT: Real, the digital media player
by Ryan Tate
June 13, 2001
http://www.upside.com/texis/mvm/print-it?id=3b26a7091&t=

RealNetworks (RNWK) has become the swinger of the digital media set, inking deals with everyone from Cisco (CSCO) to the record labels, but will its dalliances bolster sales?

Real expects second-quarter sales to be off sequentially and has said it has no visibility into the second half of the year. Its earnings for the last three quarters have come in sharply lower than year-earlier numbers, and it has met analyst expectations in the last two quarters only by issuing a December warning and keeping expectations low.

Real is suffering as its dotcom startup customers go out of business and as more established customers rein in plans to stream audio and video online. But it has shown no shortage of energy this year.

Dealmaker

In January, RealNetworks struck a deal to stream the audio from NBA games. In Feburary, Real hired former Fox TV exec Larry Jacobson, an old-media executive who could accelerate the company's dealmaking. (See related story, "RealNetworks after old-media sales with new president.")


By the end of March, Jacobson had signed off on a licensing pact with Major League Baseball, in which Real promised the association $20 million in revenue over three years for the right to webcast play-by-plays. (See related story, "RealNetworks pays $20M for baseball audio rights.")


In April, RealNetworks unveiled MusicNet, a company it had formed with three of the five major record labels -- Bertelsmann's BMG, EMI and AOL Time Warner's (AOL) Warner Music Group. Real had the largest stake in the venture and supplied the technology. (See related story, "RealNetworks grabs largest share of MusicNet.")

In May, Sony (SNE) announced RealPlayer would ship with Internet-enabled PlayStation 2 game consoles and in an upcoming Internet appliance made by Nokia (NOK). (See related story, "RealNetworks wants to deliver your streaming-media TV.") Intel (INTC) also agreed to distribute RealPlayer with two of its PC motherboards.

Just this month

And this month, the deals have come fast and furious. Through MusicNet, the company entered a technology alliance with Napster. (See related story, "Doors open, close for Napster.") It struck yet another deal with Sony, this time to bundle RealPlayer with a forthcoming Internet appliance called eVilla.

It also trumpeted a pact with Cisco on Monday, in which the networking giant will install Real's server software on some of its content networking hardware and sell the product to its customers.

Not everyone is impressed. CIBC World Markets analysts John Corcoran and Ken Gawrelski reiterated their "hold" rating on RealNetworks shares in a research note earlier this month. Technology alliances like MusicNet and content partnerships like the pro-basketball deal are "relatively small parts of the overall business today," they wrote, while Real's "core business" of selling software continues to be a problem. "RealNetworks may face increasing challenges in its core client/server software business over the next two to four quarters," they wrote. "We believe Microsoft is gaining momentum in the market."

Bill Lennan with WR Hambrecht is also not expecting most of Real's recent deals to lift the company any time soon. "The fundamental issue remains: Are people lining up and opening their checkbooks to pay for server software?," he said.

"Recently, they've been announcing a lot of deals to proliferate the player technology," he added. "A lot of their more recent announcement have been more strategic than real revenue producers."

This one's different

But Lennan said "the Cisco one is different -- it has the potential to produce real revenue." That, he said, is because the company's products are nearly ubiquitous in corporate America and the company's client base is thus very large. More importantly, Cisco will be reselling high-margin server software rather than giving away Real's consumer offerings, as is the case in many of Real's deals.

Lennan said the Cisco deal is potentially important for Real even though Cisco also resells Microsoft's (MSFT) Windows Media server software. Microsoft, he said, "will always be there," and it would be unwise to expect a company like Cisco to agree to an exclusive distribution deal.

Of course, all the deals in the world, even the best ones, won't boost demand. And Lennan said he will be watching the enterprise software sector over the next week or two for earnings warnings and signs that businesses are cutting back on their most critical software -- software that has a higher priority than streaming media servers. "If demand is softening for their server products, having someone else to sell doesn't help things much," he said.

RealNetworks is set to release its second-quarter financials on July 17.