Microsoft Corp. agreed to pay RealNetworks Inc. $761 million to settle an antitrust suit accusing the world's largest software maker of using its dominance to promote its own media player, the companies said on Tuesday.
RealNetworks shares rose 34 percent after the settlement, which was seen giving it a war chest for expansion and channels for new products. For Microsoft, the settlement comes close to closing an era of legal battles.
"We're reaching a point where the legal issues from the 1990s are behind us," said Brad Smith, Microsoft's general counsel.
RealNetWorks had sued its longtime rival nearly two years ago, saying that Microsoft's decision to bundle Windows Media Player for free within the Windows operating system was to blame for slower sales at RealNetworks.
RealNetworks, founded by Rob Glaser, a former protege of Bill Gates before he left to start his own company, built its business on its RealPlayer software for playing video and audio on computers. Faced with stiff competition from Microsoft's competing Windows Media Player, RealNetworks has shifted its business toward providing music and games online.
The deal "goes beyond the settlement," Gates said, adding that the agreement to cross-promote technology and services between the two companies will help them in the music market.
"We're trying to drive (the technology) to critical mass," Gates, Microsoft's chairman, told reporters.
RealNetworks' suit was one of the last remaining major lawsuits against Microsoft stemming from its landmark antitrust case with the U.S. government, which was settled in 2002. Since then, the Redmond, Washington, company has reached agreements with several U.S. states and other companies.
In July, Microsoft agreed to pay $775 million to International Business Machines Corp. in a discriminatory pricing settlement. Last year, it agreed to pay Sun Microsystems Inc. $2 billion. It reached a $750 million settlement with Time Warner Inc. in 2003.
Microsoft will pay RealNetworks $460 million in cash up front to resolve all damage claims and the remaining $301 million will used to promote RealNetworks' Rhapsody service on Microsoft's MSN Web site. RealNetworks will also get licenses and commitments that give it long-term access to Windows Media technologies to enhance the RealPlayer software.
"This is a much bigger deal for RealNetworks," said Alan Davis, analyst at McAdams Wright Ragen.
Shares in RealNetworks jumped nearly 50 percent in early Nasdaq trade, but later gave up some gains to close up $1.96, or 34.2 percent, higher at $7.70. Microsoft shares dropped 5 cents to $24.41, and the company said it would elaborate on the settlement's financial impact when it announces earnings on October 27.
EYEING APPLE, GOOGLE
Asked about the fate of the RealPlayer, which competed against Microsoft and became a key part of Microsoft's antitrust challenges in the U.S. and Europe, Glaser said: "RealPlayer continues to be a competing product."
In this deal, Rhapsody effectively becomes MSN's music subscription service, complementing its own download service. Rhapsody has won kudos from analysts and some fans, but the dominant player in online music remains Apple Computer Inc.'s iTunes.
"Rhapsody is now an even stronger force to compete against Napster, AOL, Yahoo and MusicNet in the music field," said American Technology Research analyst P.J. McNealy. "It's likely to be the No. 1 in subscription services in six months."
RealNetworks' general counsel Bob Kimball said that the cash payout will give the company a "granite foundation" and "flexibility" to grow its business, but declined to say whether the money would be used for potential acquisitions.
In demonstrations at a press conference, Microsoft chairman Bill Gates and RealNetworks chief executive Rob Glaser showed how Rhapsody could be included in Microsoft services such as MSN Search and MSN Messenger, its instant messenger service.
The deal could also have implications for Google Inc. , which bundles its search toolbar with the RealPlayer, American Technology Research's McNealy said. "If Real is now in bed with MSN for search, it can't make the folks at Google very happy," he said.
RealNetworks is also withdrawing from pending antitrust cases against Microsoft in Europe and South Korea, but sources involved in those cases said the settlement is unlikely to affect their outcomes.
Microsoft is challenging a 2004 decision by the European Commission which found that it violated the law by competing unfairly.