There was a moment, about two years ago, when the relevance of RealNetworks (RNWK) seemed to be in question.
Apple Computer (AAPL) was well on its way to making consumer-electronics history with its inimitable iPod. RealNetworks, in contrast, was spinning its wheels. It had a music-download service called Rhapsody—the result of its acquisition of Listen.com in 2003—but it lacked a music player of its own. So Rhapsody made its songs compatible with Apple's iPod, without getting Apple's permission. This initiative, called Harmony, sparked intense controversy, and the situation still remains unresolved.
But Real's fortunes changed suddenly on Sept. 18 when it teamed up with SanDisk (SNDK), a maker of flash-memory chips that also builds the Sansa line of MP3 players. Sansa has quietly emerged as the second-most popular brand of players in the U.S., after the iPod. Later this year, SanDisk will release a new line of Sansas that will support Rhapsody right out of the box, just as iPods are primed to deliver music downloaded from Apple's iTunes.
NARROWING THE GAP. Rhapsody currently boasts some 1.6 million subscribers, making it the second-most popular music download service after iTunes. Apple still rules, of course. It doesn't disclose the number of iTunes users, but it has clocked more than 1.5 billion song downloads since the service launched in 2003, while selling more than 60 million iPods. Still, Real's Sansa deal could help narrow the gap.
The announcement with SanDisk comes on the heels of two other major deals for Real. Rhapsody is now available as a subscription service through the Sonos Digital Music System, a system for streaming music throughout the home. (Unlike iPods and their associated gear, the Sonos players can download tunes from Rhapsody on their own—no need for a computer.) Additionally, Real announced last week that it has acquired WiderThan (WTHN), a wireless entertainment company that provides content to 25 different wireless carriers around the world, including Cingular Wireless, which is a joint venture of AT&T (T) and BellSouth (BLS); Sprint Nextel (S); and Verizon Wireless, which is a joint venture of Verizon Communications (VZ) and Vodafone (VOD), in the U.S.
Clearly, RealNetworks has a plan, which doesn't involve taking a permanent back seat to Apple. As Real CEO Rob Glaser sees it, digital music doesn't begin and end with the coupling of a player and a service—the iPod-iTunes model. A bigger concept is coming into view, something Glaser calls "the jukebox in the sky." According to this scheme, constant and pervasive connections to the Internet make it possible for music to follow you practically anywhere you go. It's not really about killing off the iPod, so much as giving consumers new ways to enjoy the music and videos they love. Here's how Glaser spells it all out:
People constantly compare RealNetworks to Apple. Is that a fair comparison?
It's one of those funny things. People lump us in with Apple—and we're in the digital music space, so it's understandable—but we have a fundamentally different paradigm at the center of what we're doing. Apple's paradigm is the iPod, and that has obviously worked great for them. Our paradigm is the jukebox in the sky. It's related to the WiderThan acquisition we did, because it's our belief that in a world where the Internet is everywhere, you should have access to the celestial jukebox anywhere you are, whether it's on a wireless device or a phone or a device like the Sansa e200.
All those modes are tied to the same idea. What is different about music, at the end of the day, is not that you can just distribute it digitally. That's just the first phase. The second phase is that if you as a consumer get the rights to all of the world's music. That changes everything because you don't have to be locked into the disadvantages of owning it, but not having it with you at a given time. That's what's good about Rhapsody. We keep track of what you like, you create a virtual library, and we bring that music to you wherever you are.
So, you're not so interested in competing head-to-head with Apple?
No, that's not what we're doing. It's more of what Microsoft (MSFT) is doing with the Zune player (see BusinessWeek.com, 9/15/06, "Coming Zune: Microsoft's Music Player"). That's more of a pure-play, zero-sum strategy, which is the sort of thing you associate with the Microsoft warrior culture. To us it was clear that, with Apple deciding to make the iPod a proprietary device, the right way for us to manifest our strategy was a set of end-to-end collaborations like what we've done with Sonos and with SanDisk, which will deliver the experience wherever people are. But if Apple were to open up the iPod, we'd love to support the iPod, too.
What's the latest on the Harmony initiative, which allows Rhapsody songs to be played on the iPod? Apple didn't like it, but Harmony still seems to work.
It's still there. Every time Apple has updated iTunes and the iPod we've maintained compatibility with it, and for every customer who wants to use it, we support them. But we've found it's much better to offer a great end-to-end experience with partners who want to be our partners as the primary effort. That is what we're doing with SanDisk and Sonos.
Have you and Steve Jobs ever talked about this whole Harmony-iTunes controversy from 2004?
We may have said hello at a conference or something, but it's not like my phone number is unlisted or anything.
Let's talk about another partner of yours, Microsoft. They are clearly about to change the way they do digital music yet again with the Zune player. You have a handful of overlapping relationships with Microsoft. What does the Zune mean to you?
We have a solid relationship with their games group, and we have a solid relationship with their MSN group, where we do a bunch of things around MSN Messenger. Microsoft is not a monolith in the music business. But what they have done, as near as we can tell, is de-emphasize this "Plays for Sure" technology they touted, which doesn't work very well. Their portable-device focus is this Zune thing, which they have decided to take in a proprietary direction. And so it's quite fortuitous that we have our own end-to-end technology, and that we have been working on our own partnerships around that for about a year and a half.
Tell us about the deal with Sonos. They make an interesting product for home users, but it's priced awfully high.
The guys on the Sonos team are an awesome product group. They are excellent at the ergonomics of product design. They are great at thinking through the customer experience. With the kind of product that Sonos has created, you assume a broadband connection. To us, getting direct access to Rhapsody [on that] just seemed natural. Their controller and box run Linux. The product teams had a common vision. So we and they designed this new Rhapsody direct service in that way.
Sonos today is not a super high-volume partner, but they build world-leadership products. I, for one, have had a lot of success in my career working with partners who do leading-edge products that then become mainstream later on. Twenty years ago, I was doing Microsoft Word. At that time, Word was the best word processor at handling fancy fonts, but laser printers cost $3,000. So we did a joint promotion with Hewlett-Packard (HPQ) where we marketed the laser printer with Word. People thought we were crazy to do it, but laser printers became mainstream, and very quickly Word went from No. 5 in the market to No. 2. It passed WordPerfect a few years later.
If you're on the right side of history, there's nothing wrong with starting out with a product at the high end and then riding that into the mainstream. That is the path we're on with Sonos.