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Can Apple buy Real? Should it?

By Eliot Hochberg (eliot@high-mountain.com), August 14, 2002

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RealNetworks. Once one of the darlings of the Internet bubble, now a company barely getting by. Like many companies of that era, it’s now plummeted back to its original IPO price, hovering around $4 a share. This from a company who was once worth nearly $100/share. At the time of writing, its market cap is approximately $600 million and its net tangible assets are around $390 million. So, Could Apple buy Real? With $4 billion in the bank, yes. So, should it?

Real recently released a streaming server that handles any kind of streaming media. A great product idea, to be sure. But also an admission that it can’t ignore its competition anymore. This smacks of the same kind of last-ditch effort that Netscape let loose before it fizzled and was gobbled up by AOL. Real’s story is very similar to Netscape’s; the company created the streaming industry, tried to control that industry’s standards, and have been challenged by Microsoft. According to numbers obtained from Macromedia, 64 percent of users have Windows Media Player, 55 percent have Real, and 39 percent have QuickTime. Clearly, there is overlap here, but the bottom line is that Microsoft is trying to do to Real what it did to Netscape. Get it out of the way.

It’s also worth noting that there is a new competitor in this game; Macromedia. Flash 6 and Flash MX now have the ability to stream video. In fact, Macromedia’s new Communications Server can do video conferencing and collaborative white boards. Flash is a very easy install for Windows users, and with all of the content that Flash has on the Web, most people end up installing the player. Macromedia is smart to piggyback video into the Flash player. Apple knows this, which is why it is fighting so hard to keep Sorenson from letting Macromedia use Sorenson’s Spark codec.

But it seems Apple’s position isn’t that strong, and it’s likely that Macromedia will be allowed to use that codec. So there will be a major new player in video streaming. Surely Microsoft will go after Macromedia, and so will Apple and Real. But it makes one wonder just how strong Real’s revenue stream is. Think of it this way; Apple makes its money off of selling systems and an OS, and has billions in the bank. Microsoft makes its money off of … so many things, and also has billions in the bank. Macromedia makes its money off of its development products, and although its total assets are less than Real’s, it doesn’t have to support legacy standards, nor does it even really have to succeed in streaming to stay in business. Real only makes money off of streaming. And it doesn’t have billions (although $340 million isn’t too shabby). But the bottom line is that Real has a tough road ahead.

But back to the new streaming server. Is this asset, coupled with Real’s user base, valuable enough for Apple to want to purchase? Maybe not right now, at this value. However, I think Apple would be missing an opportunity. The last thing it needs is for a company like AOL Time Warner to get there first. Real’s success comes from being there first and from viral marketing. AOL, on the other hand, could easily come up with a way to make Real its default player. So, in my mind, I hope that Apple is seriously contemplating a purchase of Real, if not now, then in the near future. The technology is sound. I think Real’s business model is questionable in the same way Netscape’s was. Real is depending on companies who need to stream video to pay for the bulk of its expenses, and then hoping that many users will pay for its player. Real makes it really hard to find its free player on the Web site. By contrast, Apple gives its server away and also gives the player away (with annoying Pro upgrade messages). Microsoft gives its Media Player away as you’d expect. If you already have certain Windows Server software, you can get the streaming server for free, too. Then the cost of streams is around one-third that of what Real charges. And now, Macromedia enters the fray, with costs comparable to Microsoft’s. If the tech is equal or better, then why would anyone who doesn’t already use Real’s products want to start using them?

The bottom line is that Real has a hard road ahead of it as a company that focuses on streaming only. True, video-on-demand will eventually be a huge part of the interactive, online experience. But products like Replay and soon TiVo, with broadband video-sharing capabilities, will eat into this market. And it seems as though technologically, we are still around five years away from codecs and bandwidth that would truly allow video on demand. It’s my feeling that Real will not survive alone. If its value goes down by one half or even one third, I think Apple should gobble it up and gain that immediate market share. Then Apple can do what it has done so well recently; take another company’s product and go over it with the Apple beauty/usability brush and fold that tech into its own.

Of course, if Real is truly going to have all of this trouble, why would Apple want to even consider picking it up? Well, it’s clear that Apple wants to be in the video arena, and it seems as though it is serious about streaming. Removing a competitor, gaining its technologies and maybe most importantly, keeping those assets from the remaining competitors, should be reasons enough.

It’s worth noting that any takeover of Real would have to be friendly, due to the way in which Real’s charter is structured. It has what is essentially a “poison pill,” a clause which discourages unfriendly takeovers. In the event that a company or individual tries to force a merger through the purchase of common stock, the executives of the company have the opportunity to exercise a series of preferred shares that would give them enough voting power to stop a hostile takeover. There is also a clause that would give CEO Rob Glaser, who owns 33 percent of the outstanding shares, the ability to control such a transaction. This information comes from Real’s last annual report as sent to the SEC. One hopes that if Real does start having more serious problems, these executives will see the writing on the wall in time.

Oh yeah, and if Apple ever did complete this transaction, it would own both everything from Real and Nothing Real. That would give Apple everything in the universe, wouldn’t it?

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