RealNetworks, Inc. History

Address:

2601 Elliot Avenue, Suite 1000
Seattle, Washington 98121
U.S.A.

Telephone: (206) 674-2700
Toll Free: 888-768-3248
Fax: (206) (206) 674-2699

Public Company
Incorporated: 1994 as Progressive Networks, Inc.
Employees: 798
Sales: $188.9 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: RNWK
NAIC: 541511 Custom Computer Programming Services; 511210 Software Publishers

Company Perspectives:

RealNetworks is the global leader in Internet media delivery. Combining cutting edge technology with premium content, RealNetworks opens the world of rich digital audio and video to more than 250 million unique registered consumers of our products worldwide. The result is a multimedia experience that is truly revolutionary.

Key Dates:

1994:: Progressive Networks is formed.
1995:: Progressive Networks broadcasts the first live event over the Internet.
1997:: Progressive Networks changes its name to RealNetworks, Inc.
1998:: The number of registered users of RealNetworks' audio and video software reaches 22 million.
2000:: The number of RealNetworks' registered users climbs to 215 million.

Company History:

RealNetworks, Inc. develops software used to deliver streaming media, a product type the company pioneered with the introduction of RealAudio in 1995. RealNetworks' software is used to play audio files, such as radio broadcasts and live music, and video files, such as news and multimedia content, over the Internet. The company's product line includes RealJukebox, RealPlayer, RealFlash, RealText, RealPix, and an assortment of other software. The company generates revenue by collecting money from subscribers to its multimedia programming, from Web site operators whose files use RealNetworks' software to play files over the Internet, and from electronics manufacturers whose products use the company's software. The company is led by Robert Glaser, a former vice-president at Microsoft Corporation.

Origins

A native of Yonkers, a middle-class suburb of New York City, Robert Glaser grew up five miles from Yankee Stadium but supported the New York Mets as a child. After the New York Mets, a decided underdog, won the World Series in 1969, the seven-year-old Glaser knew what he wanted to be when he grew up. Glaser wanted to replace Lindsey Nelson, the Mets' announcer. Although he later abandoned his childhood dream, Glaser's affinity for a team perceived as an underdog was indicative of the type of person he became as an adult. His father operated a small printing press in Yonkers, and his mother was a social worker; both described themselves as political activists. Their beliefs were passed to their son, who at age 12 handed out leaflets in support of the United Farm Workers' grape boycott. Glaser excelled in school, performing well enough to earn admittance to Yale University, where he expressed his progressive views in a column called "What's Left" for the university's newspaper. (In a September 3, 2001 interview with Business Week, a RealNetworks' board member described Glaser's political beliefs as "usually to the left of Che Guevera"). When he was not writing his column or participating in disarmament demonstrations, Glaser devoted himself to his studies. In this area, he proved to be indefatigable, exiting Yale in 1979 with no less than three degrees: a Bachelor of Arts in economics, a Bachelor of Science in computer science, and a Master of Arts in economics.

After graduating from Yale, Glaser had to make a decision. He could continue his education or go to work for Hewlett-Packard Co. A third option remained, but few of Glaser's friends believed he would join a little-known, start-up software company. Glaser proved his friends wrong, and moved to the Pacific Northwest, where he signed on with Seattle-based Microsoft Corp. At Microsoft, Glaser worked with the development team that produced Microsoft Word, the company's highly successful word-processing application. After working on Microsoft Word, Glaser moved to the company's networking group, before ultimately becoming vice-president of Microsoft's multimedia systems group. Glaser spent a decade at Microsoft, participating in the company's explosive rise to global dominance in the software industry.

Progressive Networks Is Formed in 1994

By the fall of 1993, Glaser was ready to build his own company. He enlisted the help of a college friend, David Halperin, and began hatching plans for the creation of what he envisioned as a culturally progressive media company. By 1994, Glaser and Halperin had formed their conduit for delivering socially conscious programming over the Internet, a company they named Progressive Networks. Within months, the founders realized that investors were more interested in the technology that delivered the socially progressive content than the content itself. Accordingly, Glaser and Halperin focused on developing software to deliver media content, which was then in its infancy on the Internet. In the years ahead, Progressive Networks would concentrate on streaming media--technology that delivered audio and video files over the Internet to personal computers.

History was made not long after Glaser started his company. In 1995, Progressive Networks broadcast the first live event over the Internet, a baseball game between the Seattle Mariners and the New York Yankees. The event marked the first streaming event on the Internet. By the end of the year--Progressive Networks' first year of sales--the company had generated $1.8 million in revenues.

By pinning Progressive Networks' fortunes on delivering streaming media, Glaser had thrust himself into a state of uncertainty. At the time he was fashioning his company to be the dominant competitor in its industry, the industry itself had yet to progress beyond infancy. Much of Progressive Networks' success depended on the Internet developing into the vast, content-rich environment that its proponents claimed it would become. By the time Glaser celebrated the successful broadcast of the first streaming media event over the Internet, however, the projected development of the Internet was uncertain. Glaser's hopes also rested on the exponential increase in connection speeds, the much talked-about but uncertain evolution from narrowband to broadband. In order for Progressive Networks' software to deliver high-quality audio and video files, particularly video files, a sufficient percentage of the online community needed to have the ability to forego dial-up modems and replace them with cable modems or digital subscriber lines (DSL's), which could deliver large files at a much faster pace than narrowband connections. The uncertainty inherent in Glaser's business stance made him, in retrospect, a visionary, the appellation earned by those who enter uncharted waters, succeed, and are followed by others.

In the wake of the first streaming media event, Glaser brokered several critical deals. He reached an agreement with his former employer, Bill Gates, to have Microsoft distribute RealAudio with every copy of Internet Explorer (Microsoft's Web browser) in 1996. The deal enabled Glaser to dramatically increase his revenue volume for the year, as Progressive Networks finished its second full year of business with $14 million generated in sales.

In early 1997, Glaser opened up a massive business arena through a technological development. RealVideo was introduced, enabling users to play videos on the Web. Glaser's biggest coup occurred next, ensuring that Progressive Networks would maintain its place in a now-burgeoning market. Gates, belatedly according to some industry pundits, had begun to realize the potential of streaming media. With vast financial resources at his disposal, the Microsoft chairman could afford to pay to strengthen his company's position in the streaming media industry. He paid $75 million for one of Progressive Networks' rivals, a company named VXtreme Inc. Glaser responded quickly, perhaps fearing that he would be squeezed out of the market just as it was gaining financial legitimacy. Glaser knew he would someday face the increasingly influential Microsoft chairman, a feeling he had had since the day he left Microsoft's Redmond headquarters in 1993. As the summer of 1997 approached, Glaser faced his first great test.

Not long after Microsoft acquired VXtreme Inc., Glaser approached the Redmond-based company. In July 1997, negotiations culminated in an agreement that gave Microsoft a 10 percent stake in Progressive Networks, for which Microsoft paid $30 million. The particulars of the deal also included a $30-million licensing agreement. Glaser convinced Gates to pay $30 million to license Progressive Networks' audio and video technology and embed it in Microsoft's player, Windows Media Player. Industry observers applauded Glaser's work in securing the licensing agreement. In a September 3, 2001 interview with Business Week, David B. Yoffie, a Harvard Business School professor, succinctly related his perception of Glaser's talks with Gates. "Rob got the better of Bill," he said.

During the months following the licensing agreement, Progressive Networks prepared for its debut in the public spotlight. The company changed its name to RealNetworks, Inc. shortly before filing for an initial public offering (IPO) of stock at the end of September 1997. The company hoped to raise $34.5 million from the offering, providing financial succor at a time when it was sorely needed. Although the company's revenue volume was expanding impressively--the company matched its sales total in 1996 during the first half of 1997--its losses were mounting. By the time the company filed for its IPO, it had accumulated $12.4 million in losses, with more than half of the total incurred during the first half of 1997.

Late 1990s Pits RealNetworks Against Microsoft

By the summer of 1998, Glaser's efforts to stave off an attack from Microsoft had begun to lose their effectiveness. Glaser was receiving reports that the latest version of Windows Media Player was automatically replacing or disabling RealNetworks' playback software. Glaser sensed the inevitable battle with Microsoft had arrived. In this battle, RealNetworks' founder would not be alone. Several weeks before Glaser began hearing the alarming rumors, the federal government had filed an antitrust case against Microsoft. Federal legislators such as Senator Orrin G. Hatch were on the prowl for any evidence of Microsoft's illegal behavior, which provided Glaser with a powerful, sympathetic audience. Senator Hatch encouraged Glaser to testify against Microsoft at a Senate Judiciary hearing, but, according to Glaser, he initially preferred to keep the battle private. He offered to discuss the matter with Gates, hoping Microsoft would make changes that would eliminate the technical problems with RealNetworks' software. Gates and Glaser reportedly exchanged several e-mail messages, but the electronic negotiations collapsed. Glaser had spent ten years at Microsoft during the company's formative period of development, making enough of an impression at the company to earn a place among its elite cadre of vice-presidents. During this period, Gates had hosted Glaser's bachelor party. Gates' final response to Glaser's proposal for a meeting belied the apparent connection between the two executives. As quoted in the September 3, 2001 issue of Business Week, Gates' e-mail to Glaser was brusque. "I've decided that it doesn't make sense for us to meet," he wrote. "I'm not very familiar with our relationship." Shortly thereafter, Glaser testified against Microsoft.

Aside from its increasingly contentious relationship with Microsoft, RealNetworks occupied an enviable market position during the late 1990s. By mid-1998, the number of registered users for the company's audio and video software had tripled during the previous 12 months, reaching 22 million. In 1999, the company's sales reached $131 million and, unlike many Internet-reliant companies, RealNetworks recorded a profit for the year, registering a $7 million gain. The company exited the 1990s as the dominant competitor in the $900 million streaming media industry, with more than 85 percent of the streaming content on the Internet being conveyed with its format. As the company entered a new decade, additional pride could be taken from the success of RealJukebox, which, by April 2000, had attracted 29 million users in less than nine months. RealJukebox allowed users who wanted to build and manage digital music collections to record songs from their CD's or download songs from the Internet and then play them on a personal computer, stereo, or portable music player.

As RealNetworks moved toward the end of its first decade of business, there was cause for both joy and concern. By mid-2001, more than twice as many personal computer users used the company's software as used Microsoft's rival product. Worldwide, 215 million people had registered to use RealPlayer, roughly a ten-fold increase during a three-year period. Further, the company's exclusive content agreements with media companies such as CNN, ABC, and Viacom generated an ever-growing amount of media content--more than 350,000 hours of content per week as RealNetworks entered the 21st century. There was a wealth of statistical information that pointed to RealNetworks ubiquity on the Internet and on personal computers worldwide, but the specter of Microsoft's alleged anti-competitive practices threatened to diminish the company's dominance. The legal battle against Microsoft continued through 2002, its resolution likely to determine the fate of RealNetworks. The vast majority of personal computers in existence used various versions of Microsoft's operating system, the environment in which RealNetworks' software operated. If that environment proved to be hostile to Glaser's software for the long-term, his company faced an arduous, perhaps fruitless, battle for survival.

Principal Subsidiaries: MusicNet, Inc.; MusicNet, Inc.; Xing Technology Corp.

Principal Competitors: America Online, Inc.; Apple Computer, Inc.; Microsoft Corporation.

RealNetworks, Inc. History

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