Eyeing Growth In Digital Music, Microsoft Settles With RealNetworks For $761M

Microsoft agreed to pay RealNetworks $761 million to settle an antitrust lawsuit against it and will promote Real's digital music software and online games through Windows and MSN. Microsoft chairman Bill Gates and RealNetworks CEO Rob Glaser announced the deal at a press conference in Seattle Tuesday morning.

Microsoft will pay Real $460 million to resolve legal claims, and grant Real licenses to its technology that will make Real's media player and other software easier to engineer and run on Windows. In addition, Microsoft will pay Real $301 million as part of an 18-month development, distribution, and promotional deal under which MSN users will be directed to RealNetworks' software and content.

The settlement ends a feud that began in December 2003, when RealNetworks sued Microsoft, accusing it of illegally blocking users' access to its RealPlayer software by directing them toward Microsoft's own Windows Media Player. The accusation was part of the basis for a 2004 European Union decision that Microsoft violated European antitrust law, which led to a $599 million fine and commercial sanctions against the company. Real had also filed an unfair competition suit against Microsoft in California.

At the press conference, Gates and Glaser said the deal settles all the antitrust claims between them. Glaser, who has worked at Microsoft, called the deal "the start of a new relationship" with Microsoft. "We're ending one chapter and opening a new chapter," he said.

Gates said the companies' agreement extends beyond the legal settlement. Microsoft has agreed to make its operating system "as effective as possible" for Real, easing engineering and ease of use barriers for Real software running on Windows. "It's more advantageous than it might have been before," he said.

In addition, Microsoft plans to promote Real's Rhapsody music service and online games on its MSN Web site. Users of MSN Messenger, for example, will be able to share up to 25 songs from Rhapsody with instant-messaging partners free of charge. MSN's search engine will direct users searching for music to Rhapsody, and the search engine will appear inside RealPlayer. And Real's online games will appear on MSN and Microsoft XBox gaming sites. Both Microsoft and Real compete with Apple Computer in the market for digital music downloads. "Our view is that digital entertainment is just at the beginning," said Gates.

For Microsoft, seeding the market with digital music and other entertainment content connected to its online properties and media playing software is central to its strategy for selling more copies of Windows, according to Matt Rosoff, an analyst at consulting company Directions on Microsoft. "They want the Windows PC to be the center of home entertainment," he says. "Microsoft believes that's going to spur the next wave of consumer upgrades."

During the past two years, Microsoft has used its considerable store of cash to settle lawsuits against it. In July, Microsoft settled an antitrust lawsuit with IBM over the OS/2 operating system for $850 million. In April 2004, Microsoft paid $1.6 billion to Sun Microsystems to settle antitrust and patent claims. And the software company reached a $750 million settlement with Time Warner Inc. unit America Online in July 2003.