Microsoft and RealNetworks: What Happened Between Them?

3. RealNetworks

4. RealNetworks is the leader, in terms of usage share, in software that supports the “streaming” of audio and video content from the Web. RealNetworks’ streaming software presents a set of APIs that competes for developer attention with APIs exposed by the streaming technologies in Microsoft’s DirectX. Like Apple, RealNetworks has developed versions of its software for multiple operating systems.

   
   

   In 1997, senior Microsoft executives viewed RealNetworks’ streaming software with the same apprehension with which they viewed Apple’s playback software — as competitive technology that could develop into part of a middleware layer that could, in turn, become broad and widespread enough to weaken the applications barrier to entry.

   
   

5. At the end of May 1997, Gates told a group of Microsoft executives that multimedia streaming represented strategic ground that Microsoft needed to capture. He identified RealNetworks as the adversary and authorized the payment of up to $65 million for a streaming software company in order to accelerate Microsoft’s effort to seize control of streaming standards. Two weeks later, Microsoft signed a letter of intent for the acquisition of a streaming media company called VXtreme.

   
   

6. Perhaps sensing an impending crisis, executives at RealNetworks contacted Microsoft within days of the VXtreme deal’s announcement and proposed that the two companies enter a strategic relationship.

   
   

   The CEO of RealNetworks told a senior vice president at Microsoft that if RealNetworks were presented with a profitable opportunity to move to valueadded software, the company would be amenable to abandoning the base streaming business.

   
   

   On July 10, a Microsoft executive, Robert Muglia, told a RealNetworks executive that it would indeed be in the interests of both companies if RealNetworks limited itself to developing valueadded software designed to run on top of Microsoft’s fundamental multimedia platform.

   
   

   Consequently, on July 18, Microsoft and RealNetworks entered into an agreement whereby Microsoft agreed to distribute a copy of RealNetworks’ media player with each copy of Internet Explorer; to make a substantial investment in RealNetworks; to license the source code for certain RealNetworks streaming technologies; and to develop, along with RealNetworks, a common file format for streaming audio and video content.

   
   

   Muglia, who signed the agreement on Microsoft’s behalf, believed that RealNetworks had in turn agreed to incorporate Microsoft’s streaming media technologies into its products.

   
   

7. RealNetworks apparently understood import of the agreement differently, for just a few days after it signed the deal with Microsoft, RealNetworks announced that it planned to continue developing fundamental streaming software. Indeed, RealNetworks continues to do so today.

   
   

   Thus, the mid-summer negotiations did not lead to the result Microsoft had intended. Still, Microsoft’s intentions toward RealNetworks in 1997, and its dealings with the company that summer, show that decision-makers at Microsoft were willing to invest a large amount of cash and other resources into securing the agreement of other companies to halt software development that exhibited discernible potential to weaken the applications barrier.

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This court case Civil Action No. 98-1232 (TPJ) retrieved on 2-06-2023, from justice.gov is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.