DrunkenBlog

A Real gamble

Had this come across the desk this morning... RealNetworks is really trying to heat things up, and are coming out of their corner firing:

...the temporary discount, making songs 49 cents and most albums $4.99, came at the same time as the full public launch of the newest version of the company's RealPlayer jukebox software."

That's drastic enough to get a hell of a lot of press, and continue their (for the moment) successful mindshare campaign to actually be seen as relevant.

I have to give RealNetworks a tip of the hat here. They don't have a massive installed base who could quickly bleed the company dry with millions of half-priced downloads and, at the moment, it's not about actually selling the songs, but cementing their technology for licensing. The more users they have in their service, the more willing the makers of digital players will be to license their technology.

Not only that, it continues to perpetuate the idea of Apple being anti-competitive in the market and insulating their users from that pesky competition competition thing. Whether you agree or not, they're doing a pretty good job of pushing the idea of lock-in; you can buy an iPod, but you can't listen to RealNetworks $0.49 192kbps AAC songs even if you weren't aware of how limited your options would be. Real would love to sell them to you, but they aren't being allowed to... Apple wants to take its ball and go home.

Pretty brilliant, really. But a gamble:

...company also said it would launch its biggest ad campaign for digital music, with print, radio and online spots centered on the idea of "Freedom of Choice."

This campaign is going to generate a lot of noise, but it's going to be very, very expensive noise.

It's worth noting that RealNetworks' market cap has evaporated by a good ~30-35% since June. Back in July, analysts were expecting a loss this quarter of $0.02/share, when Real widened their guidance to $0.03-$0.04/share and the stock took a beating. The market hasn't been doing well since, but RealNetworks has gotten a bounce recently through it's recent mindshare blitzkrieg.

With the announcement, RealNetworks guided that they could well lose up to $0.05/share. To a company of RealNetworks' size, this isn't chump change, and the market could go either way on this one... very bad things can start to happen to a company when its market cap gets too low.

But it's good to be aware of a few things:

• They currently have a current market cap of ~$880-890 million.
• They have revenues in the sub-$100 million range
• They are embroiled in a very, very costly anti-trust lawsuit with Microsoft at the moment, for damages exceeding a billion dollars
• A good chunk of their losses are due to the ongoing litigation
• They have technology in areas of DRM, server-side streaming and encoding

And it's also good to be aware that when one is trying to create selling momentum, or grooming a company for sale, there are some things one generally tries to do:

• Gain as great a brand awareness as possible; in many cases a company brand is worth more than their assets or revenues
• Increase revenue/sales figures through aggressive campaigning or special deals
• Make your company riper for acquisition by focusing on the parts the most-likely potential 'synergistic' or 'strategic' buyers will be interested in; often profitable divisions can be sold off or dropped because they don't fit the profile.
• Create barriers to entry wherever one can. You want to make it easier for a potential suitor to buy you rather than just enter the market themselves in some cases, and in others they simply sweeten the proverbial pot.

There are other things you do, but I'm making a concerted effort to be sparse this time and the tinfoil hat is feeling a bit tight. But before I leave you, it's worth noting that Roxio recently dumped its profitable divisions to focus solely on the Napster brand.

All so very interesting.

 Posted by drunkenbatman
    August 17, 2004, at 08:39 AM