The New York Times
November 19, 1998


Microsoft to Sell Interest in RealNetworks


SEATTLE -- Microsoft Corp. is selling its 10 percent stake in RealNetworks Inc., whose chairman complained before a Senate hearing this summer that Microsoft tried to deliberately "break" his Internet multimedia software.

Microsoft denied spite was the motive, but acknowledged its relationship with RealNetworks had soured.

"I think it's fair to characterize it as a fairly rocky relationship for some time," said Anthony Bay, general manager of Microsoft's Commercial Systems Division, on Wednesday.

The decision to sell should result in a tidy profit for Microsoft. It paid about $30 million for its stake in RealNetworks in July 1997, and the stock today is worth about $141 million.

Shares of the Seattle-based RealNetworks closed at $42.87 1/2, up $1.62 1/2, in trading on the Nasdaq Stock Market.

Rob Glaser, RealNetwork's chairman and founder, said Microsoft's announcement was no surprise.

"A company like Microsoft makes a decision for a million different reasons and a million different circumstances," he said. "I don't think they needed the cash. But I think it's pretty clear that the companies are not marching in lockstep."

Microsoft will keep its license for the RealNetworks technology, which Glaser said has been rendered outdated in the "exploding" Internet market.

"We're proud to be one of Microsoft's most profitable Internet ventures," added Glaser, who was vice president of multimedia at Microsoft before founding RealNetworks in 1994.

RealNetworks makes RealPlayer and other products for watching video and hearing audio over the Internet. It competes directly with Microsoft's Windows Media Player. RealNetworks says it has about an 85 percent share of the market.

In July, Glaser appeared before a Senate committee and demonstrated his RealPlayer software. The software worked fine at first, but failed after he installed Media Player.

"The code would have had to be written deliberately to that effect," testified Glaser, who was vice president of multimedia at Microsoft before founding RealNetworks in 1994.

Microsoft engineers later said a bug in RealNetworks' software caused the incompatibility, an argument supported by some industry experts who ran independent tests.

Glaser is one of a string of executives, including representatives of Netscape Communications Corp. and Apple Computer Inc., testifying at the government's antitrust trial of Microsoft alleging that Redmond, Wash.-based giant wrote software to be incompatible with their products. Microsoft denies the allegations.

In July 1997, Microsoft invested $30 million to buy 3.3 million shares of RealNetworks. Bay said Microsoft needed to license technology from the Seattle company to ensure its products were compatible with those of RealNetworks, whose software was being rapidly adopted across the World Wide Web.

The deal set up a delicate relationship that some analysts described as "coopetition," with the two companies working together in some areas and competing in others.

Before long, it was obvious the two companies were headed in different directions, Bay said.

"We ended up with sort of diverging business strategies," Bay said. "We had a combination of a competitive and cooperative relationship and the balance had sort of moved toward the competitive side."

In October, Netscape released a new version of its Internet browser that includes RealNetworks' multimedia software. A month earlier, RealNetworks persuaded America Online to distribute its software to AOL's 13 million customers.

International Business Machines Corp. also is distributing RealNetworks' video-player technology to 25 million corporate users of its popular Lotus Notes software, and microchip giant Intel Corp., long a Microsoft ally, has licensed its technology for advanced video software to RealNetworks.

Bay said Microsoft notified RealNetworks in June -- a month before Glaser's testimony -- that it was considering selling its 3.3 million shares, and this fall offered to work with RealNetworks to sell more stock.

The two companies could not agree, however, so Microsoft decided to sell its shares on the open market, Bay said.

He said Microsoft would begin selling the shares Thursday, and had no time frame for completing its divestiture.