RealNetworks' Sour Apple Note

Sometimes people just can't take a hint. Software company RealNetworks (Nasdaq: RNWK) tried to serenade Apple (Nasdaq: AAPL) about enabling the iPod to play RealNetworks' files in April but was rebuffed. With its latest digital music service, Harmony, RealNetworks has taken matters into its own hands. Harmony will allow consumers to purchase digital music from any service and play the music on an MP3 player of their choice. Much attention has been paid to its ability to play RealNetworks' files on the iPod.

Both RealNetworks CEO Rob Glazer and Apple CEO Steve Jobs have admitted that selling songs for below a dollar a pop yields little profit at best. Each company has its own model of generating profits from downloadable music. For Apple, this entails selling the highly lucrative iPods. RealNetworks wants to make money by selling subscriptions to its Rhapsody service, where subscribers pay a flat $9.95 fee a month for unlimited streaming and an additional $0.79 per song purchased.

Thus Harmony is just a slap in the face for Apple. Current iTunes Music Store (iTMS) customers will have no strong incentive to switch stores. Rhapsody will also face an uphill battle in trying to win over new iPod users, especially when access to the iTMS comes conveniently packaged with the iPod. For all its controversy, Harmony does not hit Apple where it hurts -- it does not enable iPod clones to play iTMS songs.

However, Apple will still be upset by this move. If it had intended for the iPod and iTMS to be unlocked, it would have done so earlier, on its own terms. RealNetworks has forced Apple's hand early, and Apple will probably seek to stop RealNetworks by either legal or technological means. The latter is easily implemented. Apple can simply issue a firmware upgrade that doesn't allow Harmony to be downloaded when a user fires up iTunes, and Harmony would become merely background noise.

Ultimately, RealNetworks' audacious move may help to open up the digital music industry, which Apple dominates. However, tangible benefits to RealNetworks are still uncertain pending Apple's response, especially if Apple were to seek legal recourse. RealNetworks is already embroiled in an antitrust suit filed against Microsoft (Nasdaq: MSFT), with legal expenses making up 60% of RealNetworks' just-announced second-quarter loss. With a price to forward earnings multiple in the high 70s, and RealNetworks' recent propensity for courtroom battles, there are many better investments available in the market, whether or not Harmony comes through.

Fool contributor Tim Goh still listens to music on his trusty Discman. He does not own any stake in the companies mentioned.