RealNetworks Goes for the "Gold"

The evolution of business models is the real story behind RealNetworks' new subscription service, as few online media companies have successfully charged for content.

By Nico Detourn (TMF Nico)
August 16, 2000

RealNetworks (Nasdaq: RNWK) has taken a major step in its evolution from a software developer to a media company with Tuesday's launch of RealPlayer GoldPass, a fee-based consumer subscription service. The move also makes the streaming media leader one of the few companies attempting to charge Internet users for what they're accustomed to getting for free, thanks in good part to the company's free RealPlayer, the 'Net's most widely used media player.

The new GoldPass service costs $9.95 a month and requires the purchase of RealPlayer Plus, a $29.99 enhanced version of the free player. Among the announced services GoldPass subscribers get for their monthly fee are software upgrades, film previews, concerts from House of Blues, UFO and paranormal video footage from UFO TV (we're not making this up), and the Sports Illustrated Swimsuit Video (really, we're not). will also provide content "on subjects ranging from the Apollo space missions to natural disasters," specially enhanced with additional text and graphics.

There's no getting around the paucity of this initial offering. Most conspicuously absent is downloadable music. However, the company is reportedly in talks with the major record labels, who themselves are dealing with the rapid of evolution of their business as streaming audio, high-speed Internet access, and file-sharing technology threaten to undermine their control of their own products.

The evolution of business models is the real story behind RealNetworks' new subscription service. That evolution began with the November 1999 launch of the Network. A branded hub for audio and video programming, is the company's attempt to leverage the ubiquity of RealPlayer and the RealSystem technology on which the player is based, to position itself as more than a supplier of infrastructure and a passive conduit of other people's media.

So far, the effort appears to be showing progress. Although RealNetworks last month reported a widened second-quarter loss due to acquisition costs, revenues increased by 119% over last year, and it is in the composition of those revenues where we can see the new strategy at work.

As we'd expect, most of Real's revenues come from sales of server software and related services used by other companies to produce and distribute streaming audio and video content. Second-quarter revenues in that category grew by 92% -- impressive evidence of demand, but also reflecting the overall growth of the Internet itself.

More significant to Real's evolving business model is that second-quarter advertising revenues grew by 480% since 1999, and now represent 19% of the total revenues, up from 7%. Whether the company will be able to regularly pry $9.95 a month from 140 million registered users of the free RealPlayer is unknown. But it would take only a fraction of them to contribute nicely to the company's media-based revenue stream, on which its fortunes are increasingly focused.

One risk in RealNetworks' new strategy is that its corporate customers might prefer that the company remain focused on providing them with technology rather than competing with them for the eyeballs and eardrums of Internet users. Another issue is that very few online media companies have been able to successfully charge for content.

However, as the music, motion picture, and publishing industries grapple with the issues of piracy, encryption, and distribution, some kind of streaming pay-for-play scheme seems inevitable, as does RealNetworks' participation in any proposed solution, given that its media player has more users than all the others combined. So rather than being an attempt at the unlikely, the company's new subscription service, meager as it is at the moment, could be positioning it ahead of one of the Internet's next big changes.

Your Turn:
Can RealNetworks make a go of its new subscription service? Stream your thoughts to the company's discussion board.

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