Realnetworks, a dominant player in Web audio and video technology, has more than 115 million unique registered software users. But as competition from the other dominant streaming software--Microsoft Corp.'s Windows Media Player--intensifies, RealNetworks is looking more like a media company.
RealNetworks launched software in April 1995 that allowed consumers to listen to real-time audio on the Internet. The introduction of RealAudio and the so-called streaming technology set the stage to transform the Internet from mere words on a computer screen to a complete multimedia experience.
NO. 13 PROPERTY
Since its start, RealNetworks has operated Web sites associated with its software. Its stable of properties includes the Real.com gateway, Film.com for movie fans and Take5, a daily zine on RealPlayer that features audio and video content from more than 100 media partners. The network was the 13th most-visited property on the Internet in May, according to Media Metrix, with 13 million unique visitors.
RealNetworks is making money, earning $6.9 million on revenue of $131.2 million last year. RealNetworks' stock, meanwhile, closed July 13 at $52.56, down 45% from its mid-February high.
More indicative of Real's transformation is that advertising is the company's fastest-growing revenue stream.
In the first quarter, ad sales were about 16% of revenue, or $8.4 million, up from 5.5%, or $1.3 million, in the year-earlier period. At the same time, Real's software sales fell to 63.7% of revenue from 72%; even so, software sales are expected to remain its bread and butter.
Last week, Real and America Online, in a major step for rich media, announced an agreement calling for AOL to deploy Real software throughout its network.
Real's revenue comes from selling software to consumers; selling software and services to Web sites; and advertising on its own properties.
Advertisers that have used Real's streaming capabilities recently include Ashford.com, Hewlett-Packard Co., Intel Corp., Launch.com and Nintendo of America.
"It seems pretty apparent that the company is shifting its model to become an all-encompassing media company rather than just a software provider," said Rob Martin, managing director and senior Internet analyst with investment bank Friedman, Billings, Ramsey & Co. He predicts advertising will account for 17% of Real's revenue this year, rising to 19% in 2001.
By bolstering its non-software business, Real is guarding against attack from Windows Media Player, which trails RealPlayer in usage but is gaining fast. In March, Media Player had 18.2 million unique users vs. 28.9 million for RealPlayer, according to Media Metrix.
Real faces steep competition on other fronts, too. Companies such as Napster and its software to download digital music files pose a threat to Real's real-time streaming business. Other companies, such as Yahoo! Broadcast and Exodus Communications, host audio and video content.
DEAL WITH APPLE
In June, RealNetworks struck a deal with Apple Computer to license QuickTime, yet another streaming audio and video technology. Real incorporated QuickTime into server software.
The competitive landscape is making it more crucial for Real to have a strong ad revenue stream. Much of the ad revenue growth can be attributed to Shelley Morrison, who has led Real's ad sales team since February 1999.
"Right now the streaming industry feels very much like the early days of the Web," said Ms. Morrison, VP-media and distribution sales. "This is the stage [before] real convergence."
Since joining RealNetworks from Walt Disney Co.'s Buena Vista Internet Group, where she was VP-advertising, Ms. Morrison has increased the sales staff from 14 to 37, eliminated cost-per-click deals and created new ad opportunities. Ms. Morrison also is charged with signing radio stations and Web audio and video content sites to distribution deals with Real.
A LONG WAY FROM VERMONT
It's all a homecoming of sorts for Ms. Morrison, who began her career as the "horoscope lady" on a Vermont radio station in 1972. Along the way, she covered the Olympics for NBC and ABC radio and worked as a radio war correspondent before winding up as marketing director for the Seattle Supersonics.
Ms. Morrison landed an ad sales job at Starwave Corp. in 1995, just after its launch of ESPNet SportsZone (now ESPN.com).
Co-workers give her high marks for creativity.
"When we were making it up as we went along in 1995 and 1996, we literally were creating programs on the fly, and she's very good at that," said Rich LeFurgy, Ms. Morrison's onetime boss at Starwave. Now he's a venture capitalist with Walden Group's WaldenVC and chairman of the Internet Advertising Bureau. "She's got one of the most interesting jobs in interactive ad sales in that she's in the real-day convergence of the Internet and broadband."
Real's biggest challenge is convincing advertisers that while banners and buttons are fine, streaming audio and video--so-called rich media--are better. Ms. Morrison acknowledges her job is as much evangelist as it is ad salesperson.
"We are advocates of [streaming advertising] on a broad scale, and not only on our own sites and channels," she said.
In March and April, she and a team of Real executives went on a four-city road show, presenting to agency creatives and media buyers in Chicago, New York, Los Angeles and San Francisco. Among other things, the show hyped so-called in-stream ads--15-second multimedia ads with video, audio and animation that play while something is viewed or heard using RealPlayer. Ms. Morrison's team repeated the message in June during "RealConference Europe" in France.
INCENTIVES SUPPORT TRIAL
As in the early days of Web sponsorships, Real offers aggressive incentives to convince agencies to try rich-media advertising. An in-stream ad package includes creative production by Real's in-house team, 3 million guaranteed impressions and a follow-up effectiveness study by Millward Brown Interactive. Cost starts at $70,000.
As Real takes on media attributes, it's exploring a tactic common in broadcasting: barter/syndication. The company has discussed with content partners a scenario under which Real would carry partners' content on its servers in exchange for ad slots that Real could sell. Current content partners include ABCNews.com, CNN.com, Pseudo Networks, Space.com, and Web-only and local radio stations.
"Instead of paying 'cash for carry' on Real Broadcast Network (Real's Webcasting service), we are considering allowing content providers to pay for airtime by allowing us to trade out with advertising," said Chief Financial Officer Paul Bialik, through a spokeswoman.
But at the moment, Real isn't taking any ad slots from content partners. It's a sensitive issue for content sites to let another company sell part of their inventory. Such a move would support rich-media advertising, but it would also give Real an advantage in deploying its particular rich-media offering.
If rich-media ads take off, Ms. Morrison and her Real team will be there. "The potential for broadcast campaigns that have an interactive component" is tremendous.
Contributing Editor Debra Aho Williamson writes the monthly Inside the Web report. Send Internet case study ideas to [email protected] or Editor Bradley Johnson at [email protected]
Copyright July 2000, Crain Communications Inc.