Apple and RealNetworks -- the 'Real' story

RealNetworks confirmed today that CEO Rob Glaser has e-mailed Apple CEO Steve Jobs to encourage Apple to make the digital rights-management technology used in the iPod compatible with Real's. At stake is Apple's early lead in the digital music market, which analysts feel Apple will need partners to maintain.

"I can say this: It's true that Rob sent an e-mail to Steve," RealNetworks Vice President, Corporate Communications, Greg Chiemingo told MacCentral. "Certainly some of the things [in that e-mail] are consistent with what we've said before -- that Apple should open up the iPod."

Chiemingo said he was unaware of any response to Glaser's memo from Apple or Jobs.

Chiemingo explained that RealNetworks' RealPlayer Music Store relies on the same format as Apple's iTunes Music Store: Dolby Advanced Audio Codec (AAC). Where the services differ is in their Digital Rights Management (DRM) encoding. Apple relies on a technology called FairPlay, while RealNetworks' system, which depends on its Windows-only RealPlayer 10 software, uses Real's own Helix DRM format.

"The market for permanent protected audio is in the early stages of a format war between Apple and Microsoft," said Joe Wilcox, senior analyst with Jupiter Research. "Apple may be the early leader in consumption, but Microsoft and its partners have laid broader distribution infrastructure. Most major stores have adopted Microsoft's format, more than 60 devices support the WMA DRM and Windows Media Player ships on every version of Windows sold."

What's stopping the iPod from supporting RealNetworks' music store is licensing, Chiemingo said. Apple could either license FairPlay to RealNetworks for use on their RealPlayer Music Store, or Apple could support Helix on the iPod. Alternately, suggested Chiemingo, Apple could also support Microsoft's Windows Media Audio (WMA) format on the iPod.

"Since we're both using AAC, it's very clear that [RealPlayer Music Store and the iPod] should be able to talk with one another, from a technical standpoint," said Chiemingo.

With dominant positions in both commercial online music download sales and digital player sales, however, Apple doesn't have much motivation to make a deal with RealNetworks. Chiemingo contends it's the right thing to do.

"Anything that helps consumers purchase music legally is in the best interest of the industry," he said. "It's clear that Apple has a different interpretation of what that means."

Jupiter's Wilcox agrees citing research that shows 70 percent of consumers have WMA on their primary computer, 60 percent have Real and 4 percent have iTunes. However, when you eliminate Mac users and the Windows users that also own a Mac, iTunes only shows up on 2 percent of the machines.

Apple's strategic partnership with HP will bring HP-branded iPods to market this summer, and HP is installing iTunes on its consumer computers. Those are good signs that Apple is looking for ways to expand its market penetration and maintain its leadership position, but Chiemingo urges Apple not to "turn this into a Mac thing." Asked to clarify, he recounted Apple's early experience with the Macintosh -- a great product that was ultimately marginalized by Microsoft's efforts.

"Apple has an opportunity to extend an early leadership position and carve out a place for FairPlay as one of two likely dominant formats [with Microsoft] for permanent protected audio," said Wilcox. "To get there, Apple needs partnerships -- While AOL and HP are good starts, they need more. One of their strongest potential partners would be RealNetworks."

Unlike Apple, RealNetworks doesn't have its own high-margin hardware player to sell to its customers. RealNetworks instead relies on licensing partnerships with device manufacturers. So far, RealNetworks has struck deals with Creative and Palm and is reaching out to handset manufacturers like Nokia.

"We don't have any skin in the [digital music player] device game, as it were. We just want to make it easy to manage music that people pay for and legally download," said Chiemingo.

"I can't stress enough how early in the game this is," he added. "Last year was the first good year for this business, and collectively we hope that there are many more to come."

Apple representatives were not immediately available to comment.

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