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RealNetworks files $1 billion antitrust suit against Microsoft

By Kim Peterson and Brier Dudley
Seattle Times technology reporters

RealNetworks' Rob Glaser: Was a Microsoft executive before striking out on his own.
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Real Networks' antitrust complaint against Microsoft (2.6 MB PDF)
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A regional rivalry turned into a nasty legal battle yesterday when RealNetworks filed a $1 billion antitrust lawsuit against Microsoft, claiming the software giant is still a predatory monopolist.

RealNetworks alleges Microsoft is using the same tactics that crushed the Netscape browser in the 1990s to snuff competition in the market for digital media players, a core part of Seattle-based RealNetworks' business.

In its lawsuit, RealNetworks said the 2001 U.S. antitrust settlement with Microsoft won't prevent the Redmond software giant from extending its monopoly beyond the personal computer and dominating the way digital media are created and played on other devices.

"Government intervention alone has not been sufficient," RealNetworks Chief Executive Rob Glaser said yesterday in a conference call with reporters. "It has become clear that Microsoft's settlement with the Department of Justice will not fundamentally change Microsoft's predatory conduct."

The two software companies were once friendly and made the region a center for digital-media technology, but their relationship frayed in the late 1990s, when they began to compete head-on.

Founded in 1994 by former Microsoft executive Glaser, RealNetworks pioneered technology for playing music and video over the Internet. But Microsoft leads the market, four years after it began bundling its media player into its dominant Windows operating system.

Antitrust experts said RealNetworks' case is one of the larger legal threats facing Microsoft. Others are a private antitrust lawsuit brought by Sun Microsystems and a European Union case in Brussels, Belgium, that, among other things, is looking into whether Microsoft gets an unfair advantage by tying its media player and operating system together.

Microsoft's Bill Gates: Lawsuit cites notes, e-mail from 1997 meeting he attended.
Although RealNetworks is seeking up to $1 billion — including the treble damages allowed under antitrust law — several financial analysts said the case is unlikely to drive down Microsoft stock since it may take years to resolve. RealNetworks executives said they want to expedite the case, but even then, it could last three years.

Microsoft's chief lawyer denied RealNetworks' allegations and questioned the timing of the case.

"I don't think the industry is well-served by this general practice of hiring lawyers and flying them to Brussels, then flying them to California, then flying them to D.C.," said Brad Smith. "There are two bridges across Lake Washington. We're perfectly capable of more rational discourse."

Smith noted that RealNetworks testified against Microsoft in the U.S. antitrust case before District Judge Colleen Kollar-Kotelly.

"Real had its day in court in Washington, D.C., last year," Smith said. "They testified in court, their testimony was cited over 80 times by Judge Kollar-Kotelly in her decision, so their views were considered. She found their views not persuasive."

The lawsuit focuses on competition between the leading producers of software designed to play music and video.

RealNetworks introduced its digital media player in 1995. Microsoft introduced its version in 1997 and in 1999 began bundling it into Windows.

In the lawsuit, RealNetworks alleges that its business has been hurt because Microsoft unfairly used its dominance in computer operating systems to give its media player broader distribution.

It cites internal Microsoft e-mails and meeting notes, including notes from a 1997 meeting attended by Chairman Bill Gates and executives Paul Maritz and Bob Muglia. The notes quoted Muglia as saying RealNetworks "is like Netscape, the only difference is we have a chance to start this battle earlier in the game."

As with Netscape and browsers, RealNetworks used to dominate the media-player market. But Microsoft has steadily improved its product, extended its reach by incorporating it with Windows and taken market share.

From October 2001 through March 2003, Microsoft's media player was preinstalled on 95 percent of all new personal computers, the lawsuit said. RealNetworks' competing media player was preinstalled on less than 2 percent.

RealNetworks has a broad user base, but it trails Microsoft, according to research firm Nielsen//NetRatings. In October, Microsoft's media player had 33 percent of the U.S. market for Internet applications, while RealNetworks had 19 percent. That translates to 44.6 million users of Microsoft's player compared with 26.2 million users of RealNetworks'.

Smith said the digital-media market is in flux and RealNetworks has lost market share to other media players besides Microsoft's. "This is a very dynamic market, and I think the future of this market is going to be decided by the quality of companies' products and the reactions of consumers; it is not going to be decided by lawyers and lawsuits."

RealNetworks said that while it is surviving financially, it could have been richer if it weren't for Microsoft.

The company's lawsuit covers Microsoft's conduct the past four years, the period covered by the statute of limitations in antitrust cases.

Microsoft has settled other private lawsuits with large payouts, including a $750 million settlement with AOL Time Warner, which now owns Netscape, the software company that was an early focus of the U.S. antitrust case.

But the company is more likely to fight RealNetworks rather than settle, because that could encourage more companies to bring antitrust cases against Microsoft, said Ernest Gellhorn, an antitrust expert and law professor at George Mason University School of Law in Arlington, Va.

"It's one thing to pay off those who were clearly identified in the government's case as having been injured by Microsoft," he said. "To extend that principle to cover additional market participants would seemingly invite the line to get longer of those who are now going to be seeking a handout from Microsoft."

Another antitrust expert said there's more at stake than money in the Sun and RealNetworks cases.

"We're getting down to whether any plaintiff, government or private, will be able to change Microsoft's strategy with respect to integration," said Andy Gavil, a law professor at Howard University in Washington, D.C., who has consulted on the Sun antitrust case.

The lawsuit was filed in federal court in San Jose, Calif. RealNetworks executives said they chose Silicon Valley because it is home to a number of witnesses who have seen firsthand the impact of Microsoft's predatory practices.

"We felt very comfortable that when a jury is able to see the entire story and hear the witnesses, they're going to conclude that Microsoft has once again violated the antitrust laws," said RealNetworks general counsel Robert Kimball.

San Jose is also where Sun filed its Microsoft case in March 2002. That case was moved to a federal court in Baltimore that was hearing other private antitrust cases.

RealNetworks expects its case to be moved to Baltimore as well, though it would likely come back to California once a trial begins.

Microsoft's Smith had not decided whether to ask to move the case to another court. "I was surprised that one Seattle company is going to California to sue another Seattle company," he said. "There is a federal courthouse in Seattle."

The companies were once partners. Glaser worked at Microsoft, and in 1997, Microsoft bought a 10 percent stake in RealNetworks. But a year later, Microsoft withdrew from its investment, the lawsuit said, and introduced its Windows Media Player software.

In May 1999, Microsoft launched the Windows 98 Second Edition and began to tie its digital media player to its operating system, the lawsuit said. Since then, Microsoft has been bundling its media player with its operating systems. RealNetworks' lawsuit argues that Microsoft's giveaway of its media player is designed to exclude competitors. The move is likely to create a monopoly in the digital-media market and maintain Microsoft's hold on the PC operating system, the lawsuit said.

Once Microsoft commands a digital-media monopoly, it can charge high prices for its digital-media products or for the operating systems bundled with those products, RealNetworks said.

The company also alleges Microsoft has bullied or paid off computer makers so they accept the Windows operating system with the Windows Media Player included. Microsoft also does not allow Windows users to uninstall the media player, the suit alleges.

The underlying code may remain, but users are able to remove links to Windows Media Player. Under its U.S. antitrust settlement, Microsoft was forced to distribute software that enables Windows users to change settings so Windows Media Player is not the system's default media player.

While it's being sorted out in the courts, the case is unlikely to have a big effect on Microsoft stock, several analysts said.

"Certainly, more antitrust legal issues are not good news for Microsoft, but I think investors understand there's still a large legal liability out there, the company has been branded a monopoly, there's liability around that," said Victor Raisys, of Soundview Technology Group in San Francisco, who personally owns the stock.

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com


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