RealNetworks: He fought Microsoft and he won ... now he wants to make sweet music with Gates

'The Apple-Motorola phone could be a train wreck'

The $761m is what Microsoft paid earlier this month to settle an anti-competition lawsuit brought by its American rival, alleging that Gates's company had used its Windows operating system to lock out Real's RealPlayer software in favour of Windows Media Player.

Bundling Media Player with Windows put it on 90 per cent of personal computers, and helped Microsoft's file format and media server software dominate the market, Real argued. The European Commission agreed and demanded Microsoft ship a version of Windows without Windows Media Player.

With the competition authorities on his side, Glaser, Real's chief executive, could have fought on. Instead he settled for a deal that amounts to around two and a half years' turnover for his company.

Just over half of the settlement, $460m, is in cash. The remainder will be paid for in services from Microsoft, such as advertising for Real's Rhapsody music service on Microsoft's internet portal, MSN.

"Even with the benefit of a short period of hindsight, it would have been hard for us to have achieved a better outcome," says Glaser. He argues that the deal should boost take-up of his company's premium subscription-based services. It also provides Real with a valuable war-chest for acquisitions.

But as much as he values the cash, he seems just as happy the settlement is "amicable". Glaser is an ex-Microsoft employee, and despite fierce competition with the software giant for the best part of a decade, he believes now is the time to make peace.

Much has changed since Glaser founded Real in the early 1990s. RealPlayer, launched in 1994, allowed users to watch or listen to "streaming" content in real time, rather than having to download a file to their computers first. Real developed and marketed the server software for broadcasters and other companies that wanted to put their content on the net.

Microsoft, Glaser points out, was not even in the streaming media business when he started Real. But by the late 1990s, the two companies were engaged in a fierce struggle over media player standards. Whoever controlled these would hold the key to the emerging broadband and multimedia markets.

Today, the picture is rather different. Streaming media, although important, is overshadowed by music downloads, driven in turn by the huge popularity of portable music players such as Apple's iPod. The latest iPods can now also play videos.

Real, for its part, is focusing on music download services like the subscription-based Rhapsody. It also has a fast-growing business in games downloads, and in services for mobile phones.

Microsoft, too, has changed its position. It has other rivals in its sights, including Apple. It is also gearing up for the launch of the Xbox 360 games console in December. Settling with Real gives it access to technologies that will help it distribute content to online Xbox users.

"We are not saying we have gone from total adversaries to absolute friends," says Glaser. "But we will be collaborating in around 60 per cent of our business, primarily in music and games, and competing in 40 per cent, which is around system software and media players."

For Glaser, settling with Micro- soft allows the two to rebuild trust and work together again. He is an admirer of Gates but concedes that attempts at technical collaboration, in areas like digital rights management, foundered due to the legal dispute.

Those discussions have now resumed, and will include areas such as joint efforts on search technologies - a business where Gates is determined to take on Google. Putting MSN Search into RealPlayer will get the Microsoft portal on a lot more PC desktops.

Real will also back Microsoft's software for portable media players.

And Glaser's decision to opt for access to Microsoft services, and not just cash, might also prove astute. It cements the working relationship and puts the Rhapsody service in front of millions of MSN users, giving it a leg-up in the fight with Apple's iTunes.

Glaser's battle with Microsoft would have made him a natural ally of Apple's chief, Steve Jobs. But he criticises Apple for adopting closed technologies instead of open standards. "Microsoft takes a very wide approach to licensing its digital rights management software. It is vexing that Apple has taken a closed approach."

Glaser believes that being open - and not tying his company's software to one camp, be it Apple or Microsoft - will help it gain ground in new markets. Visitors to Real's websites download one and a half million pieces of software a day, but that is dwarfed by the potential market in mobile phones.

"We can gain share there. There are already 40 million handsets with our player, and there will be 760 million handsets sold this year. That compares with less than 100 million PCs." Music, video and TV services, and easy-to-download games, will all, he predicts, transfer well to the phone.

He believes handset firms and operators will pick Real as its software is open and plays a range of file formats - something the Microsoft agreement only strengthens. That, he adds, is in contrast to Apple's strategy.

"The Apple-Motorola phone could be a train wreck. Apple's deal with HP [to sell iPods] was a train wreck. That end-to-end approach to designing the customer experience can be effective early on, but over time it will lose out because of the share of market forces against them."

And it could be that thinking which prompted Real to strike a deal with its old enemy now, rather than later.