Real Problems for RealNetworks

Cut through the S&P analyst speak, and there’s a lot of sense. RNWK is going through an identity crisis, as it periodically goes through every two years or so, for one reason or the others. However, this one is perhaps the toughest it has gone through.

In music, it is facing tons of competition: “Although RealNetworks has a significant user base, it seems that a number of others with greater name recognition and financial backing are in the offing.”

In the consumer multi-media subscription service: “RealOne is strong in sports, with content from MLB, NBA and NFL. However, Yahoo! Platinum holds its own in financial news, thanks to its relationships with CNBC and CBS MarketWatch….RNWK’s contract with MLB is due to expire after the 2003 season, and S&P believes that America Online and Yahoo! are both interested in the exclusive relationship.

On the player side: “Microsoft’s Windows Media Player has been gaining share, and that player, along with Apple’s QuickTime, are expected to be included along with the RealOne Player in AOL 9.0 when it debuts in October.”

Overall, “We believe it will have to spend more on both Internet content and associated relationships, and research and development efforts to enhance its software offerings. This would hurt RealNetworks’ margins and profits.”

What the story doesn’t mention is the brain drain at the company: during the last 10 months of this year, about 12-15 senior level execs. have left the company, some starting their own ventures and some joining other companies. Of course, it is not unusual for a person like Rob Glaser to run through people on a regular basis, but this is unusual even for his company. Of the people left at the company, Larry Jacobson, the president, is now concentrating on international efforts. Sean Ryan, who came in through Listen.com, and now looking after RNWK’s music efforts, has got to be feeling the pressure…

Meanwhile, the company’s efforts in wireless arena has been mixed, at best: it faces competition from a slew of nimble upstarts, and of course, Microsoft.

Back to the story, “Based upon these considerations, what we consider limited prospects for RealNetworks to generate earnings over the next three years, and the stock’s recent price, we think its shares are overvalued.”

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