RealNetworks’ Share Slide on Analyst Downgrade; Increasing Competition

RealNetworks’ shares slid Tuesday after an Stifel Nicolaus analyst Kit Spring downgraded the stock, saying it is overvalued and that competition in the online music and video space will only get tougher, which is not an unfair assessment, considering that Flash came out of nowhere as a video player over the last one year or so.
“We expect competition to intensify for RealNetworks, most notably in its faster growing music and games businesses. Several of the Internet and media heavyweights have recently announced and/or may announce new initiatives in music, video, and games in the second half of 2006,” wrote Spring…the analyst also called the stock expensive compared to others in the Internet media sector. Besides competition, Spring also noted that subscriptions for the company’s music service have declined, as have users of the RealPlayer media player. “Investors may be overestimating long-term margin potential in music — historically a loss leader in ‘bricks and mortar’ retailing,” Spring wrote.
From the report: Spring wrote: “The RealPlayer, a source of cheap subscriber acquisition, is continuing to be less relevant as websites embed video — you don’t need a RealPlayer or Microsoft’s Window’s Media player to watch a video on YouTube, Yahoo, etc.”
Also, this is more troublesome: “Subscriber metrics have also been deteriorating: RNWK’s pace of acquiring new net subscribers has slowed in Music and is declining in video. In 2Q, RNWK added only 50k music subscribers, down from 150k in 1Q06. Overall it did not add any subscribers during the quarter, implying its SuperPass video subscribers fell. While RNWK could see a temporary tick-up in 3Q due to the exclusive Big Brother content, we expect video subscribers to continue to decline as RNWK does not have enough proprietary content that is worth paying for given the explosion of ad-supported free content on the Web.”

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