Why Real sued Microsoft

Analysis Microsoft asked RealNetworks for royalties from the latter's Helix Universal Server even though it contained no Microsoft code, according to the antitrust suit filed by RealNetworks this week.

Microsoft has also "refused to disclose or delayed disclosing APIs" related to Secure Audio Pathway, a Microsoft technology that encrypts audio streams to the audio card (see Welcome to .NET - how MS plans to dominate digital music sales).

The accusations will have a familiar ring. Even RealNetworks' explains as much in the filing, because the tactics were in many cases identical to those deployed against Netscape.

According to records of a June 5, 1997 meeting made by Microsoft's Jim Durkin, at which Gates, Maritz and Muglia attended, Muglia said RealNetworks "is like Netscape, the only difference is we have a chance to start this battle earlier in the game". Adding to the familiarity, Real makes extensive use of the Findings of Fact in the earlier, federal suit against Microsoft.

"Microsoft's current tactics in digital media are the unlawful tactics it followed in annexing other markets: product bundling, technical tie-ins and/or lock-outs, restrictive licensing, exclusive dealing, predatory pricing, refusing to sell unbundled operating systems and discriminatory disclosure and withholding of information needed to interoperate with Microsoft's operating systems," claims Real.

"The prices at which Microsoft distributes its digital media products (zero and negative prices) are below any relevant measure of Microsoft's costs, including its average variable costs, its average total costs and its short-run and long-run marginal costs," Real argues.

A few points are new, however.

Microsoft selectively licensed the Secure Audio Pathway (SAP) APIs, RealNetworks alleges, so competitors "have to run SAP-protected content through Windows Media Player, using Windows Media formats and codecs, Windows Media protocols and Windows digital rights management" according to the filing. For example, Real wanted to offer a plug in similar to the MP3 Creation Pack for Windows Media Player, which Microsoft developed with three other companies. But Redmond only provided the information at a much later date.

Real doesn't give a specific example of a PC OEM agreement, but the list of probitions cited is lengthy.

PC makers have informed RealNetworks that their agreements with Microsoft have precluded them from, amongst other things, "removing or changing the status of Windows Media Player"; promoting RealOne subscription services during the first run of a new PC or preloading music files encoded in RealNetworks' formats in the 'My Music' folder; or making any player other than WMP the default player.

The suit reminds us that Redmond adopted similar tactics to those deployed in its battle with Sun Microsystems' Java. Microsoft bought time by licensing Java, then sought to undermine its cross platform (WORA, or Write Once Run Anywhere) appeal by adding Win32 extensions that didn't conform to Sun's specification. (Sun has its own antitrust suit against Microsoft). In 1997 Microsoft invested in RealNetworks, only to walk away the following year.

Beyond the PC

Although RealNetworks is claiming damages for a historical period, it argues that the case is more about the future than the past.

The case has "implications far beyond the PC", according to the suit: on to set top boxes, handhelds and phones.

"Microsoft's conduct threatens to dominate the creation, delivery and playback of media ... Regardless of the device used for delivery or playback."

"Microsoft's plan is to use its monopoly power in PC operating systems to dominate the market for digital media systems. If Microsoft achieves that dominance now, while the PC still plays a critical role in digital media systems, it can keep and expand that dominance if and when digital media moves beyond the PC."

There's every sign that manufacturers recognize this. On Nokia's Series 60 phones, now starting to migrate from the high end into affordable mass market models, Real is the default video player. Ericsson inked a similar deal this week, following an earlier agreement to license Helix server. And the standards here are laboriously developed by the 3GPP, rather than Microsoft. ®

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