RealNetworks Targets Mobile Music With WiderThan Acquisition

| About: RealNetworks, Inc. (RNWK)

RealNetworks (NASDAQ:RNWK), an early pioneer of delivering video on the Web, has just made its biggest acquisition to date, and its first music-related acquisition since

Seattle-based RealNetworks said it's buying WiderThan, a provider of mobile music and ringtones, for $350 million. The move comes at a time when video is exploding on the Web, and upstarts such as Brightcove are changing the way video is being delivered on the Web, potentially threatening the video business of the original deliverers of that type of content, like RealNetworks.

Maybe RealNetworks should have bought Brightcove, I said to Glaser, in gest. "I don't get that UGC business," he said, in our conversation.

Maybe Glaser has just had his eyes set on mobile and music for some time. It's not surprising since RealNetworks makes more money - more than $100 million - from music than it does from video - about $100 million.

Prior to WiderThan's IPO last year, Jefferies & Co. approached RealNetworks buy the mobile service provider, RealNetworks' CEO Rob Glaser said to me. Glasier said he wasn't going to preempt the IPO, but he kept close tabs on the company. Around 10 months ago, RealNetworks got a cash infusion -- $761 million -- from a Microsoft (NASDAQ:MSFT) settlement. That gave RealNetworks some money to play with, and the ability to make its biggest acquisition in its history.

Mobile music and ringback tones isn't a bad business. Glasier is looking to at the ringback tone market in the U.S., where it is 5% compared to 40% in Korea. RealNetworks wants to "ride that adoption curve up," he said.

But the market for ringback tones isn't larger than video is today, if the stats are correct. According to ABI Research, ringback tones generated $65 million in 2005. On the other hand, online video advertising generated roughly $250 million in 2005. OK throw in music on demand is estimated to have been a $252 million market in 2005.

At least RealNetworks bought a company with sales, profit and cash. WiderThan earned $7.4 million in net income on sales of $61.9 million. But I think it for its next acquisition, it would be crazy not to focus on a video-enabling company. It may as well leverage its existing video customer base before they start finding other next-generation video enablers.