What's the problem? Due to the settlement of Real's antitrust suit against Microsoft, the company had $780 million in cash at the end of 2005. And, the Microsoft litigation costs had gone away. The market cap for the entire company is less than $1.4 billion. Adjusting for all this cash, the market is putting an enterprise value of less than $4 on RealNetworks.
Arguably, the company just had its best year ever. Revenues rose to $325 million from $267 million in 2004. Online subscriptions to Real's music and other products rose to 2.25 million. In the first quarter of 04, they were 975,000.
The RealNetwork's forecast for next year was not awe-inspiring, but called for reasonable growth and solid margins.
The problem seems to be that the markets cannot accept RealNetworks as a standalone company. Perhaps they see too many risks from online music competitors like Apple (AAPL) or from multimedia player companies like Microsoft (MSFT). Although they settled with Microsoft, the drive to get the Windows Media Player to be the dominant multimedia player in the world is not going to end.
There has been a debate for many years about who has the most media player downloads on PCs, phones, set-tops, and other devices. A lot of players get downloaded or shipped with PCs and then never get used, so the debate also moves to "players in use". Apple says it has 250 million downloads of its Quicktime player. Kevin Foreman, who runs one of the divisions at Real, says that they have 400 million downloads based on unique e-mails addresses from the users. These numbers may be fairly good approximations.
Leave it at this. Only a very small number of companies have this kind of media player distribution. Being on hundreds of millions of PCs has a value. It is not unlike owning a cable or TV network. It is a delivery platform with few competitors. The fact that Real and Microsoft also have the best digital rights management to protect content from theft improves the value of Real's "network" even more.
Real has also made inroads to the cellphone and cable markets, cutting deals with Cingular and Cox (COX). As of a year ago, the company claimed to have 70 operators in 40 countries using the Real Universal Mobile platform.
But, the market feels that RealNetorks is just too small. It's in the stock price. Having the distribution is not enough. You need the content, the eyeballs and the marketing muscle.
Real needs to turn to TimeWarner (TWX) or Yahoo! (YHOO) and get itself a parent that can leverage the technology and distribution. Could this happen at a 40% premium to the current price. Based on the sales of some other public software companies in the last year, it's possible. Is Real's stock likely to get to $12 on its own anytime soon. I doubt it.
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetix. In addition, he has been chief executive of On2 Technologies, Inc. He does not own securities in the company in this article.