Microsoft Corp. and RealNetworks Inc. yesterday ended years of bitter rivalry, settling Real's antitrust claims against the software giant and forging a partnership in online music and gaming to help the two companies more effectively battle competitors.
Under the agreement, Microsoft will pay Real $761 million in cash and services. Microsoft will promote Rhapsody, Real's subscription service for online music, throughout Microsoft's MSN network. And Microsoft Chairman Bill Gates said his company would ensure that Real's media player operates seamlessly with the Windows operating system, an issue at the core of Real's 2003 antitrust lawsuit against Microsoft.
In return, Seattle-based Real is withdrawing the suit and will no longer participate in actions against Microsoft by competition authorities in Europe and South Korea.
Microsoft was fined more than $600 million by the European Union last year and ordered to produce a version of Windows without its Windows Media Player, so that Real was not disadvantaged by Microsoft's near-monopoly in personal-computer operating systems.
Microsoft is appealing the decision, and the status of the E.U. case is now unclear.
In the United States, the settlement closes the last in a series of cases that have dogged Microsoft since the Clinton administration's Justice Department and 20 states sued the company for antitrust violations.
In 2001, a federal appeals court ruled that Microsoft had engaged in a series of anticompetitive acts in the 1990s that helped cement its dominance. The company eventually settled the case with the government, which was followed by the series of private lawsuits.
With the RealNetworks agreement, Microsoft will have paid about $4.6 billion to seven companies, including Sun Microsystems Inc., Time-Warner Inc. (on behalf of America Online), International Business Machines Corp., Novell Inc., Gateway Inc. and Burst.com Inc.
Microsoft also has paid about $1.5 billion to settle state and consumer class-action claims in connection with the antitrust violations.
The Real settlement "is an important milestone," said Microsoft General Counsel Bradford L. Smith, who has worked for more than two years to resolve the company's legal troubles. "This has been one of our goals, to find a way to make peace."
Microsoft's strategy has been to use its cash horde to free itself of legal burdens, and in the process develop working relationships with companies that in the past it often sought to hobble.
Few of those battles had more personal animosity than the rivalry with Real, which was founded by former Microsoft employee Robert Glaser.
Real grabbed an early lead in media-playing software, which began to erode as Microsoft bundled its media player with Windows.
Today, the two companies face stiff competition in digital media, such as Apple's iTunes service and Yahoo, which has moved aggressively into video news and entertainment.
Microsoft plans its own subscription music service, but it has not gotten off the ground. By incorporating and promoting Rhapsody on MSN and in its instant messenger application, Microsoft gets a toehold on the market.
RealNetworks and Microsoft also will collaborate to produce online games that will be featured on MSN and on Microsoft's Xbox Live arcade.
"This is the start of a new relationship," Glaser said as he and Gates appeared together. "It's ending one chapter and opening a new chapter."