What's wrong with Microsoft?

The software giant usually demolishes any opponent that dares to step in its path. But it can't beat streaming-media king RealNetworks.

By Damien Cave

Feb 16, 2001 | If Microsoft had its way, which it usually does, it would be dominating the streaming-audio and streaming-video software market with typical ruthless efficiency. Over the past decade, Microsoft has littered its path to world domination with the corpses of countless competitors; a little company named Netscape comes to mind. But when the subject is streaming media -- seen by many observers as one of the big growth areas of the broadband Internet future -- Microsoft is stumbling far, far behind the market leader, RealNetworks.

Though not for lack of trying. Microsoft is up to its usual tricks, bundling its software as a free add-on to its operating systems and signing Windows-only deals with every company it can. Boston's WGBH, Manhattan's WNYC and dozens of other public broadcasters stream their audiovisual content only in the Windows Media Player format. Trance-heavy Spike Radio also forces listeners to use Microsoft's player, and when millions logged on to MSN last year to watch sold-out shows by Paul McCartney and Madonna, their Real and QuickTime players did them little good. Microsoft had already cordoned off the content, routing the streams exclusively through Windows Media servers.

RealNetworks CEO Rob Glaser first raised the specter of a Microsoft-monopolized streaming-media market two years ago when he testified before Congress about Microsoft's "anti-competitive practices." Since then, Microsoft has slowly begun to cut into RealNetworks' dominant position. Microsoft representatives are, as usual, serenely confident: They expect "to reach parity quite quickly," says one spokesperson. And when influential Merrill Lynch analyst Henry Blodget downgraded RealNetworks' stock on Jan. 24, he focused on the company's allegedly imminent fade, writing, "There's a significant risk that Microsoft will do to RealNetworks what it did to Netscape -- take over the market by bundling functionality in larger products and giving it away for free."

But even with Microsoft's recent gains, twice as many users tuned into Real Player's streams last year, according to Nielsen/Net ratings. Meanwhile, more than 85 percent of the streams on the Web are RealNetworks-encoded, and the Net's most popular streams still arrive through RealNetworks' servers, not Microsoft's or QuickTime's. And that's after four years of effort by Microsoft -- in a competitive environment in which RealNetworks charges users of its server software for every stream that gets broadcast, while Microsoft lets people stream for free.

So is the Colossus of Redmond crumbling? Not exactly. It is worth remembering that Microsoft doesn't always win, despite its reputation. Microsoft Money's failure to displace Intuit's Quicken as the most popular personal financial management program is exhibit No. 1 of Microsoftian fallibility. There is also the widely noted dominance enjoyed by the Apache Web server over Microsoft's IIS, although Microsoft has made significant gains lately in some high-performance e-commerce niches.

More to the point is the fact that the fight over streaming video is taking place on a different battleground than the fight over the Web browser or other popular applications, like word processing or spreadsheets. It's not desktops that are at issue but Internet servers, those Net-connected computers that host the audio and visual content streamed out to users. Microsoft, as the Apache example indicates, doesn't control the server market -- and because of that fact, many Net citizens can breathe a sigh of relief. For whoever controls the servers controls a massive portion of the Net's core infrastructure. And if Microsoft gained that power, then the company really could do anything it wanted.

Right now, no one controls the server market -- Sun Solaris, IBM, Windows NT, Linux, FreeBSD and even Apple are all major players. The key to RealNetworks' success, in large part, is understanding this heterogeneity and adapting to it, rather than attempting, à la Microsoft, to do the opposite and make the Net conform to Gates and Co.'s wishes.

Is RealNetworks a hero, then, a child of the cross-platform, open-standards Net? Not quite. RealNetworks also plays its own proprietary game, ensuring that no one else can play Real-encoded streams. But maybe that's the answer: Perhaps the only way to beat Microsoft is to be both proprietary and open.

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