RealNetworks Revenue Model

1. RealNetworks Revenue Model Revenue Description Example Product sales Sell or license physical or Sell and license streaming information-based product media products Advertising Market other company’s Advertising on website, products or services carrying special promotions, Programming content Subscription fee Charge for regular receipt Selling annual upgrade of products or information subscription Commission or Agent, broker, or intermediate Programming customers Transaction fee charge. Can be a set fee or pay transaction fee based a % of cost on viewers Consulting and Charge for services provided. Services to design/develop service fee Set or variable streaming media content Membership fee Charge to belong to a group None

2. GUEST SPEAKER Thursday, February 1 Wayne Myamoto Systems Engineering Manager Cisco Systems Topic: “New Internet Technologies”

3. “In Turbulent times, an enterprise has to be managed to withstand sudden blows and avail itself of sudden unexpected opportunities. This means that in turbulent times, the fundamentals have to be managed, and managed well.” Peter Drucker

4. MARKETING: TRADITIONAL MODEL C C Content Channel P C C C

5. ELECTRONIC COMMUNITIES: NEW MODEL P P Con- tent C Content Channel Content C P P Con- tent C C Fuente: Hoffman, Novack & Chatterjee 1995

6. Consumers’ Needs for Community Communities of Transactions: facilitate the buying/selling products/services and provide information related to transaction (example: virtual vineyards) Communities of Interest: participants interact extensively with one another on specific topics (example: GardenWeb) Communities of Fantasy: where participants create new environments, personalities, or stories (Example: ESPNet) Communities of Relationship: participants come together around certain life experiences that often are intense and can lead to deep personal connections (Example: the Cancer Forum/CompuServe)

7. Traditional Sources of Economic Value in Electronic Communities - Charge Usage Fees - Charge Content Fees - Revenue from Transactions and Advertising - Synergies with other part of their business

8. New Roles in Managing Electronic Communities Executive moderators: Moderate discussion, keep discussions focused, inject new topics/provocative views,seed discussion with facts/content. Community merchandisers: Identify attractive goods/services, negotiate with providers, and market them creatively and unobtrusively. Executive editor: Develops a programming strategy for community and manage external providers of content, information, and services. Archivist: maintains and organizes the content generated over time. Usage analyst: Studies data on participants’ behavior. New-product developer: Keep the community fresh/distinct from rivals.

9. Follow-Up June 98 Microsoft partner with broadcast.com July 98 RealNetworks charged that Microsoft’ WMP had sabotaged its RealPlayer in the US Senate Judiciary Committee’s hearing on the Microsoft’s anti-competitive business practices. Nov 98 Microsoft announced: “Though the companies have achieved some initial interoperability, RealNetworks and Microsoft have decided to accelerate their innovations and impro- vements in different directions.” Microsoft to pull out $140 Million+ from RealNetworks

10. Follow-Up April 2000 Microsoft won’t include RealNetworks toolbar in IE 5.0 Yahoo! bought Broadcast.com ($5.7 Billion) Yesterday Larry Jacobson, former president of Ticketmaster and former president of FOX Television Network, named President of RealNetworks. Product: PC wirelessly sending Internet media to other consumer devices in a home Today RealNetworks has 125 Million subscribers and over 60% of market share

11. The most popular revenue model on the Internet is advertising REVENUES = (# Visitors/day) * (# pages viewed/ visit) * (365 days/year) * CPM In 2000, average CPM price was $60-$150 depending on site’s reach. Source: Cowen Internet Observer, Jan 2001

12. Launch of Real.com RealAudio Made compatible with MS WebTV Split Shares fall 16% on speculation that Yahoo will stop usingsoftware Shares climb 12% after record 111% jump in Q4 revenues Split Includes MS Windows Media in versions of music player software RNWK History and Financial Impact

13. Key Success Factors • Technology Distribution Relationships

14. Technology • Changing the standard--core competence • Proprietary streaming technology • Targeted audio technology vs. video • Timing • Piggy-backed advertising and Internet craze • Beta testers

15. Distribution • Ensured high quality • Consumer readiness • Timing--educated public • Predicted the market well • Thought leadership • Made it easy for customers to use • Gave away client-side software (switching costs)

16. Relationships • Quality, Reliability, and Speed • Value, trust, and convenience • Reputation • Targeted larger customer base (non-techies) • Brand • Loyalty - decreased acquisition costs • Partnerships--> Advertising/ Content

17. Real Networks, Inc. Real Broadcast Networks Content Context Streaming Software Infrastructure

18. Microsoft Licensing Agreement • Technology • Licenses • Distribution • Channels • Relationships • Customers

19. Key Risk Factors • Disruptive Technology • Channel Conflicts • Decreased Distribution Capability • Getting “Leap Frogged” • Resource Allocation • Competitive Dynamics • Microsoft’s response

20. Trade-offs in RealNetworks’ Strategy Pros • Diversification of Risk • Full-Integration Cons • Competition with Customers • Spread too Thin • Microsoft Could Take Advantage of License Agreement

21. The “Harvest” Decision Advantages Disadvantages - Access to short- & long-term capital - Lose of operating confidentiality - Future offerings to fund growth - Cost of public auditing, reporting - Establish market value and shareholder fiduciary responsibility - Controls to protect shareholders and and from shareholders - Image management more serious - Info controlled to prevent inside trading - SEC limits timing and amount of stock insiders may sell - Founders get money immediately - Key managers/employees needed to keep - Acquiring company assumes all risks. core employees - Non-compete clauses limit expenditure . - If sale through stock exchange, founders receive a fraction of the purchase price - Access to resources required to grow - Synergies do not materialize - Increase scale, scope and market share - Clash of cultures, operations, or system - Management continues to be involved - Lack of freedom to operate the company Public offering Outright sale Merger, acquisition or partnership

22. THE PRIMARY OBJECTIVES OF • THE REALNETWORKS, INC. CASE STUDY WERE: • 1. TO DESCRIBE INTERNET STREAMING MEDIA, AND ITS • MARKET OPPORTUNITY. • 2. TO PROVIDE AN ILLUSTRATION OF A FIRM THAT • IDETIFIED A NEW TECHNOLOGICAL OPPORTUNITY, • AND ISSUES RELATED TO HOW TO PROVIDE VALUE. • 3. TO EXPLORE THE CHALLENGES FACE BY MANAGERS IN • DESIGNING, BUILDING, AND GROWING A SUCCESSFUL • INFORMATION AGE BUSINESS. • (COMING UP WITH A GREAT IDEA IS JUST THE FIRST • STEP IN THE PROCESS…)