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RealNetworks Should Acquire A Payment Company ASAP

Posted on Tuesday, Apr 13th 2010

Rob Glaser, founder of RealNetworks (NASDAQ:RNWK), resigned as CEO in January. Bob Kimball is its new president and interim CEO. Kimball joined the company in 1999 and for 10 years was responsible for legal matters and business development. During the fourth quarter earnings call, he outlined a plan to exit the content businesses and focus on the company’s core infrastructure for delivering and playing digital media on computers and mobile phones. Let’s take a closer look.

RealNetworks will be spinning off Rhapsody, its music joint venture with Viacom’s MTV Networks, into a standalone company. Rhapsody is a music subscription service that allows subscribers to listen online or download music to their players for a monthly fee. The business model was not working for it as it also needs to pay royalties to record labels whenever subscribers use its service and also because online music has become easily available and cheaper. Following the spinoff, RealNetworks and MTV/Viacom will each maintain a 47.5% stake in Rhapsody. Just before the spinoff, the company cut 60 jobs or 4% of its workforce.

Rhapsody recently announced that it would be reducing its monthly subscription fee to $10 from $15 in a bid to save its customer base. In 2009, Rhapsody lost 125,000 of its 800,000 subscribers. However, it is hopeful about its applications for playing music on mobile devices. Its iPhone app has seen more than 1.5 million downloads. It has launched a new Android application, and a BlackBerry app is expected by the second half of this year.

Its games division, RealGames would on the other hand, function independently but remain as part of the company. For the past two years, RealGames has been posting losses. Its revenue comes from ads and game downloads. It posted a $62.5 million loss in 2009 as the online ad market slumped and price wars followed. As part of its new strategy, it would be sticking to higher prices for premium games. The company already has an audience of about 3.5 million on Facebook. According to comScore Networks, it is ranked twelfth among online gaming sites in the United States, with more than 5.3 million unique visitors per month. A spin-off of the games division is imminent, but executives don’t see an actual spinoff in 2010 unless market conditions improve.

RealNetworks reported fourth quarter revenue declined 5% to $145.5 million. Net loss attributable to common shareholders of $(13.3) million or $(0.11) per share versus $(240.5) million, or $(1.78) per share last year. For the full year 2009, revenue was down 7% to $562.3 million and net loss was $(212.3) million or $(1.60) per share compared with a net loss of $(243.9) million, or $(1.74) per share, in 2008. It ended the year with $384.9 million in cash. Earlier coverage is available here and here.

I think that RealNetworks needs to get into additional online and mobile infrastructure businesses that have DNA synergy with their current businesses. In gaming, for example, the micropayment business is a very reasonable expansion opportunity through an acquisition of a company such as Zong or Boku. Zong’s TAM is estimated to be about $12 billion in 2010, growing to $45 billion in 2012. For the near term, Zong is focused on the fast-growing online gaming and social networking segments for which it provides a mobile payment service. It leverages direct connections with mobile network operators around the world to provide consumers, merchants, and publishers with a a secure payment solution. Boku is in the same business. RealNetworks needs to acquire one or the other.

For the first quarter of 2010, RealNetworks expects revenue to decline by up to 12% y-o-y and up to 15% q-o-q. The company has also recently settled a litigation with the six major Hollywood studios: it would be paying them $4.5 million for copyright infringement in its RealDVD software. The stock is currently trading around $4.5 with market cap of about $600 million. It hit a 52-week high of $5.38 on March 12.

Chart for RealNetworks Inc. (RNWK)

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