Rob Glaser, CEO of Real Networks, talks to AO's Tony Perkins about the future of digital media. With recommendations for survival for startups: how to avoid competiton with monopolies, and how to build bona fide revenue sources.
Glaser: We recently announced a product that's the first video-on-demand service for the Internet, it's called Starz Ticket on Real Movies or the acronym STORM. The reason it's such a long name is that it is a partnership with Starz Encore, one of the leading video subscription services—Starz, HBO and Showtime are the three big ones in the U.S. What we were able to put together with them is for the first time, mainstream commercial movies are available on an on-demand model for a flat subscription fee. For $12.95 a month, subscribers get access to a library of 100 movies.
The library product includes everything thing from old Batman to top picks hits like Chicago, mainline Hollywood movies that are post their theatrical release but are still not available on broadcast television or even basic cable television. Very valuable movies in terms of where they are in the distribution chain. What Starz did that was very smart is that when they got the subscription right, they also got the Internet right as part of an integrated service. We built an application with them that sits inside the Real Player that allows consumers to pick a movie they want and either do scheduled or live downloads.
It requires a good broadband connection, and the quality of what we can deliver is close to DVD quality, better than broadcast quality. In the consumer tests we've done, consumers love it. The target scenario is a consumer has a notebook computer typically and downloads a couple of movies. The exciting thing about the model is that the consumer can watch as many movies as they want during the month of their availability, so it is an all-you-can-eat model. And as we've seen it in all kinds of media models, all-you-can-eat models are very successful and very compelling.
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On the music side, a lot of people hopefully are familiar with our Rhapsody service, which delivers access to a Jukebox of 600,000 plus songs where we can do searching and navigation. One of the things people ask us a lot is 'Well, this is great that you have it on the PC but how do I take this to the television?' So one of our partners, Go Video, has a box that has Rhapsody inside. Basically this is a DVD player, but it is a connected DVD player that has Wi-Fi in the back, and it knows Rhapsody, so I can navigate through my collections here. Our philosophy is, with the remote control, a consumer doesn't want to do Boolean searches, a consumer wants to pick from playlists, artists or albums that the consumer selected and said they want. This is a kind of point-and-click model.
The idea here is essentially that the PC is the hub, which is a model that we think is going to work well. We can offer consumers that for the same $10 fee that gives them access to this Jukebox list through the PC, and we can then use Wi-Fi or whatever kind of access people have in their homes to take that to the living room. The nice thing about these boxes is they range in price of $100 to $200. We're seeing the first phase of them coming from companies like Linksys and Netgear who have been in the network business already.
The fundamental message is digital media is breaking out of the PC, and we're doing it in two directions. One, by broadening the range of content that we offer with what we're seeing with movies, and the second, by taking it from the PC as a fixed device, through the living room and through the home, in addition to things like the iPod that have become sort of the icon of portable sound.
Perkins: I want to focus here on lessons as an entrepreneur. I've always believed that the ideal strategy is to find a guy like you or a Bill Gates or a Michael Dell that can run the company all the way into the future and reinvent themselves because they maintained the passion for the company. You've obviously had to reinvent yourself several times and you're still here.
Glaser: I'd say there were a couple of times. The last ten years have been extraordinary and generally extraordinarily fun and sometimes extraordinarily challenging. The initial period when we started was just at the dawn when the Internet was becoming commercially viable. So we had a great run there where I would say the mainstream companies, the then big players, weren't focused on the Internet, so we were able to get some running room. Then the bubble happened in the late 90s and probably the late bubble period was the period that I disliked the most, because it was like the laws of physics had been repealed—but we knew they hadn't been.
So what do you do? You've got all these companies that are coming in, in our case licensing our technology and doing things that we thought were not necessarily going to be sustainable over the long term. We had competitors who were using funny money or money that wouldn't turn up from pension funds to venture capitalists to fund companies that were being uneconomic in what they did. We tried to strike a balance between focusing on building fundamental value and realizing that market share does matter, so you when there are opportunities to grow you have to take them.
Fortunately, I think we struck a balance reasonably well, so when the bubble burst and all of these companies that didn't have underlying economics withered and went away, we had some fundamental businesses. Even though our business dipped in 2001 and 2002, it didn't dip so precipitously that we weren't able to come out the other side. In the last couple of years, we've been growing driven by the growth of our consumer services side of the business.
Abstracting from that for entrepreneurs, I think the first thing is to make sure—it sounds like a mother's thing to say—but make sure that you're building fundamental value and that your customers if they're consumers, they have high satisfaction with your services. If [your customers are] advertisers, they have underlying economics in their business so that kind of advertiser will continue, and if they're business customers, they're going to be getting return on investments for buying your products and services.
Obviously, there will be a mix, but if too high a percentage of your customers don't seem to have sustainable return, either consumer satisfaction or business results, then that's a danger sign. So to some extent, flaky revenue is more dangerous than no revenue, because if you have no revenue, you know you have no revenue and you're scared to death. But if you have flaky revenue, you can get lulled into a sense of false confidence. That would be the biggest lesson in my view.
Perkins: Did you guys have flaky revenue?
Glaser: We had some, but we tried to strike a balance. In early 2000, going into the middle of 2000, our revenue was about two-thirds technology licensing and about a third consumer-based revenue. The first thing we did, was we had a diversity in there. Then in the beginning of 2000, we started selling not just premium software—which was most of our consumer revenue in the first couple of years—but we started selling subscription services, and we now have over 1.3 million paying subscribers. We started early enough in subscriptions so that when the technology licensing revenue fell off, in part because of the bubble bursting and some of the flaky revenue going away, we could replace it with bona fide consumer services revenue, recurring revenue from consumers.
From our standpoint, the issue wasn't that we had no flaky revenue, the benefit was that we had a diversified business where a significant part of it was consumer, as well as the larger part from technology licensing. When the technology licensing was challenged, we had an opportunity to ramp up that consumer revenue. Advertising at that point was never a really big part of the revenue but in so far as we had some flaky advertising revenue, the consumer growth in services carried the day.
Perkins: One of our Summit chat room users is saying 'In terms of lessons of entrepreneurship, don't fight a government-sanctioned monopoly.' I don't know who specifically they're talking about, but you woke up in the morning working for a monopoly, and decided to go in business inevitably against a monopoly.
Glaser: I spent 10 years at Microsoft. When I started, Microsoft was a $50 million company with about 250 employees that didn't have a monopoly on anything. Over a period of time, Microsoft developed strong market positions in two businesses that the government has subsequently ruled are monopolies, operating systems and application software suites.
I left Microsoft not because those were monopolies, I left because my passion was about the intersection of media and technology and that was something that I thought would be a huge opportunity. When we started RealNetworks and created the first streaming system nine years ago, we weren't chasing anybody else, we were pursuing a new thing. If there was anything inevitable about it, we created a technology that people used on hundreds of millions of desktops worldwide. You could say that it was likely that a company that had an operating system monopoly would want to be in that game. We did not start our business with the approach of saying we're going to go compete with this company or that company.
My advice to startups is that you generally want to go into an area that did not have established competitors. If you have a concrete advantage over established competitors, you can in some businesses succeed but the best thing to do is a new frontier-type business where either a business hasn't developed yet or you're taking an idea that has worked in one context and putting it into another context. For instance, if a model has worked in the U.S. and you're doing the first one of it in Europe, or vice versa. That makes a lot more sense in terms of how you start a company up.
In our case, the fact that we had competition—and we had many competitors, in the first two years of Real, I think there were eight or nine companies that came up to do streaming—we did very well against all the startups. Then we got into the bonus round where we were starting to compete against incumbents, and I think we've held our own there as well. Clearly, a large part of how we've held our own is by changing our business model.
This posting, part one of three, is excerpted from an interview with Rob Glaser, the CEO of RealNetworks, that took place at the AO Innovation Summit, held this past July at Stanford University. To see the webcast of this and other speeches from the Summit, go to the AO2004 events page.
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Member Comments
It is ironic to come here today and see an interview with Rob Glaser. You see, I spent some of last night and much of this morning trying to get fraudulent charges from Glaser's Real Networks removed from my PayPal account. After acquiring my credit card number from a free trial of Rhapsody (which I can't use because I have a Macintosh) Real has billed me numerous times over several months. (I resigned the trial within days and informed Real accordingly.) Real has tried to force through charges as often as a dozen times on a single day. When PayPal rejected one version of Real Networks billing name, Real switched to another. Considering their recent hack of the iPod in violation of Apple's proprietary rights, and what may be a pattern and practice of cheating consumers, I do not foresee a positive future for Real Networks.
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