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Possible Music Deal Seen Big For RealNetworks

A possible deal between major record labels and Internet media software firm RealNetworks Inc. to offer online music subscriptions could breathe new life into delivering entertainment over the Web, a goal held up by bitter fighting over copyright issues.

Seattle-based Real, which makes the popular RealPlayer software for playing audio and video on a personal computer, was reported by the Wall Street Journal to be in talks with three record companies to license their music for use in a subscription service.

Citing people familiar with the talks, the paper said AOL Time Warner Inc.’s Warner Music Group, Bertelsmann AG’s BMG Entertainment and EMI Group PLC were all talking to Real.

“This is potentially a big deal. It is really the first good news to come to the Internet sector in a long time,” Phil Leigh, an analyst with Raymond James & Associates wrote in a research note.

RealNetworks declined to comment, but its shares, which have been battered in recent months amid the carnage in the Internet sector, rose 11/16, or 10.8 percent, to $7-1/16 in Nasdaq trading.

It would be the first major initiative blessed by record labels for using the Internet to pipe music to fans in the wake of a March 5 federal court ruling that popular online song-swap service Napster must block copyrighted music.

Real is better known and reaches more consumers than other digital music start-ups like MP3.com Inc. and EMusic.com Inc.

“This is definitely the most significant talk,” said David Bench, an analyst with Arnhold & S. Bleichroeder.

Long-Term Payoff

Any deal would have little impact on Real’s bottom line in the next few quarters, although it might pay off down the road, analysts said.

“Over the long-term this could be something that will benefit them,” Bench said.

The potential could be huge. Leigh noted that a recent survey found 70 percent of Napster users would be willing to pay $15 a month for that service.

If just a few million customers signed up for a similarly priced service from Real, the company could easily double its annual revenues of $240 million, Leigh said.

But many details are unclear. For instance, analysts said Real would need the participation of the two other major labels, Sony Music and Vivendi Universal’s Universal Music, to make a music subscription worthwhile to consumers.

Also unclear is what terms the labels might extract. The Journal said the deal would not be exclusive.

But it is clear that Real is intent on expanding from its core business of providing the software used to encode, deliver and receive content on the Internet.

Real has a subscription service called GoldPass, which boasts about 175,000 users who pay about $10 a month for exclusive sports and entertainment footage. It has recently beefed that service up with content deals with the National Basketball Association and Major League Baseball.

“The extent to which they can get people to pay 10 bucks a month to insulate them from these cyclical businesses, that’s good,” said Adam Hamilton, an analyst with McAdams Wright Ragen, a Seattle brokerage.

“For the time being I don’t think it has huge income statement implications. But it will provide a psychological lift to the stock,” Hamilton said.

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