Case Analysis realNetworks - RealNetworks
still hot in business?

von: Malko Ebers

Structure

1. Introduction 2

2. Opportunities vs. Threats: Analysis of the environment the RealNetworks company is settled in 2

2.1 Macro environment 2
2.2 Industry Analysis: 3

2.2.1 Potential entrants 3
2.2.2 Bargaining power of buyers 4
2.2.3 Bargaining power of suppliers 4
2.2.4 Closeness of substitutes to the industry’s products 4
2.2.5 Intensity of rivalry among strategic groups 6

3. Strengths vs. Weaknesses: Internal aspects of RealNetworks 7

3.1 Tangible resources 7
3.2 Making the difference – Intangible resources as RealNetworks` Core Competencies Intangible resources 8

4. Strategic Analysis 8

4.1 Business level strategy 9
4.2 Corporate level strategy 10
4.3 Cooperation Approach 10
4.4. Global strategy 11

5. Conclusions: RealNetworks still hot in business? 12

5.1 Under pressure: Recent standing in the industry 12
5.2 Future outlook Turning challenges into profits 13

Sources
 

1. Introduction

Since Rob Glaser founded RealNetworks in 1994 the company has been developed to one of the most innovative high quality network companies in the young history of commercial internet. One could say RealNetworks, its invent ion and development of real time internet media streaming such as videos and audio files paved the way for effective and consumer friendly use of internet content. “Real`s technology had become the dominant standard” and the company achieved an outstand ing market position and was `hot in business`. However since the last years the company is facing increasing competition. The first step of this analysis, which focuses on RealNetworks Rhapsody service is an examination of the environment RealNetworks is settled in. Afterwards I will give an overview regarding three internal aspects: resource situation, strength and weaknesses of the value chain and core competencies. In the third part I will draw the line using the gained information of the SWOT analysis and the company’s current situation to explain the recent strategies and future prospect. The leading question will be: Is the companies resource allocation and strategy still adequate to succeed the new challenges and what are possible alternatives?

2. Opportunities vs. Threats : Analysis of the environment the Real Networks

Company is settled in

To analyse the specific opportunities and threats RealNetworks is facing in its business I will give a short overview of the general environment of the industry including, technological, socio-cultural economic and global segments. Once the boundaries have been identified I go on analysing competitive forces in the industry environment by using Porter’s five forces model. The leading question to answer will be: How is the market structured and what factors cause environmental change?

2.1 Macro environment

In the last years major technological change encouraged the growth of online music markets. Based on the invention of much more effective formats for video or audio data such as the MPEG standard several companies provided households with wired and non wired interfaces which made it easier to consume music and other data at any place. The consumption of films and music and the compatibility between stereo, car hi-fi PC and other music players was becoming more and more consumer friendly. This development was supported by high investments of telecommunication providers in data transmission capacity which led to “bandwidth costs dropping by one third to one-half per year”1. Standardised “easy to handle” data formats, and shrinking costs of data transmission and portable music players led to an increase of US households with broadband connections from 20% in 2003 to 43% in 2006.2 After the new economy bubble bust in 2000 RealNetworks and the whole network and music industry had some tough years with plunging stock market capitalisation and revenues. This scenario was even becoming more negative due to so called P2P-platforms of free music exchange such as Napster. Ho wever the current market and near outlook for digital providers of data such as RealNetworks is quite positive, whereas standard non-digital selling of music stagnates3. Even though technology and household demand for digitised and online delivered data made major progress and the amount of illegal downloads of music seems to decline since 20034 the business is very dynamic and underlying constant change of technology and consumer demand. Furthermore court decisions regarding the legal status of free downloads could have a major impact on RealNetworks competitiveness.

2.2 Industry Analysis:

By using Porters five forces model I will analyse the competitive forces in the industry environment of the company. This model outlines the attractiveness of the industry by using five different categories: risk of entry by potential competitors, bargaining power of buyers, bargaining power of suppliers, closeness of substitutes to an industry’s products and the intensity of rivalry among established companies within an industry. 5

2.2.1 Potential entrants

The risk of entry by potential competitors depends on factors, that make it costly to enter an industry. One high entry barrier are the high technology investments necessary to achieve the same motion and sound quality and transmission speed the existing digital infrastructure in the form of delivery programs already has. The entrance barrier consumer behavior may be even harder to overcome: “Consumers are habituated, even though the old model [analog data, no online distribution] offers them only a limited amount of music at a high price”6. It is very difficult to build up consumer trust and a brand name which helps to convince consumers of the advantages of the more rewarding online delivery subscription models. Hereby the marketing efforts to build up consumer confidence are often ineffective 7 and require besides money, consumer knowledge and time. Furthermore necessary co-operations with distribution channels such as brick and mortar stores or TV cabel stations, partnerships with content providers and good relations with music suppliers (labels) represent a very high entry barrier. In my view the second mover advantage doesn’t outweigh the costs, so that only heavy long-time investments seem to be sustainable. The potential entrance of record labels will be discussed separately in 2.2.3 Bargaining power of suppliers.

2.2.2 Bargaining power of buyers

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1 Eisenmann, T., Carpenter, S. (2004): 6.

2 Eisenmann, T., Carpenter, S. (2004): 6-7.

3 For the development of CDs sold see Annex 1.

4 Eisenmann, T., Carpenter, S. (2004): 7.

5 Porter, M. (1979).

6 Eisenmann, T., Carpenter, S. (2004): 15.

7 For example the marketing spending of new entrant Roxio didn’t pay out. In: Eisenmann, T., Carpenter, S. (2004): 13.