Case Analysis RealNetworks - RealNetworks still hot in business?

Structure

1. Introduction

2. Opportunities vs. Threats: Analysis of the environment the RealNetworks company is settled in
2.1 Macro environment
2.2 Industry Analysis:
2.2.1 Potential entrants
2.2.2 Bargaining power of buyers
2.2.3 Bargaining power of suppliers
2.2.4 Closeness of substitutes to the industry’s products
2.2.5 Intensity of rivalry among strategic groups

3. Strengths vs. Weaknesses: Internal aspects of RealNetworks
3.1 Tangible resources
3.2 Making the difference – Intangible resources as RealNetworks` Core Competencies Intangible resources

4. Strategic Analysis
4.1 Business level strategy
4.2 Corporate level strategy
4.3 Cooperation Approach
4.4. Global strategy

5. Conclusions: RealNetworks still hot in business?
5.1 Under pressure: Recent standing in the industry
5.2 Future outlook Turning challenges into profits

Sources

Annex
A1 : Music Industry Revenue
A2: Profile of Online Music Services
A3: Demographics of online Music Consumer Segments
A4: Quotes from provider Homepages Regarding Licensing Restrictions
A5a: RealNetworks Income Statements ($ dollars)
A5b: Financial Coefficients of RealNetworks
A5c: RealNetworks Financial Data Trends
A6: Technology Leadership of RealNetworks

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 invention 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 outstanding 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. However the current market and near outlook for digital providers of data such as RealNetworks is quite positive, whereas standard non-digital selling of music stagnates^[3]. 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 2003^[4] 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

If one analyses the market structure there are only very few companies on the supply side^[8] and “there won’t be room for a dozen more online music services”^[9] in the near future. On the other side for example 42 million downloads of the Realplayer music software and 60 million users of the Napster P2P platform at it’s peak in 2001^[10] indicate a very broad and fragmented demand side, so that one could clearly speak of an oligopoly market structure^[11] and for that reason of low bargaining power of buyers.

Of course a big share of the mass of consumers could switch quite easily from legal data providers to free often illegal providers such as Kazaa , but the sue-“policy of deterrence” of legal providers and labels against illegal downloads seems to be effective and also a considerable amount of actual “free riders” agrees in principle to pay a certain sum for music downloads. Therefore in the long run I consider the chance of getting new customers higher than loosing old ones^[12].

2.2.3 Bargaining power of suppliers

Theoretically for internet providers the infrastructure itself is not of much value, especially the non-visible one of digital data transmission. The value production is closely addicted to the delivered content thus the content providers should have high bargaining power? The answer is differentiated and depends on the type of content. There are several suppliers for ring tones, games, radio, news etc. who have a medium or low bargaining power. But at the moment there are also three very crucial types of content: music, to a lower degree sports and maybe in the near future videos.

Music labels already receive a very high margin up to $0,80 of each (regularly) $0,99 priced song download, which indicates high bargaining power. Furthermore after a review of most of the provider offers-they were all limited to U.S. citizens due to licensing agreements which indicates high bargaining power of labels.^[13] On the other hand the bargaining power of music suppliers is limited because the probability of substituting infrastructure providers, such as RealNetworks, through a forward integration strategy is pretty low. If labels could threaten providers with this strategy they would gain a lot of bargaining power.

Because of “consumers [who] want an integrated approach to managing all their digital media”^[14], high necessary technological and marketing investments, antitrust hurdles, and consumers who want to have songs from one source and not from several label-sources, music suppliers “only” have medium bargaining power. This bargaining power might increase when online distribution is expected to grow far more rapidly, from 2006 onwards.^[15]

Suppliers of sports content such as football or basketball already have high bargaining power, because in U.S. America these sports are very popular, with 48% of households with broadband connections people already have the capability to use this service and there are no substitutes. Moreover the online providers have to negotiate with single, powerful sports associations such as NHL, NBA or NFL so that the bargaining power is very high.

2.2.4 Closeness of substitutes to the industry’s products

To identify possible substitutes one should first of all refer to the basic question: what is the industry’s product? The product the industry produces is a transport service of data, and the consumer friendly combination of different online services reaching from news, sports over (partly) videos to music. As mentioned before the probability that music labels will be successful in substituting this service can be seen as pretty low.

Even if the optimistic “Forrester forecast that U.S. online music sales would reach $1,4 billion in 2006, or 11% of all consumer spending on music”^[16] is realistic, 89 % of all spending on music would still be spend for “regular” CDs ibid. “offline”-data formats. This shows clearly that the closest substitute for online customised and delivered data is the existing consumer behaviour, the habit of people.

In particular young people are more used to online formats and distribution and the trend shows that online formats substitute “regular” ways of consuming music and other data not the other way round, but “this requires a huge mental shift, which will take time”^[17].

[...]

^[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.

^[8] See annex 2 for a table of the biggest companies which account for an enormous market share.

^[9] Eisenmann, T., Carpenter, S. (2004): 1.

^[10] Eisenmann, T., Carpenter, S. (2004): 2, 3.

^[11] An Oligopol is the economic expression for few suppliers and a demnand side consisting of so many consumers that the market decision of a single consumer can`t influence price or supply. See: Mankiw (2001): 369-377. Furthermore the mass of consumers can’t bargain (prices) that good because of high transaction costs the co-ordination would require (collective action problem).

^[12] See annex 3

^[13] See annex 4: Quotes from providers regarding licensing agreements.

^[14] Eisenmann, T., Carpenter, S. (2004): 15.

^[15] See annex a1 for a forecast of this development.

^[16] Eisenmann, T., Carpenter, S. (2004): 7.

^[17] Eisenmann, T., Carpenter, S. (2004): 11.