Real files lawsuit against Microsoft

RealNetworks Inc., a software company in Seattle, yesterday filed an antitrust lawsuit against Microsoft Corp., accusing its larger competitor of using its monopoly power in personal computer operating systems to gain control of the market for technology used to play audio and video files.

Real is trying to avoid the fate of another company whose inventions threatened Microsoft's dominance: Netscape Communications, a Silicon Valley start-up that made the first commercial Internet browser but withered under pressure from the software giant.

The lawsuit, filed in federal court in San Jose, Calif., accused Microsoft of using many of the tactics that it used to replace Netscape as the prevailing browser, including bundling its digital-media software with its operating system, imposing restrictive licensing deals, and using predatory pricing.

Real said Microsoft's actions limited consumer choice, hurt competition, and cut sharply into Real's business. Among other things, the lawsuit accused Microsoft of using its monopoly power to limit how PC makers install competing media players while giving Windows users no choice over whether they get Microsoft's media player.

Real CEO Rob Glaser, who testified against Microsoft in the US government's antitrust case, said his company planned to seek more than $1 billion in damages and an injunctive order forcing Microsoft to change its tactics.

"We believe our business would be substantially larger today if Microsoft was playing by the rules," he said.

Microsoft, based in Redmond, Wash., disputed the specific allegations and said Real was trying to use antitrust laws to protect its successful business. "There is vibrant competition in this market, and Real Networks' own reported growth shows that they have thrived on Windows and many other operating system platforms," a Microsoft spokeswoman said in a prepared statement.

Microsoft was found in its government antitrust case to have violated antitrust laws, but a breakup order was overturned by an appeals court, which instead imposed remedies that many Microsoft critics called too weak. Acquired by AOL Time Warner Inc., Netscape later sued Microsoft and settled for $750 million.

Other antitrust cases have dogged Microsoft, including civil lawsuits by Caldera and Sun Microsystems Inc., as well as an ongoing antitrust investigation by the European Commission, which has closely scrutinized Microsoft's competition with Real.

"That's the fact of being a monopolist, a dominant company: You're exposed to a whole different set of rules," said Jonathan L. Rubin, a research fellow with the American Antitrust Institute, a Washington think tank.

At stake in the fight between Microsoft and Real is the lucrative business of selling media companies the software used to send audio and video over the Internet.

Digital music services have begun to proliferate, as evidenced by the debut yesterday of Walmart.com's first download music store, where people can buy songs for 88 cents each.

Songs in these stores are encoded using software by either Microsoft, Real, or Apple Computer Inc. That format is usually linked to a particular digital media player. Songs in Microsoft's Windows Media format, for example, will only play on Microsoft's Windows Media Player and in compatible jukeboxes made by Microsoft partners.

Microsoft and Real give away those media players to consumers in hopes of becoming the dominant format so they can sell their encoding software to media companies.

"If Microsoft controls the operating system and somebody else controls the media standard, it creates huge obstacles for Microsoft to evolve the PC world and the media world in the direction they think is best," said Josh Bernoff, an analyst with Forrester Research Inc. in Cambridge.

But Bernoff said Real's accusations are very similar to Netscape's, with one key difference: Microsoft has better technology. Windows Media 9 software compresses songs and movies into smaller files, making them easier to send over the Internet, and it includes strong copying protections to prevent piracy, he said.

Microsoft called Real's claims a "rehash" of the government antitrust case. "The government antitrust ruling imposes a range of significant restrictions on Microsoft's business and provides considerable new opportunities for companies like Real Networks," the company said.

Although Real will fight to hold on to the streaming-software marketplace through the lawsuit, Glaser said, his company has diversified its business in recent years to lessen the direct competition with Microsoft. Real sells subscriptions to its digital music service, Rhapsody, and to streamed video programs.

"We believe Microsoft's conduct is illegal, and that conduct has prevented us from competing solely on the merits of our products," said Real general counsel Bob Kimball.

Chris Gaither can be reached at gaither@globe.com.