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Digital media queues up a rivalry

As Microsoft and Real Networks square off over the future of digital media on the computer, this rivalry is headed to court, thanks to a billion-dollar antitrust suit. By CNBC's Cory Johnson.

Arch rivalries can be fostered over generations — think Coke and Pepsi — or they can take shape in a matter of just a decade, as is the case with Microsoft and Real Networks. And while the two have squared off over the future of digital media on the computer, this rivalry is headed to court, thanks to a billion-dollar antitrust suit. (MSNBC is a Microsoft-NBC joint venture.)

It's seen as a David and Goliath battle in Seattle. On one side, Microsoft and its 55,000 employees. On the other, Real Networks, a company of just 689 people, dedicated to beating mighty Microsoft in world of digital entertainment.

Can Real win? Or will it go the way of Netscape?

“I think digital media is huge and fundamental,” said Rob Glaser, Real's pugnacious CEO, who started the company a decade ago and spoke about the rivalry at last week's consumer electronics show in Las Vegas.

Real developed software that let consumers listen to music or video and stream or download it on their personal computers. A tiny niche beforebroadband, Real thought itwould get huge when broadband got huge, and Microsoft would be playing catch up. But Microsoft came on strong.

“When you're trying to do big things, you attract big attention,” said Glaser. “Amazon got Wal-Mart's attention, Yahoo! got Microsoft's and AOL's attention; Google surely has Microsoft's attention. That's just life in the big city.”

Analysts say that fight is over, with Real's media player on the losing end.

"That's the format war they've lost to Microsoft,” said analyst Stephen Frankel at Adams Harkness and Hill.

So the rivalry has turned to litigation, with Real filing a billion-dollar anti-trust  suit against Microsoft, claiming the Redmond-giant coerced PC makers and tried to shut out the Real player.

Meanwhile, Real has moved the battle against Microsoft to another market — subscription-based digital content, which now makes up 70 percent of Real's revenues.

Real claims 1.3 million subscribers for those services and another 350,000 for its digital music services Rhapsody and Radio Pass.

"I think the wisdom that the company has is that they've switched their business model and focused instead on content,” said Frankel. “And that's the battle they can win against Microsoft."

“It's an incredibly competitive environment,” said Microsoft’s Bill Gates, who still has a master plan: Cheap content and music bought by the song, rather than by subscription.

“Broadband is a building block here — getting at video, getting at music, getting at information, really assumes that's there,” said Gates. “So we're doing everything we can to make that attractive and push that forward.”

“Competition is good,” said Glaser. “So any time a competitor plays by the rules, it's a good thing.”

CNBC: "And when that happens you'll let us know?”

“Your words,” replied Glaser.

Words Realwill have to liveby. And for Microsoft, perhaps some real competition for a company not used to it.