Two weeks ago, after 12 years of investigation, back-room deals, and public scrutiny, the Department of Justice finally released its settlement proposal regarding Microsoft's anti-trust behavior ["Soft Justice," Amy Jenniges, Nov 11]. The proposal offers a variety of restrictions on Microsoft's business practices, and sets up a three-person oversight panel with unlimited access to Microsoft's internal records. But as the dust settled, it became clear to many that Microsoft wiggled out of any serious punishment and scored big-time. From tech journals and business magazines like Business Week to TV pundits and state attorneys general, many agreed that the Microsoft remedy was filled with loophole after loophole, leaving the Redmond software giant completely free to use its dominance in the desktop software industry to continue to crush future competition.

If the new remedy goes through, one company in particular could find itself in Microsoft's crosshairs: Seattle-based RealNetworks. In fact, RealNetworks, along with a variety of Microsoft competitors and state attorneys general, are meeting this week with high-powered D.C. attorney Brendan Sullivan, of Williams & Connolly, to try to hammer out a strategy to counter the Department of Justice (DOJ) proposal. "This is a reward, not a remedy," Kelly Jo McArthur, RealNetworks' general counsel, said in a press release. "It fails to terminate the illegal monopoly and fails to unfetter the market from anticompetitive conduct."

Inside RealNetworks' headquarters off Elliott Avenue, a few blocks from the Spaghetti Factory, executives make decisions every day about how to deal with their new best enemy, Microsoft. Both local companies are battling for the emerging and promising market of digital media. RealNetworks leads the market with media software called RealPlayer. Microsoft trails close behind with analogous software called Windows Media Player. Both programs allow consumers to watch online movies or download songs through a paid subscription. Both Microsoft and RealNetworks are vying for the top spots in digital media delivery. The global music market alone is a $37 billion industry, according to the International Federation of the Phonographic Industry 2000 figures. The new DOJ settlement proposal hurts RealNetworks' chances.

RealNetworks was hoping the DOJ settlement would help reel in Microsoft's documented anti-competitive behavior. That hope must be fading. RealNetworks could be directly affected by two loopholes in a key provision of the November 2 DOJ settlement. The provision purports to give computer makers--Dell or Compaq, for instance--more freedom to buy software from other companies. For example, if Dell wants to put a RealPlayer in their computers instead of the Windows Media Player, they can, without fear of retaliation. The provision tries to blunt a traditional Microsoft tactic of penalizing computer makers that don't use Microsoft products. One Microsoft tactic: raising the cost of the entire Windows operating system, a must-have for PC manufacturers. The DOJ remedy tries to solve this by requiring Microsoft to sell Windows to all computer makers at the same cost, thereby increasing the likelihood that computer makers will have the choice to put other software, like a RealPlayer, in their machines. However, there are two significant loopholes that Microsoft can exploit.

First, the provision doesn't prevent Microsoft from raising the cost of other Microsoft software products that computer makers depend on, like Office Suite. Though computer makers may get Windows at the same cost as competitors, Microsoft can punitively jack the prices up on other software. Second, and more importantly, the settlement ignores a current fact: The computer/PC industry is taking a hard hit right now. "PC retail is seeing a 30 percent decline every month compared to last year," says Steven Baker, an analyst with NPD Intellect. "The market has been just crap since last Christmas." Even though the DOJ settlement may give PC makers the freedom to offer, and thus buy, other software products, like RealPlayer, without fear of retaliation, why would they? They can't afford it. For example, if they buy Windows XP, Microsoft's newest operating system, they don't have to pay for anything separately--all the desired software comes bundled in a nice little package for the cost of XP alone. Whether it's Windows Media Player or a home video editing program, Microsoft has its own products to muscle into the digital media market. Needless to say, this is bad news for competing software makers like RealNetworks, and as many state attorneys general argue, for consumers as well.

While RealNetworks and others try to understand many of the settlement's loopholes, the stakes couldn't be higher in the digital media industry. Remember Napster? Last year, the now-all-but-dead online music swapping program highlighted the concerns of record labels and movie companies--and just how much money is at stake. Microsoft and RealNetworks are battling for a piece of that pie. Every time RealNetworks announces a laundry list of high-profile partners, like AOL and CNN, to establish a lead in the market, Microsoft counters with an equally impressive list. Later this month, RealNetworks is turning up the heat by unveiling its own version of a media subscriber service, a legal Napster if you will, called RealOne. For a rumored $9.95 per month, subscribers to RealOne get exclusive access to video and MusicNet, a huge collection of songs from EMI, Time Warner, and BMG record label catalogs. This would be impressive, except that Microsoft is countering with its own version, called PressPlay. Partnering with Sony, Vivendi Universal, Yahoo, and, Microsoft hopes its service will dominate. RealNetworks does have a solid subscriber base, and owns 40 percent of the soon-to-be-released MusicNet, but will it be enough to ward off a DOJ-approved Microsoft?

As RealNetworks and other software companies deal with Microsoft, they share a common goal--to avoid becoming another Netscape. In the '90s, Microsoft began bundling all of its Windows software with its own web browser, Internet Explorer. This was in direct competition with Netscape, which produced the dominant browser at the time. Microsoft's bundling strategy, which the current DOJ proposal all but ignores, paid off. Within a year, Microsoft crushed Netscape.

Neither RealNetworks nor Microsoft will comment on the DOJ proposal.