We May Hear Nothing But Profits from This Player

If you own a computer, there is a very good chance you probably have the RealPlayer video and music player loaded. And, if you happen to be a shareholder of the company that developed the software, you are probably full of optimism for the stock.

 RealNetworks Inc. (NASDAQ/RNWK) makes the RealPlayer software, but what really makes the company attractive is its popular subscription-based “Rhapsody” premium digital music service and commercial-free Internet radio services. The premium music business has been gaining in subscriptions to the point where RealNetworks is profitable and shareholders are encouraged.

 But, driving the stock to above $8 in October, after being stuck at the $5 range since June, was the awarding of a massive $761 million antitrust settlement from none other than software bully Microsoft Corp. (NASDAQ/MSFT). Microsoft was charged for using its dominance to promote its own media player. For RealNetworks, this may be enough to make the company a serious player in the on-line music business. The settlement will give RealNetworks a significant cash balance of over $1 billion! As expected, RealNetworks surged on the news and was the recipient of numerous upgrades from the Street. That is what a billion in cash will do.

 With the cash settlement, RealNetworks will have $1.12 billion in cash. Accounting for the $100 million in debt, the net cash position is a whopping $1.02 billion, or $5.96 per share. This makes RealNetworks extremely cash rich and will allow it to develop its surging “Rhapsody” music business, as well as give it financial flexibility. Given the current share price of $8.09, this implies you are paying about $2.13 per share for the company’s assets, excluding cash and debt.

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 But here is the kicker: In addition to the settlement, RealNetworks will partner with Microsoft in the area of digital music and games. I see this as a win-win situation for RealNetworks. Microsoft has the reach via its operating system, and the partnership should open up new channels for RealNetworks to expand its Rhapsody service via Microsoft products. The settlement also requires Microsoft to offer RealNetworks’ digital games via MSN Games and Xbox Live Arcade for Xbox 360.

 Times are clearly looking up for RealNetworks, but now the company needs to execute, as the on-line music business is extremely competitive. RealNetworks already has over one million subscribers to its paid Rhapsody music service, and the trend is positive. I like the settlement not only for its cash value, but also for its partnership with Microsoft. I’m looking forward to seeing how the partnership works out for RealNetworks. If RealNetworks can continue to deliver going forward, shareholders will hear nothing but the sound of profits from this player.