Exclusive Deal for On2 and Real

On2 Technologies (www.on2.com) announced on Thursday that it is licensing its new VP4 video codec to RealNetworks ( www.realnetworks.com). On2 and RealNetworks will create VP4 plug-ins for RealServers and the RealPlayer. In addition, RealNetworks made a $1,000,000 investment in On2's stock.

The codec deal is an exclusive one — meaning that the VP4 codec will only be available on RealNetworks' systems. On2's older codec, VP3, is currently available for all three architectures, Real, Windows Media and QuickTime.

So why is On2 limiting the distribution of VP4? According to Doug McIntyre, On2's president and CEO, the move is a strategic one. "We wanted to have a very, very broadly distributed player and server," he said, calling the integration "supertight." "You can't imagine having integration that tight, then giving it out to competitors," he said. Despite the exclusivity of VP4, McIntyre said that the VP3 codec would continue to be available to all three systems.

"We are in a closely knit way, becoming a much more important codec to Real," said McIntyre. "It's a tremendous opportunity for us to leverage their distribution and our codec technologies."

The companies said that the deal also involves next generation devices, like set-top boxes. "With On2 we are furthering our goal of delivering a great Internet media experience from any platform, in any format, to any device," said Martin Plaehn, senior vice president, Media Systems, RealNetworks.

Aside from its codec, On2 recently unveiled its own VP4 server, called the TrueCast, available for Windows NT and 2000. McIntyre said that TrueCast would continue to exist, as well. "A lot of this is distribution," he said. "There are thousands of RealServers in the world, [while] there's not even hundreds of our servers."

About the $1 million investment from Real, McIntyre said that it's primarily a show of faith, since On2 isn't actively looking for underwriting. "We’re not looking for Real to be our investment bankers by any means," he said. "If the tail wags the dog, the money is the dog, and the tail is the money."

Busy Week for RealNetworks

For RealNetworks, it's been a busy week. On Tuesday, it missed Wall Street expectations, when it released its second quarter financial results. Net revenues for the quarter were a healthy $47.9 million. However, pro forma net earnings for the quarter were $2.4 million, slightly lower than analysts’ expectations. As a result, investment banks Pacific Crest and Wedbush Morgan downgraded their recommendations.

Rob Glaser, RealNetworks chairman and CEO said in a statement: "While the current and near-term market remains challenging, RealNetworks is strongly positioned to capitalize on the tremendous long-term growth opportunities ahead of us." In the midst of the earnings announcement, Real said that its CFO Paul Bialek, was stepping down for personal reasons.

Still, in a bit of bright news, RealNetworks said that its GoldPass subscription has surpassed 300,000 subscribers. "The popularity of the RealPlayer GoldPass service, among consumers as well as content providers, has been phenomenal," said Larry Jacobson, president and COO, in a statement.

RealPlayer's GoldPass was launched in August 2000, and includes content like exclusive Major League Baseball and NBA programming. It also made a deal with CBS to provide GoldPass subscribers 24/7 live video streaming from the "Big Brother 2" house.

In earlier news, RealNetworks announced a distribution agreement with Activision and other game publishers to push its RealArcade. With these deals, RealArcade has support from more than 50 game developers and publishers, since its debut in mid-May. RealNetworks said the RealArcade software has been downloaded over 1.5 million times.