The Music Streaming Economy – Part 2: The Pioneers of Music Streaming

2008 is rightly regarded as a watershed year for the music streaming industry, with Stockholm-based streaming service Spotify launching in October. It was also the year that the fourth generation of mobile telephony (4G LTE) became widely available in many developed countries. This laid the foundations for the music streaming boom: Mobile broadband technology (4G), the smartphone (iPhone 1) that could access the Internet via Wi-Fi, and an ad-funded free streaming service (Spotify) that could be easily used on smartphones from August 2009 on, after Spotify made its offering available for both Android and iOS operating systems.

The Music Streaming Economy – Part 2: The Pioneers of Music Streaming

However, the technology of music streaming is much older and basically dates back to the Stone Age of the Internet, i.e. even before the introduction of the World Wide Web (WWW) by Tim Berners-Lee during a research stay at the European nuclear research centre CERN in Geneva. Even in the early days of the internet, it was possible to send sound files in WAV format, for example. However, the files still had to be downloaded to local desktops and decompressed before they could be listened to using an application that was usually written by the user. It was only with the advent of the World Wide Web that it became possible to embed sound files in the data stream and send them via the http or https protocols. However, the streaming of audio files was hampered by insufficient bandwidth, especially at the last mile to individual homes. This situation changed in the second half of the 1990s, when the expansion of broadband Internet, at least in the developed world, was rapidly accelerated.

“Severe Tire Damage”

It was only a matter of time before the first music was streamed over the Internet. Unsurprisingly, it was IT technicians working for Silicon Valley companies Digital Equipment Corp (DEC), Apple, Sun and Xerox in Palo Alto who came up with the idea of forming a rock band with the evocative name “Severe Tire Damage” to broadcast a concert online for the first time from the Xerox PARC research centre in Palo Alto on 24 June 1993. In a Vimeo video trailer, the band can be seen performing in a kind of computer hardware warehouse in front of shelves full of CRT monitors, before three band members – Mark Manesse, Russ Haines and Steve Rubin – cheerfully recall their pioneering deeds in an interview twenty years later. The technical basis for the stream was a channel called IP Multicast Backbone, or MBONE, created in 1992 by Van Jacobson, Steve Deering and Stephen Casner, which could be used for live streaming and was initially set up primarily for teleconferencing.

This technology was also used when “Severe Tire Damage” (STD) were booked as an opening act for the Rolling Stones on their “Voodoo Lounge” tour on 18 November 1994. With mischievous smiles, the now three old men told us in 2014 how it all came about. The Stones wanted to be the first band to broadcast their concerts on the internet. But they realised that the party band from Palo Alto had beaten them to the punch, so as a tribute, Severe Tire Damage from California were allowed to play 20 minutes before the Stones’ concert in Dallas via the internet as the opening act. They immodestly announced themselves as the “First Virtual Concert” and disconnected the stream after their performance. The Rolling Stones then took the stage, but the technical crew did not have the same equipment as the IT specialists. As a result, during the live stream of the Stones concert, there were repeated image and sound interruptions due to a lack of bandwidth, while the stream of the Severe Tire Damage performance ran smoothly, which the band members were visibly proud of in the interview. The example of “Severe Tire Damage” shows that in the 1990s, streaming music was the privilege of a few IT specialists who understood the possibilities and limitations of the Internet. But there was still a long way to go before streaming technology was widely available.

RealNetworks

The tech company RealNetworks set an important milestone on this path in the mid-1990s. Originally called Progressive Networks, the company was founded in 1994 by former Microsoft employee Robert “Rob” Glaser. Glaser, who studied computer science and economics, became fascinated with radio as a teenager. In high school, he ran an in-house radio station and was responsible for programming. After graduating from Yale University, he joined Microsoft in Seattle and worked his way up to become Vice President of Multimedia and Consumer Systems. This top job not only allowed him to put aside a million dolloars or two, but also gave him the necessary expertise in the then-current technological developments surrounding the fledgling Internet. He saw the internet as an alternative channel for news, apart from the powerful media corporations that controlled radio, television and print in the US at the time. As he explained in an interview for the Museum of History and Industry in 2002, he foresaw the convergence of technology, media and communications as early as 1993. His employer at the time, Microsoft, saw itself as a software and technology company that had little to do with media. So Glaser left what was probably the most powerful company in the world to start his own company. Inspired by the ideas of the Electronic Frontier Foundation (EFF), founded in 1990 by Grateful Dead musician and civil rights activist John Gilmore, Glaser launched his Progressive Networks project in February 1994 with the aim of creating an alternative communications platform on the internet outside the mainstream media.

Glaser realised that the only way to do this was through technological innovation. The new company would be an integrated technology and communications provider. The result was the RealAudio player. This was a computer program that could stream speech and music using the RealAudio format. The RealAudio player could be downloaded for free from the internet. However, if you wanted to install the server, you had to pay an additional US $1,500. In the mid-1990s, you still had to dial up to the internet using a modem, so the transfer rate of 14.4 kilobits per second was very modest, which of course had a negative impact on sound quality. It made more sense to download music in RealAudio format to your desktop than to stream it.

Despite the technical limitations, around 230,000 technology enthusiasts downloaded the software within the first four months of the RealAudio player’s launch on 3 April 1995 to watch the Seattle Mariners and New York Yankees baseball game live on the internet stream on 5 September that year. Although the broadcast collapsed just before the end of the game, the event was hailed in the media as a major breakthrough and Progressive Networks received the public response it had hoped for. The Los Angeles Times reporter was particularly enthusiastic, describing 5 September 1995 as a memorable day in the history of cyberspace and celebrating RealAudio technology as an innovative breakthrough. Although he had to admit that the broadcast quality was poor, the fact that the game could be watched around the world via the internet earned him respect, and he predicted that “I expect that one day all baseball games will be available live on the Internet”. He was to be proved right.

With this media tailwind, Progressive Networks developed an improved version of the RealAudio player, which was launched in 1996 and sold for US $29.95. However, Glaser had struck a deal with his former employer, Microsoft, to integrate the RealPlayer into Microsoft’s Internet Explorer, which led to the rapid spread of the streaming software. In 1997, the RealVideo player was also unveiled to the public, which in turn brought Microsoft onto the scene. The company’s founder and CEO at the time, Bill Gates, had watched the rise of his former employee and began to see the commercial potential of streaming digital content. When RealNetworks’ RealVideo player was unveiled to great media fanfare, Microsoft bought tech start-up VXTreme, Progressive Networks’ direct competitor, for US $75 million. This set off alarm bells for Glaser. Realising that he and his company could not compete with the software giant, he sought a negotiated solution with his former boss in the summer of 1997. Gates and Glaser agreed that Microsoft would take a 10 per cent stake in Progressive Networks for US $30 million and that RealAudio technology would be integrated into Windows Media Player. It was a win-win situation for both partners. Microsoft now had a foothold in the digital media business, and Progressive Networks had the largest technology company at the time as a partner. The IPO, which had been planned for some time, was now within reach. The company was renamed RealNetworks and floated on the New York Stock Exchange in October 1997, with a market capitalisation of around US $600 million.

RealNetworks and its founder, Rob Glaser, basked in their success. By October 1997, RealPlayer had been downloaded by more than 1 million users worldwide and revenues had more than doubled from the previous year to US $32.7 million. However, RealNetwork was still not profitable and was losing money every year. In 1998, new trouble was on the horizon. In November, Microsoft announced that it was selling its stake in RealNetworks and once again took a confrontational stance. Microsoft removed RealNetworks technology from its Windows Media Player and made it impossible to play music with the RealPlayer. This was a veritable declaration of war, and after Rob Glaser had unsuccessfully sought dialogue with Bill Gates, he testified as a witness in the antitrust case brought against Microsoft by the U.S. Congress. The dispute dragged on for years, and it was only when Microsoft was fined US $600 million by the EU Commission in 2004 for abusing its dominant market position that the U.S. software company relented and reached an out-of-court settlement with RealNetworks in October 2005 for US $761 million in damages.

Despite the legal battle with Microsoft, RealNetworks continued to grow its user base and revenue year after year. 1999 saw the release of the seventh version of RealPlayer and the launch of RealJukebox, which allowed users to manage their digital music collection easily and efficiently. RealPlayer 8 followed in 2000, and RealNetwork acquired Netzip, which had pioneered internet download technology. Another innovation was the introduction of the GoldPass subscription service, which the company billed as “the first all-in-one media subscription service on the Internet, combining premium audio and video content, value-added software and games, and advanced consumer services”.

The MusicNet Disaster

At the turn of the millennium, RealNetworks was the global leader in digital music distribution, and its streaming technology had become the beacon of hope for the recording industry when the P2P music exchange Napster boomed in 1999. In 2001, to counter the free downloading of copyrighted music, three music majors at the time – EMI Group, Bertelsmann Music Group and Warner Music – approached RealNetworks to create a fully licensed online music service. Together, they launched MusicNet in April 2001. MusicNet was a disaster right from the start. For US $9.95 a month, subscribers could download a hundred tracks from a catalogue of just 75,000 songs and stream another hundred via their PCs. For an extra ten dollars, you could upgrade to a gold membership and get access to some live sports and a news feed from CNN and the Wall Street Journal. No wonder Rolling Stone magazine came to a scathing conclusion in December 2001 under the title “The Digital Beat: MusicNet Doesn’t Rock”, criticising the extremely limited music offering, which was also made unattractive by strict digital rights management (DRM). Music downloaded to a PC could not be transferred to a portable MP3 player and was blocked if the monthly subscription was not renewed. MusicNet was a mere drop in the ocean in the face of free download competition from new P2P file-sharing platforms that offered access to the world’s entire music repertoire.

To make matters worse, the two largest music majors, Universal Music Group and Sony Music Entertainment, were unwilling to license their music repertoire to MusicNet because they had launched their own streaming service, first called Duet and later Pressplay, in May 2001. For monthly US $14.95, subscribers could stream 500 songs a month in poor audio quality, 50 of which could be downloaded to a PC but not to a portable player. The music files were also DRM-protected and could not be listened to after the subscription had expired. As a result, Pressplay and MusicNet have the dubious honour of being placed 9^th ex-aequo in PCWorld’s list of the 25 worst technology products of all time.

Collabortaing with three of the music majors had negative consequences for RealNetworks. The company was seen as an agent of the music conglomerates, which had also launched a technically inferior product with MusicNet. When the majors realised the disaster they had created with MusicNet and Pressplay, they threw themselves into the arms of Apple and its iTunes Store, turning their backs on RealNetworks and its streaming technology.

Rhapsody and Napster 2.0

Nevertheless, RealNetworks continued to build its business model around music streaming. In August 2003, the Seattle-based company bought the music service Listen.com, founded in 1998 by Rob Reid in San Francisco as a music database. In April 2001, Listen.com bought TuneTo.com, which had developed advanced streaming technology for internet radio. This made Listen.com an ideal acquisition target, and in April 2003, RealNetworks put US $17.3 million in cash and 4.1 million shares of stock on the table. This gave RealNetworks access to Rhapsody, which TuneTo.com had become. Rhapsody was the first music streaming service to offer unlimited music for a monthly fee. The music offering, which originally included only the classical repertoire of Naxos, was massively expanded by July 2002 by licensing the music catalogues of the five music majors at the time.

The deal came just a week before the launch of Apple’s iTunes store, which the majors had also licensed. This gave RealNetworks/Rhapsody a strong opponent, whose download store was far more attractive in the age of P2P music sharing than streaming music, which was limited by digital rights management. Despite partnerships with streaming provider MOG (Music On the Go) and MTV, Rhapsody never really took off. In 2010, RealNetworks decided to spin off Rhapsody as a separate division with the help of MTV and Viacom. To strengthen its market position, in August 2011 Rhapsody acquired the Napster 2.0 streaming service from electronics retailer Best Buy, which in turn secured a minority stake in Rhapsody. Best Buy bought Napster in 2008 for US $121 million from Roxio, which had acquired the brand and name rights to the bankrupt P2P file-sharing network Napster from Bertelsmann AG in 2002. With the acquisition of Pressplay, which Sony and Universal sold for US $40 million in May 2003, Roxio formed the paid streaming service Napster 2.0, which was able to establish itself in the market. With the file-sharing pioneer’s brand still very strong, the owners of Rhapsody decided to rename the company Napster in July 2016.

Napster failed to compete with Spotify, Apple Music, YouTube Music and Amazon Music, and only managed to capture a small share of the music streaming market, prompting its majority owner RealNetworks to sell Napster (formerly Rhapsody) to the virtual reality concert provider MelodyVR for US $70 million in August 2020, and ended up eventually with blockchain company Hivemind & Algorand in 2022. As a pioneer in music streaming, RealNetworks has exited the market 22 years after acquiring other music streaming pioneers such as Rhapsody and Napster 2.0. Despite its initial dominance in streaming technology, RealNetworks was never able to establish a sustainable business model for music streaming. It was left to other companies to take the lead in the music streaming economy.

Endnotes

The proposal for a hypertext system for the Internet, which Berners-Lee submitted to his boss Mike Sendall in March 1989, can be read on the CERN website: CERN, “Tim Berners-Lee’s proposal”, n.d., accessed: 2024-04-03.

Wikipedia, “Streaming media”, version of June 11, 2024, accessed: 2024-06-13.

Karl Auerbach, “History of the Internet – Severe Tire Damage, The Internet’s First Live Band”, July 20, 2014, accessed: 2024-06-18.

Ibid.

Ibid.

HNF-Blog, “Kleine Geschichte des Streaming”, April 3, 2020, accessed: 2024-06-18.

The Org, “Rob Glaser, Founder, Chairman & CEO at RealNetworks”, n.d., accessed: 2024-06-18.

The entire interview can be listened to in the video stream in the Internet Archive: “Oral history interview with Rob Glaser, August 13, 2002 by Museum of History & Industry”, August 13, 2002, accessed: 2024-06-18.

Ibid.

HNF-Blog, “Kleine Geschichte des Streaming”, April 3, 2020, accessed: 2024-06-18.

Ibid.

Los Angeles Times, “The Cutting Edge: COMPUTING / TECHNOLOGY / INNOVATION: Take Me Out to the Internet? Tune in to Baseball on the Web” by Daniel Akst, September 6, 1995, accessed: 2024-06-18.

Find the company’s history of RealNetworks in the International Directory of Company Histories, vol 53. St. James Press, 2003, pp 280-282 as well as online on Funding Universe, “History of RealNetworks Inc.”, n.d., accessed: 2024-06-18.

Encyclopedia.com, “Realnetworks Inc.”, n.d., accessed: 2024-06-18.

Ibid.

Funding Universe, “History of RealNetworks Inc.”, n.d., accessed: 2024-06-18.

This paved the way for the settlement of other antitrust cases brought by the Clinton administration and 20 states, which resulted in fines totalling US $1.5 billion. In addition, Microsoft had to pay US $4.6 billion in damages to seven other U.S. companies. See: The Washington Post, “RealNetworks, Microsoft Settle Suit”, October 11, 2005, accessed: 2024-06-18.

Encyclopedia.com, “Realnetworks Inc.”, n.d., accessed: 2024-06-18.

Frankfurter Allgemeine Zeitung, “Bertelsmann: Abo-Plattform für Musik im Internet”, April 3, 2001, accessed: 2024-06-18.

Rolling Stone, “The Digital Beat: MusicNet Doesn’t Rock”, December 12, 2001, accessed: 2024-06-18.

New York Times, “Record Labels’ Answer to Napster Still Has Artists Feeling Bypassed”, February 18, 2002, accessed: 2024-06-18.

PCWorld, “The 25 Worst Tech Products of All Time”, June 15, 2006, accessed: 2024-06-18.

AdWeek, “Listen.com Buys TuneTo.com”, April 5, 2001, accessed: 2024-06-18.

New York Times, “RealNetworks To Acquire Listen.com, A Music Site”, April 22, 2003, accessed: 2024-06-18.

San Francisco Chronicle, “Industry starting to endorse Net music/Listen.com to offer songs from all five major labels”, July 1, 2002, accessed: 2024-06-18.

The Wall Street Journal, “RealNetworks, Viacom to Spin Off Rhapsody”, February 10, 2010, accessed: 2024-06-18.

Variety, “Rhapsody buys Napster”, October 3, 2011, accessed: 2024-06-18.

Ibid.

Wired, “Roxio Buys Pressplay. Napster Lives”, May 19, 2003, accessed: 2024-06-18.

Variety, “Napster Is Back as Rhapsody Rebrands Its Streaming Service”, June 14, 2016, accessed: 2024-06-18.

Music Business Worldwide, “Napster sold to MelodyVR in $70m deal, including $44m owed to record labels and other partners”, August 25, 2020, accessed: 2024-06-18.

MusicTech, “Hivemind and Algorand buy Napster ‘to once again revolutionise the music industry'”, May 16, 2022, accessed: 2024-06-18.