RealNetworks has filed a lawsuit against Microsoft, alleging that the software giant has illegally used its power as a monopoly to control the digital-media market.

The lawsuit seeks to recover damages lost because of "Microsoft's illegal conduct," according to a quote in the statement attributed to Rob Glaser, RealNetworks' chairman and chief executive officer. These damages could exceed $1 billion, according to a statement released yesterday.

The lawsuit, filed in federal court in San Jose, California, claims that Microsoft has forced PC manufacturers to include Microsoft's media player while at the same time placing restrictions on how competing players may be installed, RealNetworks said.

"We're accusing Microsoft of engaging in a broad range of predatory practices to protect their operating system monopoly and to try to create a new monopoly in the digital-media space," said David Stewart, deputy general counsel for RealNetworks, in an interview.

RealNetworks accuses Microsoft of unlawful tactics including product bundling, restrictive licensing, exclusive dealing, predatory pricing, refusing to sell unbundled operating systems and discriminatory disclosure and withholding of information needed to interoperate with the Windows operating system, according to a copy of the complaint.

"We're trying to stop Microsoft's conduct in the digital media space and we're seeking good compensation for the harm Microsoft has caused us," Stewart said.

Anti-trust settlement 'flawed'

The settlement Microsoft reached in November 2001 in the antitrust case brought against it by the Department of Justice (DOJ) and several US states is flawed, Stewart said. The settlement orders Microsoft not to retaliate against PC makers who offer competing software products, such as RealNetworks' media player, with the PCs they sell.

"We cooperated extensively with the DOJ in the antitrust case, but it has become clear that government action wasn't enough," Stewart said. "The settlement is full of loopholes and Microsoft is using them all. Microsoft is still restricting how PC makers install media players on PCs and forcing PC makers to install Windows Media Player."

Furthermore, Microsoft is preventing consumers from removing Windows Media Player, Stewart said. "The settlement the DOJ entered into just isn't stopping Microsoft's predatory conduct, and we're also alleging a broader course of predatory conduct," Stewart said.

In 1997, Microsoft had virtually no presence in the digital media space, but by 2002, Microsoft's "anticompetitive conduct" enabled it to surpass RealNetworks' market share for media players and usage in the US, RealNetworks said in its complaint.

Microsoft issued a statement calling RealNetworks' action "rear-view mirror litigation." There is "vibrant competition" in the digital media market, the vendor said. Computer makers are free to install and promote the media player of their choice on new PCs and consumers are free to select which player they want to use, Microsoft said.

"This is a case where a leading firm is seeking to use the antitrust laws to protect and increase its market share and to limit the competition it must face in the market," Microsoft spokesman Jim Desler said. "These issues are a rehash of the same issues that have already been the subject of extensive litigation and a tough but fair resolution of the government antitrust suit."

Business practices

One analyst disagreed. RealNetworks has a case, said Richard Doherty, director of research at Envisioneering Group. He believes other providers of media players, such as Apple, will join in the lawsuit.

"It is not a level playing field for media players," Doherty said. "Microsoft's own team is getting access to nuances, features or pitfalls of the operating system that are not being shared with third parties, which was the spirit of the settlement."

Michael Gartenberg, a research director at Jupiter Research, said the case is not about technology or adoption of media players, but about business practices.

"Both Microsoft's and RealNetworks' formats are widely supported today; the question is about what the implications are of the fact that Windows Media Player is bundled with Windows and what Microsoft business practices prevent RealNetworks player adoption by PC vendors," he said.