##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number 0-23137
 RealNetworks, Inc.
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1628146(State of incorporation)
    
    (I.R.S. Employer Identification Number)2601 Elliott Avenue, Suite 1000Seattle, Washington
    
    98121(Address of principal executive offices)
    
    (Zip Code)
 (206) 674-2700  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePart I. Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    42Part II. Other InformationItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 3. Default Upon Senior Securities
    
    
    53Item 4. Submission of Matters to a Vote of Security Holders
    
    
    53Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    54Signature
    
    
    55EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    197,492
    
    
    $
    232,968Short-term investments
    
    
    165,266
    
    
    
    137,766Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    
    
    64,413
    
    
    
    70,201Deferred costs, current portion
    
    
    6,111
    
    
    
    4,026Prepaid expenses and other current assets
    
    
    36,699
    
    
    
    34,599Total current assets
    
    
    469,981
    
    
    
    479,560Equipment, software, and leasehold improvements, at cost:Equipment and software
    
    
    143,374
    
    
    
    135,788Leasehold improvements
    
    
    30,954
    
    
    
    30,719Total equipment, software, and leasehold improvements, at cost
    
    
    174,328
    
    
    
    166,507Less accumulated depreciation and amortization
    
    
    114,109
    
    
    
    103,500Net equipment, software, and leasehold improvements
    
    
    60,219
    
    
    
    63,007Restricted cash equivalents and investments
    
    
    14,600
    
    
    
    14,742Equity investments
    
    
    22,384
    
    
    
    18,582Other assets
    
    
    3,782
    
    
    
    3,775Deferred costs, non-current portion
    
    
    6,980
    
    
    
    6,120Deferred tax assets, net, non-current portion
    
    
    9,442
    
    
    
    9,236Other intangible assets, net
    
    
    14,268
    
    
    
    18,727Goodwill
    
    
    
    
    
    
    175,264Total assets
    
    $
    601,656
    
    
    $
    789,013LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    34,666
    
    
    $
    36,575Accrued and other liabilities
    
    
    117,445
    
    
    
    118,688Deferred revenue, current portion
    
    
    39,816
    
    
    
    39,835Related party payable
    
    
    6,930
    
    
    
    13,155Accrued loss on excess office facilities, current portion
    
    
    4,214
    
    
    
    4,317Total current liabilities
    
    
    203,071
    
    
    
    212,570Deferred revenue, non-current portion
    
    
    2,003
    
    
    
    1,961Accrued loss on excess office facilities, non-current portion
    
    
    1,010
    
    
    
    2,893Deferred rent
    
    
    4,564
    
    
    
    4,614Deferred tax liabilities, net, non-current portion
    
    
    811
    
    
    
    1,379Other long-term liabilities
    
    
    11,475
    
    
    
    11,660Total liabilities
    
    
    222,934
    
    
    
    235,077Noncontrolling interest in Rhapsody America
    
    
    3,627
    
    
    
    378Shareholders equity:Preferred stock, $0.001 par value, no shares issued and outstanding:Series A: authorized 200 shares
    
    
    
    
    
    
    Undesignated series: authorized 59,800 shares
    
    
    
    
    
    
    Common stock, $0.001 par value authorized 1,000,000 shares; issued and outstanding
134,772 shares in 2009 and 134,354 shares in 2008
    
    
    135
    
    
    
    134Additional paid-in capital
    
    
    659,550
    
    
    
    642,705Accumulated other comprehensive loss
    
    
    (43,573
    )
    
    
    (48,729
    )Retained deficit
    
    
    (241,017
    )
    
    
    (40,552
    )Total shareholders equity
    
    
    375,095
    
    
    
    553,558Total liabilities and shareholders equity
    
    $
    601,656
    
    
    $
    789,013
  3




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REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenue (A)
    
    $
    135,725
    
    
    $
    152,648
    
    
    $
    276,498
    
    
    $
    300,211Cost of revenue (B)
    
    
    55,614
    
    
    
    55,645
    
    
    
    111,635
    
    
    
    111,038Gross profit
    
    
    80,111
    
    
    
    97,003
    
    
    
    164,863
    
    
    
    189,173Operating expenses:Research and development
    
    
    28,923
    
    
    
    29,065
    
    
    
    57,482
    
    
    
    54,071Sales and marketing
    
    
    42,273
    
    
    
    53,054
    
    
    
    85,958
    
    
    
    106,650Advertising with related party
    
    
    6,865
    
    
    
    9,240
    
    
    
    14,288
    
    
    
    16,580General and administrative
    
    
    19,338
    
    
    
    18,337
    
    
    
    42,169
    
    
    
    35,421Impairment of goodwill
    
    
    175,583
    
    
    
    
    
    
    
    175,583
    
    
    
    Restructuring and other charges
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    686Total operating expenses, net
    
    
    272,982
    
    
    
    109,696
    
    
    
    376,274
    
    
    
    213,408Operating loss
    
    
    (192,871
    )
    
    
    (12,693
    )
    
    
    (211,411
    )
    
    
    (24,235
    )Other income (expenses):Interest income, net
    
    
    754
    
    
    
    3,375
    
    
    
    1,937
    
    
    
    8,333Equity in net loss of investments
    
    
    (269
    )
    
    
    (107
    )
    
    
    (924
    )
    
    
    (198
    )Gain on sale of equity investments, net
    
    
    68
    
    
    
    222
    
    
    
    205
    
    
    
    222Gain on sale of interest in Rhapsody America
    
    
    
    
    
    
    3,371
    
    
    
    
    
    
    
    7,097Other income, net
    
    
    (449
    )
    
    
    50
    
    
    
    406
    
    
    
    818Other income, net
    
    
    104
    
    
    
    6,911
    
    
    
    1,624
    
    
    
    16,272Loss before income taxes
    
    
    (192,767
    )
    
    
    (5,782
    )
    
    
    (209,787
    )
    
    
    (7,963
    )Income taxes
    
    
    (1,210
    )
    
    
    (3,700
    )
    
    
    (2,759
    )
    
    
    (7,708
    )Net loss
    
    
    (193,977
    )
    
    
    (9,482
    )
    
    
    (212,546
    )
    
    
    (15,671
    )Net loss attributable to noncontrolling interest in Rhapsody America
    
    
    5,648
    
    
    
    8,177
    
    
    
    12,081
    
    
    
    16,792Net income (loss) attributable to common shareholders
    
    $
    (188,329
    )
    
    $
    (1,305
    )
    
    $
    (200,465
    )
    
    $
    1,121Basic net income (loss) per share available to common shareholders
    
    $
    (1.40
    )
    
    $
    (0.01
    )
    
    $
    (1.51
    )
    
    $
    0.01Diluted net income (loss) per share available to common shareholders
    
    $
    (1.40
    )
    
    $
    (0.01
    )
    
    $
    (1.51
    )
    
    $
    0.01Shares used to compute basic net income (loss) per share available to
common shareholders
    
    
    134,420
    
    
    
    142,905
    
    
    
    134,394
    
    
    
    142,946Shares used to compute diluted net income (loss) per share available to
common shareholders
    
    
    134,420
    
    
    
    142,905
    
    
    
    134,394
    
    
    
    156,000Comprehensive income (loss):Net loss
    
    $
    (193,977
    )
    
    $
    (9,482
    )
    
    $
    (212,546
    )
    
    $
    (15,671
    )Unrealized holding losses (gains) on short-term and equity
investments, net of income taxes
    
    
    5,760
    
    
    
    145
    
    
    
    3,938
    
    
    
    (289
    )Foreign currency translation gains (losses)
    
    
    9,207
    
    
    
    (12,269
    )
    
    
    1,218
    
    
    
    (20,331
    )Comprehensive loss
    
    
    (179,010
    )
    
    
    (21,606
    )
    
    
    (207,390
    )
    
    
    (36,291
    )Comprehensive loss attributable to noncontrolling interest
    
    
    5,648
    
    
    
    8,177
    
    
    
    12,081
    
    
    
    16,792Comprehensive loss attributable to common shareholders
    
    $
    (173,362
    )
    
    $
    (13,429
    )
    
    $
    (195,309
    )
    
    $
    (19,499
    )(A) Components of net revenue:License fees
    
    $
    24,389
    
    
    $
    28,613
    
    
    $
    50,568
    
    
    $
    54,368Service revenue
    
    
    111,336
    
    
    
    124,035
    
    
    
    225,930
    
    
    
    245,843$
    135,725
    
    
    $
    152,648
    
    
    $
    276,498
    
    
    $
    300,211(B) Components of cost of revenue:License fees
    
    $
    9,869
    
    
    $
    10,614
    
    
    $
    19,115
    
    
    $
    20,002Service revenue
    
    
    45,745
    
    
    
    45,031
    
    
    
    92,520
    
    
    
    91,036$
    55,614
    
    
    $
    55,645
    
    
    $
    111,635
    
    
    $
    111,038
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REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedJune 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (212,546
    )
    
    $
    (15,671
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    15,522
    
    
    
    25,701Stock-based compensation
    
    
    10,818
    
    
    
    11,520(Gain) loss on disposal of equipment, software, and leasehold improvements
    
    
    (34
    )
    
    
    182Equity in net loss of investments
    
    
    924
    
    
    
    198Gain on sale of equity investments, net
    
    
    (205
    )
    
    
    (222
    )Impairment of goodwill
    
    
    175,583
    
    
    
    Excess tax benefit from stock option exercises
    
    
    (9
    )
    
    
    (88
    )Accrued loss on excess office facilities
    
    
    (1,986
    )
    
    
    (1,592
    )Deferred income taxes
    
    
    (682
    )
    
    
    (2,138
    )Gain on sale of interest in Rhapsody America
    
    
    
    
    
    
    (7,097
    )Accrued restructuring and other charges
    
    
    (3,675
    )
    
    
    Other
    
    
    24
    
    
    
    89Net change in certain operating assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    5,716
    
    
    
    14,614Prepaid expenses and other assets
    
    
    (2,268
    )
    
    
    (17,606
    )Accounts payable
    
    
    (2,043
    )
    
    
    (24,367
    )Accrued and other liabilities
    
    
    (3,380
    )
    
    
    (11,801
    )Net cash used in operating activities
    
    
    (18,241
    )
    
    
    (28,278
    )Cash flows from investing activities:Purchases of equipment, software, and leasehold improvements
    
    
    (7,608
    )
    
    
    (15,231
    )Purchases of short-term investments
    
    
    (66,192
    )
    
    
    (95,671
    )Proceeds from sales and maturities of short-term investments
    
    
    38,692
    
    
    
    68,741Decrease in restricted cash equivalents and investments, net
    
    
    141
    
    
    
    839Payment of acquisition costs, net of cash acquired
    
    
    (3,154
    )
    
    
    (10,164
    )Purchase of equity investments
    
    
    (2,000
    )
    
    
    Proceeds from sales of equity investments
    
    
    205
    
    
    
    1,225Net cash used in investing activities
    
    
    (39,916
    )
    
    
    (50,261
    )Cash flows from financing activities:Net proceeds from sale of common stock under employee stock purchase plan and
exercise of stock options
    
    
    819
    
    
    
    6,041Excess tax benefit from stock option exercises
    
    
    9
    
    
    
    88Net proceeds from sales of interest in Rhapsody America
    
    
    19,537
    
    
    
    14,607Repurchase of common stock
    
    
    
    
    
    
    (681
    )Net cash provided by financing activities
    
    
    20,365
    
    
    
    20,055Effect of exchange rate changes on cash and cash equivalents
    
    
    2,316
    
    
    
    (2,408
    )Net decrease in cash and cash equivalents
    
    
    (35,476
    )
    
    
    (60,892
    )Cash and cash equivalents, beginning of period
    
    
    232,968
    
    
    
    476,697Cash and cash equivalents, end of period
    
    $
    197,492
    
    
    $
    415,805Supplemental disclosure of cash flow information:Cash received from income tax refunds
    
    $
    5,942
    
    
    $
    Cash paid for income taxes
    
    $
    3,336
    
    
    $
    8,341
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REALNETWORKS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2009 and 2008
 Note 1. Summary of Significant Accounting Policies
 Description of Business.
  Basis of Presentation.
    Revenue Recognition. Software Revenue Recognition; Software Revenue Recognition with Respect to Certain Arrangements Accounting for Performance of Construction-Type and Certain Production-Type Contracts Revenue Recognition in Financial Statements Reporting
Revenue Gross as a Principal versus Net as an Agent; Revenue Arrangements
with Multiple Deliverables
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Accounting for Gains on Sale of Subsidiary Stock. Non-controlling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51
 Noncontrolling Interests. Consolidated Financial Statements Classification and
Measurement of Redeemable Securities
  Note 2. Recent Accounting Pronouncements
  Adopted Accounting Pronouncements
 Business
Combinations
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Determination of the Useful Life of Intangible Assets Goodwill and
Other Intangible Assets
 Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
 Subsequent
Events
 Recognition and Presentation of Other-Than-Temporary Impairments
 Note 3. Stock-Based Compensation
 Share-Based Payment
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Quarters
    
    Six MonthsEnded June 30,
    
    Ended June 30,2009
    
    2008
    
    2009
    
    2008Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    1.76
    %
    
    
    2.96
    %
    
    
    1.64
    %
    
    
    2.61
    %Expected life (years)
    
    
    4.2
    
    
    
    4.2
    
    
    
    4.2
    
    
    
    4.2Volatility
    
    
    63
    %
    
    
    45
    %
    
    
    63
    %
    
    
    45
    %
  Quarters
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of revenue
    
    $
    363
    
    
    $
    662
    
    
    $
    993
    
    
    $
    896Research and development
    
    
    2,234
    
    
    
    2,146
    
    
    
    4,058
    
    
    
    4,059Sales and marketing
    
    
    1,199
    
    
    
    1,433
    
    
    
    2,265
    
    
    
    3,341General and administrative
    
    
    1,800
    
    
    
    1,790
    
    
    
    3,502
    
    
    
    3,224Total stock-based compensation expense
    
    $
    5,596
    
    
    $
    6,031
    
    
    $
    10,818
    
    
    $
    11,520
  Note 4. Rhapsody America
 Formation
  
    
    RealNetworks contributed its Rhapsody service subscribers, RadioPass subscribers,
cash, contracts, revenue from existing Rhapsody subscribers, marketing materials, player
hardware, rhapsody.com and related URLs, certain liabilities, and distribution
arrangements in exchange for a 51% equity interest in Rhapsody America. RealNetworks also
licensed certain assets to Rhapsody America, including Rhapsody content, Rhapsody
technology, the Rhapsody brands and related materials.
    
    MTVN contributed its URGE service subscribers, cash, contracts, marketing
materials, and revenue from existing URGE subscribers, certain liabilities, plus the note
payable described below, in exchange for a 49% equity interest in Rhapsody America. MTVN
has also licensed certain assets to Rhapsody America, including URGE content, brands and
related materials.
    
    In addition to the assets described above, MTVN also contributed a $230 million
five-year note payable in consideration for acquiring MTVNs interest in the venture. In
February 2009, RealNetworks and MTVN signed an amendment to the Rhapsody America venture
agreement to true-up the original fair values contributed to the venture. The amendment
reduced the MTVN note payable from $230.0 million to $213.8 million over the same
five-year term. Rhapsody America must use the proceeds from the note solely to purchase
advertising from MTVN. As MTVN makes payments on the note, Rhapsody America records
equity and RealNetworks realizes an immediate appreciation in the carrying value of the
Companys interests in the venture.Effective January 1, 2009, the Company adopted SFAS 160 which requires the
appreciation of gains on the sale of non-controlling interest to be recorded as an equity
transaction. Prior to the adoption of SFAS 160, the Company elected to recognize any such
gain in the consolidated statement of operations in accordance with SAB 51. MTVN made
payments of $7.2 million and $14.4 million during the quarter and six months ended June 30,
2008, respectively. As a result, RealNetworks realized and recorded gains in the condensed
consolidated statements of operations for the quarter and six months ended June 30, 2008 of
$3.7 million and $7.3 million, respectively, as all of the SAB 51 gain criteria were met.
During the quarter and six months ended June 30, 2009, MTVN made payments of $6.9 million
and $14.5 million, respectively, for which the sale of ownership interests in Rhapsody
America have been reflected as an equity transaction
and $3.5 million and $7.4 million, respectively, have been recorded directly to
shareholders equity. As of June 30, 2009, $84.0 million in payments have been made on the
note since the formation of Rhapsody America.
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Call/Put Rights
 ccounting for
Derivatives and Hedging Activities Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity
      10




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Noncontrolling interest rollforward
  Noncontrolling interest
    
    
    Total EquityBalances, December 31, 2007
    
    $
    19,613
    
    
    $
    875,104Net income (loss)
    
    
    (16,792
    )
    
    
    1,121Contribution and other transactions with owners
    
    
    8,110
    
    
    
    Unrealized holding losses on short-term and equity investments, net of taxes
    
    
    
    
    
    
    (289
    )Foreign currency translation losses
    
    
    
    
    
    
    (20,331
    )Stock-based transactions and compensation expense, net of taxes
    
    
    
    
    
    
    16,105Balances, June 30, 2008
    
    $
    10,931
    
    
    $
    871,710
 Noncontrolling interest
    
    
    Total EquityBalances, December 31, 2008
    
    $
    378
    
    
    $
    553,558Net loss
    
    
    (12,081
    )
    
    
    (200,465
    )Contribution and other transactions with owners
    
    
    13,475
    
    
    
    7,237Accretion of MTVNs equity interest in Rhapsody Amercia
    
    
    5
    
    
    
    (5
    )Accretion of MTVNs preferred return in Rhapsody Amercia
    
    
    1,850
    
    
    
    (1,850
    )Unrealized holding losses on short-term and equity investments, net of taxes
    
    
    
    
    
    
    3,938Foreign currency translation losses
    
    
    
    
    
    
    1,218Stock-based transactions and compensation expense, net of taxes
    
    
    
    
    
    
    11,464Balances, June 30, 2009
    
    $
    3,627
    
    
    $
    375,095
 Note 5. Fair Value Measurements
 Fair Value Measurement
  
    
    Level 1: Observable inputs such as quoted prices in active markets for identical
assets or liabilities
    
    Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly; these include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active
    
    Level 3: Unobservable inputs that reflect the reporting entitys own assumptions
 11




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Items Measured at Fair Value on a Recurring Basis
  Fair Value Measurements as ofJune 30, 2009Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(In thousands)Cash equivalentsMoney market funds
    
    $
    143,051
    
    
    $
    143,051
    
    
    $
    
    
    
    $
    Short-term investmentsCorporate notes and bonds
    
    
    90,912
    
    
    
    90,912
    
    
    
    
    
    
    
    U.S. government agency securities
    
    
    74,354
    
    
    
    74,354
    
    
    
    
    
    
    
    Equity investmentsPublicly traded investments
    
    
    16,630
    
    
    
    16,630
    
    
    
    
    
    
    
    Total
    
    $
    324,947
    
    
    $
    324,947
    
    
    $
    
    
    
    $
    
 Fair Value Measurements as ofDecember 31, 2008Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(In thousands)Cash equivalentsMoney market funds
    
    $
    157,063
    
    
    $
    157,063
    
    
    $
    
    
    
    $
    U.S. government agency securities
    
    
    4,292
    
    
    
    4,292
    
    
    
    
    
    
    
    Short-term investmentsU.S. government agency securities
    
    
    84,330
    
    
    
    84,330
    
    
    
    
    
    
    
    Corporate notes and bonds
    
    
    53,436
    
    
    
    53,436
    
    
    
    
    
    
    
    Equity investmentsPublicly traded investments
    
    
    13,903
    
    
    
    13,903
    
    
    
    
    
    
    
    Total
    
    $
    313,024
    
    
    $
    313,024
    
    
    $
    
    
    
    $
    
  Items Measured at Fair Value on a Nonrecurring Basis
  Note 6. Cash, Cash Equivalents, Trading Securities, Short-Term Investments, and Restricted Cash
Equivalents and Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    54,441
    
    
    $
    
    
    
    $
    
    
    
    $
    54,441Money market mutual funds
    
    
    143,051
    
    
    
    
    
    
    
    
    
    
    
    143,051Total cash and cash equivalents:
    
    
    197,492
    
    
    
    
    
    
    
    
    
    
    
    197,492Short-term investments:Corporate notes and bonds
    
    
    90,281
    
    
    
    1,021
    
    
    
    (390
    )
    
    
    90,912U.S. Government agency securities
    
    
    74,263
    
    
    
    130
    
    
    
    (39
    )
    
    
    74,354Total short-term investments:
    
    
    164,544
    
    
    
    1,151
    
    
    
    (429
    )
    
    
    165,266Total cash, cash equivalents and short-term investments
    
    $
    362,036
    
    
    $
    1,151
    
    
    $
    (429
    )
    
    $
    362,758Restricted cash equivalents and investments
    
    $
    14,600
    
    
    $
    
    
    
    $
    
    
    
    $
    14,600
 12




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    71,613
    
    
    $
    
    
    
    $
    
    
    
    $
    71,613Money market mutual funds
    
    
    156,803
    
    
    
    260
    
    
    
    
    
    
    
    157,063U.S. government agency securities
    
    
    4,203
    
    
    
    89
    
    
    
    
    
    
    
    4,292Total cash and cash equivalents
    
    
    232,619
    
    
    
    349
    
    
    
    
    
    
    
    232,968Short-term investments:Corporate notes and bonds
    
    
    54,685
    
    
    
    154
    
    
    
    (1,403
    )
    
    
    53,436U.S. Government agency securities
    
    
    83,920
    
    
    
    410
    
    
    
    
    
    
    
    84,330Total short-term investments
    
    
    138,605
    
    
    
    564
    
    
    
    (1,403
    )
    
    
    137,766Total cash, cash equivalents, and short-term investments
    
    $
    371,224
    
    
    $
    913
    
    
    $
    (1,403
    )
    
    $
    370,734Restricted cash equivalents
    
    $
    14,742
    
    
    $
    
    
    
    $
    
    
    
    $
    14,742
     Amortized
    
    
    EstimatedCost
    
    
    Fair ValueWithin one year
    
    $
    57,345
    
    
    $
    57,484Between one year and five years
    
    
    105,664
    
    
    
    106,250Between five years and fifteen years
    
    
    1,535
    
    
    
    1,532Total available-for-sale investments
    
    $
    164,544
    
    
    $
    165,266
 Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns
  Allowance ForDoubtfulAccounts
    
    
    SalesReceivable
    
    
    ReturnsBalances, December 31, 2008
    
    $
    3,532
    
    
    $
    1,099Additions charged to expenses
    
    
    504
    
    
    
    845Amounts written off
    
    
    (1,778
    )
    
    
    (888
    )Balances, June 30, 2009
    
    $
    2,258
    
    
    $
    1,056
  Note 8. Equity Investments
  13




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June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    
    
    
    
    CarryingCost
    
    
    Value
    
    
    Cost
    
    
    ValuePublicly traded investments
    
    $
    10,765
    
    
    $
    16,630
    
    
    $
    10,765
    
    
    $
    13,903Privately held investments
    
    
    7,364
    
    
    
    5,754
    
    
    
    5,695
    
    
    
    4,679Total equity investments
    
    $
    18,129
    
    
    $
    22,384
    
    
    $
    16,460
    
    
    $
    18,582
 Note 9. Other Intangible Assets
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    34,011
    
    
    $
    23,877
    
    
    $
    10,134Developed technology
    
    
    28,681
    
    
    
    25,355
    
    
    
    3,326Patents, trademarks and tradenames
    
    
    6,407
    
    
    
    6,248
    
    
    
    159Service contracts and other
    
    
    5,859
    
    
    
    5,210
    
    
    
    649Total other intangible assets
    
    $
    74,958
    
    
    $
    60,690
    
    
    $
    14,268
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    34,004
    
    
    $
    21,705
    
    
    $
    12,299Developed technology
    
    
    28,673
    
    
    
    23,849
    
    
    
    4,824Patents, trademarks and tradenames
    
    
    8,556
    
    
    
    7,176
    
    
    
    1,380Service contracts and other
    
    
    3,711
    
    
    
    3,487
    
    
    
    224Total other intangible assets
    
    $
    74,944
    
    
    $
    56,217
    
    
    $
    18,727
   2009 (remaining six months)
    
    $
    4,0732010
    
    
    4,3832011
    
    
    2,1562012
    
    
    1,9242013
    
    
    1,495Thereafter
    
    
    237Total
    
    $
    14,268
 Accounting for the Impairment or Disposal of Long-Lived
Assets
  14




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Note 10. Goodwill
  Balance, December 31, 2008
    
    $
    175,264Effects of foreign currency translation
    
    
    319Impairment of goodwill
    
    
    (175,583
    )Balance, June 30, 2009
    
    $
    
       15




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Note 11. Accrued and Other Liabilities
  June 30,
    
    
    December 31,2009
    
    
    2008Royalties and other fulfillment costs
    
    $
    54,921
    
    
    $
    55,247Employee compensation, commissions and benefits
    
    
    21,778
    
    
    
    21,679Sales, VAT and other taxes payable
    
    
    15,414
    
    
    
    16,801Legal fees and contingent legal fees
    
    
    5,734
    
    
    
    3,290Other
    
    
    19,598
    
    
    
    21,671Total
    
    $
    117,445
    
    
    $
    118,688
 Note 12. Loss on Excess Office Facilities
   Accrued loss on excess office facilities, December 31, 2008
    
    $
    7,210Less amounts amortized from the accrued loss on excess office facilities
    
    
    (1,986
    )Accrued loss on excess office facilities, June 30, 2009
    
    
    5,224Less current portion
    
    
    (4,214
    )Accrued loss on excess office facilities, non-current portion
    
    $
    1,010
 Note 13. Earnings Per Share
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) available to common shareholders:Net income (loss) attributable to common shareholders
    
    $
    (188,329
    )
    
    $
    (1,305
    )
    
    $
    (200,465
    )
    
    $
    1,121Less accretion of MTVNs preferred return in
Rhapsody America
    
    
    (416
    )
    
    
    
    
    
    
    (1,850
    )
    
    
    Net income (loss) available to common shareholders
    
    $
    (188,745
    )
    
    $
    (1,305
    )
    
    $
    (202,315
    )
    
    $
    1,121Weighted average common shares outstanding used to
compute basic net income (loss) per share available to
common shareholders
    
    
    134,420
    
    
    
    142,905
    
    
    
    134,394
    
    
    
    142,946Dilutive potential common shares:Stock options and restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,304Convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,750Shares used to compute diluted net income (loss)
per share available to common shareholders
    
    
    134,420
    
    
    
    142,905
    
    
    
    134,394
    
    
    
    156,000Basic net income (loss) per share available to
common shareholders
    
    $
    (1.40
    )
    
    $
    (0.01
    )
    
    $
    (1.51
    )
    
    $
    0.01Diluted net income (loss) per share available to
common shareholders
    
    $
    (1.40
    )
    
    $
    (0.01
    )
    
    $
    (1.51
    )
    
    $
    0.01
  16




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Note 14. Commitments and Contingencies
 Borrowing Arrangements
    Litigation
   17




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18




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##### Table of Contents



Note 15. Segment Information
 Disclosures about Segments of an Enterprise and Related Information
       MediaSoftware and
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    40,452
    
    
    $
    29,774
    
    
    $
    19,291
    
    
    $
    46,208
    
    
    $
    
    
    
    $
    135,725Cost of revenue
    
    
    24,945
    
    
    
    8,801
    
    
    
    2,590
    
    
    
    19,278
    
    
    
    
    
    
    
    55,614Gross profit
    
    
    15,507
    
    
    
    20,973
    
    
    
    16,701
    
    
    
    26,930
    
    
    
    
    
    
    
    80,111Impairment of goodwill
    
    
    37,029
    
    
    
    41,247
    
    
    
    46,776
    
    
    
    50,531
    
    
    
    
    
    
    
    175,583Other operating expenses
    
    
    26,673
    
    
    
    26,761
    
    
    
    18,417
    
    
    
    25,512
    
    
    
    36
    
    
    
    97,399Operating income (loss)
    
    
    (48,195
    )
    
    
    (47,035
    )
    
    
    (48,492
    )
    
    
    (49,113
    )
    
    
    (36
    )
    
    
    (192,871
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    104Income (loss) before income taxes
    
    
    (48,195
    )
    
    
    (47,035
    )
    
    
    (48,492
    )
    
    
    (49,113
    )
    
    
    68
    
    
    
    (192,767
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,210
    )
    
    
    (1,210
    )Net income (loss)
    
    
    (48,195
    )
    
    
    (47,035
    )
    
    
    (48,492
    )
    
    
    (49,113
    )
    
    
    (1,142
    )
    
    
    (193,977
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    5,648
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,648Net income (loss) attributable
to common shareholders
    
    $
    (42,547
    )
    
    $
    (47,035
    )
    
    $
    (48,492
    )
    
    $
    (49,113
    )
    
    $
    (1,142
    )
    
    $
    (188,329
    )
 19




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MediaSoftware and
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    84,505
    
    
    $
    62,597
    
    
    $
    39,609
    
    
    $
    89,787
    
    
    $
    
    
    
    $
    276,498Cost of revenue
    
    
    52,245
    
    
    
    17,365
    
    
    
    6,297
    
    
    
    35,728
    
    
    
    
    
    
    
    111,635Gross profit
    
    
    32,260
    
    
    
    45,232
    
    
    
    33,312
    
    
    
    54,059
    
    
    
    
    
    
    
    164,863Impairment of goodwill
    
    
    37,029
    
    
    
    41,247
    
    
    
    46,776
    
    
    
    50,531
    
    
    
    
    
    
    
    175,583Other operating expenses
    
    
    56,490
    
    
    
    53,912
    
    
    
    38,366
    
    
    
    51,849
    
    
    
    74
    
    
    
    200,691Operating income (loss)
    
    
    (61,259
    )
    
    
    (49,927
    )
    
    
    (51,830
    )
    
    
    (48,321
    )
    
    
    (74
    )
    
    
    (211,411
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    1,624Income (loss) before income taxes
    
    
    (61,259
    )
    
    
    (49,927
    )
    
    
    (51,830
    )
    
    
    (48,321
    )
    
    
    1,550
    
    
    
    (209,787
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,759
    )
    
    
    (2,759
    )Net income (loss)
    
    
    (61,259
    )
    
    
    (49,927
    )
    
    
    (51,830
    )
    
    
    (48,321
    )
    
    
    (1,209
    )
    
    
    (212,546
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    12,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,081Net income (loss) attributable
to common shareholders
    
    $
    (49,178
    )
    
    $
    (49,927
    )
    
    $
    (51,830
    )
    
    $
    (48,321
    )
    
    $
    (1,209
    )
    
    $
    (200,465
    )
  MediaSoftware
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    and Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    37,170
    
    
    $
    34,945
    
    
    $
    29,238
    
    
    $
    51,295
    
    
    $
    
    
    
    $
    152,648Cost of revenue
    
    
    20,693
    
    
    
    10,655
    
    
    
    3,707
    
    
    
    20,590
    
    
    
    
    
    
    
    55,645Gross profit
    
    
    16,477
    
    
    
    24,290
    
    
    
    25,531
    
    
    
    30,705
    
    
    
    
    
    
    
    97,003Operating expenses
    
    
    32,652
    
    
    
    28,424
    
    
    
    15,605
    
    
    
    32,778
    
    
    
    237
    
    
    
    109,696Operating income (loss)
    
    
    (16,175
    )
    
    
    (4,134
    )
    
    
    9,926
    
    
    
    (2,073
    )
    
    
    (237
    )
    
    
    (12,693
    )Total non-operating income, net
    
    
    3,371
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,540
    
    
    
    6,911Income (loss) before income taxes
    
    
    (12,804
    )
    
    
    (4,134
    )
    
    
    9,926
    
    
    
    (2,073
    )
    
    
    3,303
    
    
    
    (5,782
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,700
    )
    
    
    (3,700
    )Net income (loss)
    
    
    (12,804
    )
    
    
    (4,134
    )
    
    
    9,926
    
    
    
    (2,073
    )
    
    
    (397
    )
    
    
    (9,482
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    8,177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,177Net income (loss) attributable
to common shareholders
    
    $
    (4,627
    )
    
    $
    (4,134
    )
    
    $
    9,926
    
    
    $
    (2,073
    )
    
    $
    (397
    )
    
    $
    (1,305
    )
  MediaSoftware
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    and Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    75,249
    
    
    $
    66,743
    
    
    $
    55,647
    
    
    $
    102,572
    
    
    $
    
    
    
    $
    300,211Cost of revenue
    
    
    42,212
    
    
    
    19,292
    
    
    
    7,683
    
    
    
    41,851
    
    
    
    
    
    
    
    111,038Gross profit
    
    
    33,037
    
    
    
    47,451
    
    
    
    47,964
    
    
    
    60,721
    
    
    
    
    
    
    
    189,173Operating expenses
    
    
    66,258
    
    
    
    51,355
    
    
    
    30,348
    
    
    
    64,973
    
    
    
    474
    
    
    
    213,408Operating income (loss)
    
    
    (33,221
    )
    
    
    (3,904
    )
    
    
    17,616
    
    
    
    (4,252
    )
    
    
    (474
    )
    
    
    (24,235
    )Total non-operating income, net
    
    
    7,097
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,175
    
    
    
    16,272Income (loss) before income taxes
    
    
    (26,124
    )
    
    
    (3,904
    )
    
    
    17,616
    
    
    
    (4,252
    )
    
    
    8,701
    
    
    
    (7,963
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,708
    )
    
    
    (7,708
    )Net income (loss)
    
    
    (26,124
    )
    
    
    (3,904
    )
    
    
    17,616
    
    
    
    (4,252
    )
    
    
    993
    
    
    
    (15,671
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    16,792
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,792Net income (loss) attributable
to common shareholders
    
    $
    (9,332
    )
    
    $
    (3,904
    )
    
    $
    17,616
    
    
    $
    (4,252
    )
    
    $
    993
    
    
    $
    1,121
 20




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Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008United States
    
    $
    90,685
    
    
    $
    100,898
    
    
    $
    187,351
    
    
    $
    200,067Europe
    
    
    23,469
    
    
    
    27,196
    
    
    
    46,134
    
    
    
    51,363Rest of the World
    
    
    21,571
    
    
    
    24,554
    
    
    
    43,013
    
    
    
    48,781Total net revenue
    
    $
    135,725
    
    
    $
    152,648
    
    
    $
    276,498
    
    
    $
    300,211
  June 30,
    
    
    December 31,2009
    
    
    2008United States
    
    $
    56,394
    
    
    $
    163,730Republic of Korea
    
    
    8,156
    
    
    
    51,508Europe
    
    
    7,128
    
    
    
    37,315Rest of the World
    
    
    2,809
    
    
    
    4,445Total long-lived assets
    
    $
    74,487
    
    
    $
    256,998
  June 30,
    
    
    December 31,2009
    
    
    2008United States
    
    $
    323,136
    
    
    $
    437,565Republic of Korea
    
    
    26,401
    
    
    
    64,824Europe
    
    
    18,424
    
    
    
    45,845Rest of the World
    
    
    7,134
    
    
    
    5,324Total net assets
    
    $
    375,095
    
    
    $
    553,558
  June 30,
    
    
    December 31,2009
    
    
    2008Music
    
    $
    
    
    
    $
    37,029Games
    
    
    
    
    
    
    41,526Media Software and Services
    
    
    
    
    
    
    46,776Technology products and solutions
    
    
    
    
    
    
    49,933Total goodwill
    
    $
    
    
    
    $
    175,264
 Note 16. Related Party Transactions
 Transactions with MTVN.
  21




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Transactions with LoEn Entertainment, Inc.
 Note 17. Repurchase of Common Stock
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain
forward-looking statements that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on current expectations,
estimates, and projections about RealNetworks industry, products, managements beliefs, and
certain assumptions made by management. Words such as anticipates, expects, intends, plans,
believes, seeks, estimates, and similar expressions are intended to identify forward-looking
statements. All statements contained in this report that do not relate to matters of historical
fact should be considered forward-looking statements. Forward-looking statements include statements
with respect to:
 
    
    future revenues, income taxes, tax benefits, net income (loss) per diluted share,
acquisition costs and related amortization, and other measures of results of operations;
    
    the potential outcomes and effects of claims and legal proceedings, including those
relating to RealDVD and our ongoing arbitration with VeriSign, on our business, prospects,
financial condition or results of operations;
    
    the effects of our acquisitions, including WiderThan, Sony NetServices GmbH, Exomi Oy and
Trymedia, and our position as a technology services provider for leading wireless carriers;
    
    plans, strategies and expected opportunities for growth, increased profitability and
innovation in 2009 and future years;
    
    the creation of new strategic partnerships and broadening of existing strategic
partnerships and the advantages and growth we will achieve as a result of such partnerships;
    
    the expected financial performance, growth and profitability of our businesses;
    
    the performance, governance, management, accounting and integration of our Rhapsody
America venture;
    
    the dilutive impact on our shareholders if the call or put rights contained in the
limited liability agreement for Rhapsody America are exercised and result in the issuance of
additional shares of our common stock;
 22




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##### Table of Contents




    
    our intention to separate our Games business, distribute shares of the newly created
games company to its shareholders, and the potential sale of up to 20% of the shares of the
new games company in an initial public offering;
    
    the migration of our Media Software and Services businesses from general purpose
subscription businesses toward premium services and free-to-consumer services, the
popularity of the RealPlayer and our expected introduction of new products and innovations
in our Media Software and Services business;
    
    our ability to grow our Music business, including opportunities for us to become the
platform of choice for the consumer electronics industry, the integration of our Rhapsody
DNA into the digital devices of an expanding list of partners and our plans to introduce
additional innovations;
    
    the effect of future interoperability on our Music business, the significance of growth
opportunities in the digital music market and our expectations for short-term progress and
long-term success in our Music business;
    
    the effects of legislation, regulations, administrative proceedings, court rulings,
settlement negotiations and other factors that may impact music publishing royalty rates;
    
    our financial position and the availability of resources;
    
    our expectations regarding acquisition activity in 2009 and our focus on the integration
of completed acquisitions;
    
    our relationships with our employees;
    
    the effects of U.S. and foreign income taxes on our business, prospects, financial
condition or results of operations;
    
    the impairment of our assets and anticipated effects on our customers, business,
prospects, financial condition or results of operations;
    
    the effect of economic and market conditions on our business, prospects, financial
condition or results of operations;
    
    the effect of volatility in foreign exchange rates on our business, prospects, financial
condition or results of operations;
    
    future competition; and
    
    the degree of seasonality in our revenue.
 These statements are not guarantees of future performance and actual actions or results may
differ materially. These statements are subject to certain risks, uncertainties and assumptions
that are difficult to predict, including those noted in the documents incorporated herein by
reference. Particular attention should also be paid to the cautionary language in section Item 1 of
Part II entitled Legal Proceedings and Item 1A of Part II entitled Risk Factors. RealNetworks
undertakes no obligation to update publicly any forward-looking statements as a result of new
information, future events or otherwise, unless required by law. Readers should, however, carefully
review the risk factors included in other reports or documents filed by RealNetworks from time to
time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q
and any Current Reports on Form 8-K .
 Overview
   23




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24




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Critical Accounting Policies and Estimates
  
    
    Revenue recognition;
    
    Estimating music publishing rights and music royalties;
    
    Estimating recoverability of deferred costs;
    
    Estimating allowances for doubtful accounts and sales returns;
    
    Estimating losses on excess office facilities;
    
    Determining whether declines in the fair value of investments are other-than-temporary
and estimating fair market value of investments in privately held companies;
    
    Valuation of long-lived assets;
    
    Valuation of goodwill;
    
    Stock-based compensation;
    
    Noncontrolling interest;
    
    Accounting for gains on sale of subsidiary stock;
    
    Accounting for taxes collected from customers; and
    
    Accounting for income taxes.
 Revenue Recognition. Software Revenue Recognition; Software Revenue Recognition with Respect to Certain Arrangements Accounting for
Performance of Construction-Type and Certain Production-Type Contracts Revenue Recognition in Financial
Statements Revenue Arrangements with Multiple Deliverables; Reporting Revenue
Gross as a Principal versus Net as an Agent
   25




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##### Table of Contents



Music Publishing Rights and Music Royalty Accruals.
 Recoverability of Deferred Costs.
  Allowances for Doubtful Accounts and Sales Returns.
 Accrued Loss on Excess Office Facilities.
 Impairment of Investments.
 26




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Valuation of Long-Lived Assets.
 Valuation of Goodwill.
 
    
    poor economic performance relative to historical or projected future operating results;
    
    significant negative industry, economic or company specific trends;
    
    market and interest rate risk;
    
    changes in the manner of our use of the assets or the plans for our business; and
    
    loss of key personnel.
    Stock-Based Compensation. Share-Based Payment
 27




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Accounting for Stock
Issued to Employees
 Noncontrolling Interests. Consolidated Financial Statements Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 Classification and Measurement of Redeemable Securities
  Accounting for Gains on Sale of Subsidiary Stock.
 Accounting for Income Taxes.
    28




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Results of Operations
 Revenue by Segment
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008Music
    
    $
    40,452
    
    
    
    9
    %
    
    $
    37,170
    
    
    $
    84,505
    
    
    
    12
    %
    
    $
    75,249Games
    
    
    29,774
    
    
    
    (15
    )
    
    
    34,945
    
    
    
    62,597
    
    
    
    (6
    )
    
    
    66,743Media Software and Services
    
    
    19,291
    
    
    
    (34
    )
    
    
    29,238
    
    
    
    39,609
    
    
    
    (29
    )
    
    
    55,647Technology Products and Solutions
    
    
    46,208
    
    
    
    (10
    )
    
    
    51,295
    
    
    
    89,787
    
    
    
    (12
    )
    
    
    102,572Total net revenue
    
    $
    135,725
    
    
    
    (11
    )%
    
    $
    152,648
    
    
    $
    276,498
    
    
    
    (8
    )%
    
    $
    300,211
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Music
    
    
    30
    %
    
    
    24
    %
    
    
    31
    %
    
    
    25
    %Games
    
    
    22
    
    
    
    23
    
    
    
    23
    
    
    
    22Media Software and Services
    
    
    14
    
    
    
    19
    
    
    
    14
    
    
    
    19Technology Products and Solutions
    
    
    34
    
    
    
    34
    
    
    
    32
    
    
    
    34Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Music
   29




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Games
   Media Software and Services
   Technology Products and Solutions
 30




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Geographic Revenue
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008United States
    
    $
    90,685
    
    
    
    (10
    )%
    
    $
    100,898
    
    
    $
    187,351
    
    
    
    (6
    )%
    
    $
    200,067Europe
    
    
    23,469
    
    
    
    (14
    )
    
    
    27,196
    
    
    
    46,134
    
    
    
    (10
    )
    
    
    51,363Rest of the world
    
    
    21,571
    
    
    
    (12
    )
    
    
    24,554
    
    
    
    43,013
    
    
    
    (12
    )
    
    
    48,781Total net revenue
    
    $
    135,725
    
    
    
    (11
    )%
    
    $
    152,648
    
    
    $
    276,498
    
    
    
    (8
    )%
    
    $
    300,211
    31




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##### Table of Contents



License and Service Revenue
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008License fees
    
    $
    24,389
    
    
    
    (15
    )%
    
    $
    28,613
    
    
    $
    50,568
    
    
    
    (7
    )%
    
    $
    54,368Service revenue
    
    
    111,336
    
    
    
    (10
    )
    
    
    124,035
    
    
    
    225,930
    
    
    
    (8
    )
    
    
    245,843Total net revenue
    
    $
    135,725
    
    
    
    (11
    )%
    
    $
    152,648
    
    
    $
    276,498
    
    
    
    (8
    )%
    
    $
    300,211
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008License fees
    
    
    18
    %
    
    
    19
    %
    
    
    18
    %
    
    
    18
    %Service revenue
    
    
    82
    
    
    
    81
    
    
    
    82
    
    
    
    82Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 License Fees.
   Service Revenue
   Deferred Revenue
  32




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Cost of Revenue by Segment
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008Music
    
    $
    24,945
    
    
    
    21
    %
    
    $
    20,693
    
    
    $
    52,245
    
    
    
    24
    %
    
    $
    42,212Games
    
    
    8,801
    
    
    
    (17
    )
    
    
    10,655
    
    
    
    17,365
    
    
    
    (10
    )
    
    
    19,292Media Software and Services
    
    
    2,590
    
    
    
    (30
    )
    
    
    3,707
    
    
    
    6,297
    
    
    
    (18
    )
    
    
    7,683Technology Products and Solutions
    
    
    19,278
    
    
    
    (6
    )
    
    
    20,590
    
    
    
    35,728
    
    
    
    (15
    )
    
    
    41,851Total cost of revenue
    
    $
    55,614
    
    
    
    
    %
    
    $
    55,645
    
    
    $
    111,635
    
    
    
    1
    %
    
    $
    111,038
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008Music
    
    
    62
    %
    
    
    56
    %
    
    
    62
    %
    
    
    56
    %Games
    
    
    30
    
    
    
    30
    
    
    
    28
    
    
    
    29Media Software and Services
    
    
    13
    
    
    
    13
    
    
    
    16
    
    
    
    14Technology Products and Solutions
    
    
    42
    
    
    
    40
    
    
    
    40
    
    
    
    41Total cost of revenue
    
    
    41
    %
    
    
    36
    %
    
    
    40
    %
    
    
    37
    %
 Cost of Music Revenue.
   Cost of Games Revenue.
  Cost of Media Software and Services Revenue.
   33




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Cost of Technology Products and Solutions.
   Cost of License and Service Revenue
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008License fees
    
    $
    9,869
    
    
    
    (7
    )%
    
    $
    10,614
    
    
    $
    19,115
    
    
    
    (4
    )%
    
    $
    20,002Service revenue
    
    
    45,745
    
    
    
    2
    
    
    
    45,031
    
    
    
    92,520
    
    
    
    2
    
    
    
    91,036Total cost of revenue
    
    $
    55,614
    
    
    
    
    %
    
    $
    55,645
    
    
    $
    111,635
    
    
    
    1
    %
    
    $
    111,038
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2008
    
    2009
    
    2008License fees
    
    
    40
    %
    
    
    37
    %
    
    
    38
    %
    
    
    37
    %Service revenue
    
    
    41
    
    
    
    36
    
    
    
    41
    
    
    
    37Total cost of revenue
    
    
    41
    %
    
    
    36
    %
    
    
    40
    %
    
    
    37
    %
 Cost of License Fees
   Cost of Service Revenue
 34




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Operating Expenses
 Research and Development
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    Change
    
    2008
    
    2009
    
    Change
    
    2008Research and development
    
    $
    28,923
    
    
    
    
    %
    
    $
    29,065
    
    
    $
    57,482
    
    
    
    6
    %
    
    $
    54,071As a percentage of total net revenue
    
    
    21
    %
    
    
    
    
    
    
    19
    %
    
    
    21
    %
    
    
    
    
    
    
    18
    %
   Sales and Marketing
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    Change
    
    2008
    
    2009
    
    Change
    
    2008Sales and marketing
    
    $
    42,273
    
    
    
    (20
    )%
    
    $
    53,054
    
    
    $
    85,958
    
    
    
    (19
    )%
    
    $
    106,650As a percentage of total net revenue
    
    
    31
    %
    
    
    
    
    
    
    35
    %
    
    
    31
    %
    
    
    
    
    
    
    36
    %
  35




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Advertising with Related Party
  General and Administrative
  Quarters Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    Change
    
    2008
    
    2009
    
    Change
    
    2008General and administrative
    
    $
    19,338
    
    
    
    5
    %
    
    $
    18,337
    
    
    $
    42,169
    
    
    
    19
    %
    
    $
    35,421As a percentage of total net revenue
    
    
    14
    %
    
    
    
    
    
    
    12
    %
    
    
    15
    %
    
    
    
    
    
    
    12
    %
  Impairment of Goodwill
 Goodwill and Other Intangible Assets
   36




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Other Income (Expenses), Net
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008Interest income, net
    
    $
    754
    
    
    
    (78
    )%
    
    $
    3,375
    
    
    $
    1,937
    
    
    
    (77
    )%
    
    $
    8,333Equity in net loss of investments
    
    
    (269
    )
    
    
    151
    
    
    
    (107
    )
    
    
    (924
    )
    
    
    367
    
    
    
    (198
    )Gain on sale of equity investments, net
    
    
    68
    
    
    
    (69
    )
    
    
    222
    
    
    
    205
    
    
    
    8
    
    
    
    222Gain on sale of interest in Rhapsody America
    
    
    
    
    
    
    (100
    )
    
    
    3,371
    
    
    
    
    
    
    
    (100
    )
    
    
    7,097Other income, net
    
    
    (449
    )
    
    
    998
    
    
    
    50
    
    
    
    406
    
    
    
    50
    
    
    
    818Other income, net
    
    $
    104
    
    
    
    98
    %
    
    $
    6,911
    
    
    $
    1,624
    
    
    
    90
    %
    
    $
    16,272
  Income Taxes
   37




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New Accounting Pronouncements
  Adopted Accounting Pronouncements
 Determination of the Useful Life of
Intangible Assets
 Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51
 Subsequent Events
 Recognition and Presentation of Other-Than-Temporary Impairments
 38




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Liquidity and Capital Resources
  June 30,
    
    December 31,2009
    
    2008Working capital
    
    $
    266,910
    
    
    $
    266,990Cash, cash equivalents, and short-term investments
    
    
    362,758
    
    
    
    370,734Restricted cash
    
    
    14,600
    
    
    
    14,742
   Six Months EndedJune 30,2009
    
    2008Cash used in operating activities
    
    $
    (18,241
    )
    
    $
    (28,278
    )Cash used in investing activities
    
    
    (39,916
    )
    
    
    (50,261
    )Cash provided by financing activities
    
    
    20,365
    
    
    
    20,055
       39




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##### Table of Contents



Off-Balance Sheet Agreements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 40




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##### Table of Contents



Investment Risk.
 Foreign Currency Risk.
       41




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    th
 42




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##### Table of Contents



Item 1A. Risk Factors
  Risks Related to Our Music, Games and Media Software and Services Businesses
 Our Music, Games and Media Software and Services businesses face substantial competitive and other
challenges that may prevent us from being successful in, and negatively impact future growth in,
those businesses.
  43




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##### Table of Contents




    
    reduced prices or margins,
    
    loss of current and potential customers, or partners and potential partners who
provide content we distribute to our customers,
    
    changes to our products, services, technologies, licenses or business practices or
strategies,
    
    lengthened sales cycles,
    
    pressure to prematurely release products or product enhancements, or
    
    degradation in our stature and reputation in the market.
  Music.
 Games.
 Media Software and Services.
 44




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##### Table of Contents



The success of our subscription services businesses depends upon our ability to increase
subscription revenue and to license compelling content on commercially reasonable terms.
  Music publishing royalty rates for music subscription services offered through RealNetworks and
Rhapsody America are not yet fully established; an unexpected modification or application of
settlement terms could negatively impact our operating results.
  An appeal of, or other industry settlement relating to, the April 2007 Copyright Royalty Board
decision regarding Internet radio royalties and minimum payments could result in material expenses
that would harm our operating results and our ability to provide popular radio services.
  Our RealDVD PC application is currently the subject of pending litigation, and we could incur
significant expenses or be further prevented from selling RealDVD.
  45




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We may not be successful in maintaining and growing our distribution of digital media products.
  We face risks with respect to certain matters in the governance and management of our Rhapsody
America joint venture and the integration and operation of assets that have been combined to form
Rhapsody America.
   We and MTVN have certain contractual rights relating to the purchase and sale of MTVNs membership
interest in Rhapsody America that may be settled in part through the issuance of additional shares
of our capital stock, which would dilute our other shareholders voting and economic interests in
us, and may require us to pay MTVN a price that exceeds the appraised value of its proportionate
interest in Rhapsody America.
  46




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Risks Related to Our Technology Products and Solutions Business
 Contracts with our carrier customers subject us to significant risks that could negatively impact
our revenue or otherwise harm our operating results.
    Our ongoing arbitration proceeding with VeriSign, Inc. could ultimately result in a damages award
in favor of VeriSign that may be material to our financial condition and results of operations.
 th
 The mobile entertainment market is highly competitive.
  47




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A majority of the revenue that we generate in our Technology Products and Solutions business is
dependent upon our relationship with a few customers, including SK Telecom; any deterioration of
these relationships could materially harm our business.
  Our traditional system software licensing business has been negatively impacted by competitive
factors, and we may not experience improved sales of our system software products.
  Risks Related to Our Business in General
 Our operating results are difficult to predict and may fluctuate, which may contribute to
volatility in our stock price.
  
    
    impairments of long-lived assets,
    
    integrating and operating newly acquired businesses and assets,
    
    the seasonality of our business, which has experienced increased revenues in the
fourth quarter of our fiscal year, and
    
    the general difficulty in forecasting our operating results and metrics, which could
result in actual results that differ significantly from expected results.
  Uncertainty and adverse conditions in the economy could have a material adverse impact on our
business, financial condition and results of operations.
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New products and services may not achieve market acceptance or may be subject to legal challenge
that could negatively affect our operating results.
  We depend upon our executive officers and key personnel, but may be unable to attract and retain
them, which could significantly harm our business and results of operations.
   Acquisitions involve costs and risks that could harm our business and impair our ability to realize
potential benefits from acquisitions.
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
    
    difficulties and expenses in assimilating the operations, products, technology,
information systems, and/or personnel of the acquired company;
    
    retaining key management or employees of the acquired company;
    
    entrance into unfamiliar markets, industry segments, or types of businesses;
    
    operating and integrating acquired businesses in remote locations;
    
    integrating and managing businesses based in countries in which we have little or no
prior experience;
    
    diversion of management time and other resources from existing operations to
integration activities for acquired businesses;
    
    impairment of relationships with employees, affiliates, advertisers or content
providers of our business or acquired business; and
    
    assumption of known and unknown liabilities of the acquired company, including
intellectual property claims.
 An impairment in the carrying value of our long-lived assets could adversely affect our financial
condition and results of operations.
 Accounting
for the Impairment or Disposal of Long-Lived Assets,
  We need to develop relationships and technical standards with manufacturers of non-PC media and
communication devices and interoperability of our services with these devices to grow our business.
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We may be unable to adequately protect our proprietary rights or leverage our patent portfolio, and
may face risks associated with third-party claims relating to our intellectual property.
   Our business and operating results will suffer if our systems or networks fail, become unavailable,
unsecured or perform poorly so that current or potential users do not have adequate access to our
products, services and websites.
  The growth of our business is dependent in part on successfully implementing our international
expansion strategy.
  We may be subject to market risk and legal liability in connection with the data collection
capabilities of our products and services.
  We may be subject to assessment of sales and other taxes for the sale of our products, license of
technology or provision of services.
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We may be subject to additional income tax assessments.
  Risks Related to Our Previously Announced Separation of Our Games Business
 We announced our intention to separate our global Games business into an independent company and to
distribute shares of the newly created games company to our shareholders. If such transactions are
postponed for a significant period of time or not completed, our stock price and business may be
adversely affected, and we may not realize the anticipated benefits of the separation transactions.
   Risks Related to the Securities Markets and Ownership of Our Common Stock
 Our directors and executive officers beneficially own more than 38% of our stock, which gives them
significant control over certain major decisions on which our shareholders may vote, may discourage
an acquisition of us, and any significant sales of stock by our officers and directors could have a
negative effect on our stock price.
  
    
    elect or defeat the election of our directors;
    
    amend or prevent amendment of our articles of incorporation or bylaws;
    
    effect or prevent a merger, sale of assets or other corporate transaction; and
    
    control the outcome of any other matter submitted to the shareholders for vote.
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Provisions of our charter documents, Shareholder Rights Plan, and Washington law could discourage
our acquisition by a third-party.
  
    
    adopt a plan of merger;
    
    authorize the sale, lease, exchange or mortgage of assets representing more than 50%
of the book value of our assets prior to the transaction or on which our long-term
business strategy is substantially dependent;
    
    authorize our voluntary dissolution; or
    
    take any action that has the effect of any of the above.
     
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable
 (b)
    
    Not applicable
 (c)
    
    Not applicable
 
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
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Item 6. Exhibits
  ExhibitNumber
    
    Description31.1
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURE
  REALNETWORKS, INC.By:
    /s/ Michael EggersMichael EggersTitle: Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 55




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of Robert Glaser, Chairman and Chief Executive
Officer of RealNetworks, Inc., Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification of Michael Eggers, Senior Vice President, Chief
Financial Officer and Treasurer of RealNetworks, Inc.,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 56