##### 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 September 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 Information
    
    
    3Item 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
    
    
    41Part II. Other Information
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 3. Default Upon Senior Securities
    
    
    54Item 4. Submission of Matters to a Vote of Security Holders
    
    
    54Item 5. Other Information
    
    
    54Item 6. Exhibits
    
    
    55Signature
    
    
    56EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 REALNETWORKS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    204,777
    
    
    $
    232,968Short-term investments
    
    
    168,420
    
    
    
    137,766Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    
    
    67,060
    
    
    
    70,201Deferred costs, current portion
    
    
    5,383
    
    
    
    4,026Prepaid expenses and other current assets
    
    
    31,388
    
    
    
    34,599Total current assets
    
    
    477,028
    
    
    
    479,560Equipment, software, and leasehold improvements, at cost:Equipment and software
    
    
    147,430
    
    
    
    135,788Leasehold improvements
    
    
    31,003
    
    
    
    30,719Total equipment, software, and leasehold improvements, at cost
    
    
    178,433
    
    
    
    166,507Less accumulated depreciation and amortization
    
    
    119,903
    
    
    
    103,500Net equipment, software, and leasehold improvements
    
    
    58,530
    
    
    
    63,007Restricted cash equivalents and investments
    
    
    13,700
    
    
    
    14,742Equity investments
    
    
    21,768
    
    
    
    18,582Other assets
    
    
    4,180
    
    
    
    3,775Deferred costs, non-current portion
    
    
    8,945
    
    
    
    6,120Deferred tax assets, net, non-current portion
    
    
    9,867
    
    
    
    9,236Other intangible assets, net
    
    
    12,761
    
    
    
    18,727Goodwill
    
    
    
    
    
    
    175,264Total assets
    
    $
    606,779
    
    
    $
    789,013LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    39,264
    
    
    $
    36,575Accrued and other liabilities
    
    
    111,295
    
    
    
    118,688Deferred revenue, current portion
    
    
    35,812
    
    
    
    39,835Related party payable
    
    
    8,007
    
    
    
    13,155Accrued loss on excess office facilities, current portion
    
    
    4,338
    
    
    
    4,317Total current liabilities
    
    
    198,716
    
    
    
    212,570Deferred revenue, non-current portion
    
    
    1,933
    
    
    
    1,961Accrued loss on excess office facilities, non-current portion
    
    
    
    
    
    
    2,893Deferred rent
    
    
    4,534
    
    
    
    4,614Deferred tax liabilities, net, non-current portion
    
    
    859
    
    
    
    1,379Other long-term liabilities
    
    
    11,027
    
    
    
    11,660Total liabilities
    
    
    217,069
    
    
    
    235,077Noncontrolling interest in Rhapsody America
    
    
    5,440
    
    
    
    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
134,823 shares in 2009 and 134,354 shares in 2008
    
    
    135
    
    
    
    134Additional paid-in capital
    
    
    664,052
    
    
    
    642,705Accumulated other comprehensive loss
    
    
    (40,420
    )
    
    
    (48,729
    )Retained deficit
    
    
    (239,497
    )
    
    
    (40,552
    )Total shareholders equity
    
    
    384,270
    
    
    
    553,558Total liabilities and shareholders equity
    
    $
    606,779
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenue (A)
    
    $
    140,264
    
    
    $
    151,955
    
    
    $
    416,762
    
    
    $
    452,166Cost of revenue (B)
    
    
    53,686
    
    
    
    62,164
    
    
    
    165,321
    
    
    
    173,202Gross profit
    
    
    86,578
    
    
    
    89,791
    
    
    
    251,441
    
    
    
    278,964Operating expenses:Research and development
    
    
    29,425
    
    
    
    31,076
    
    
    
    86,907
    
    
    
    85,147Sales and marketing
    
    
    39,573
    
    
    
    55,080
    
    
    
    125,531
    
    
    
    161,730Advertising with related party
    
    
    7,941
    
    
    
    15,153
    
    
    
    22,229
    
    
    
    31,733General and administrative
    
    
    13,039
    
    
    
    15,453
    
    
    
    55,208
    
    
    
    50,874Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    175,583
    
    
    
    Restructuring and other charges
    
    
    877
    
    
    
    
    
    
    
    1,671
    
    
    
    686Total operating expenses
    
    
    90,855
    
    
    
    116,762
    
    
    
    467,129
    
    
    
    330,170Operating loss
    
    
    (4,277
    )
    
    
    (26,971
    )
    
    
    (215,688
    )
    
    
    (51,206
    )Other income (expenses):Interest income, net
    
    
    1,253
    
    
    
    2,865
    
    
    
    3,190
    
    
    
    11,198Equity in net loss of investments
    
    
    (273
    )
    
    
    (226
    )
    
    
    (1,197
    )
    
    
    (424
    )Gain on sale of equity investments, net
    
    
    604
    
    
    
    
    
    
    
    809
    
    
    
    222Gain on sale of interest in Rhapsody America
    
    
    
    
    
    
    7,405
    
    
    
    
    
    
    
    14,502Other income (expense), net
    
    
    (888
    )
    
    
    818
    
    
    
    (482
    )
    
    
    1,636Other income (expenses), net
    
    
    696
    
    
    
    10,862
    
    
    
    2,320
    
    
    
    27,134Loss before income taxes
    
    
    (3,581
    )
    
    
    (16,109
    )
    
    
    (213,368
    )
    
    
    (24,072
    )Income taxes
    
    
    (686
    )
    
    
    (728
    )
    
    
    (3,445
    )
    
    
    (8,436
    )Net loss
    
    
    (4,267
    )
    
    
    (16,837
    )
    
    
    (216,813
    )
    
    
    (32,508
    )Net loss attributable to noncontrolling interest in Rhapsody America
    
    
    5,787
    
    
    
    12,337
    
    
    
    17,868
    
    
    
    29,129Net income (loss) attributable to common shareholders
    
    $
    1,520
    
    
    $
    (4,500
    )
    
    $
    (198,945
    )
    
    $
    (3,379
    )Basic net income (loss) per share available to common shareholders
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (1.50
    )
    
    $
    (0.02
    )Diluted net income (loss) per share available to common shareholders
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (1.50
    )
    
    $
    (0.02
    )Shares used to compute basic net income (loss) per share available to
common shareholders
    
    
    134,793
    
    
    
    141,975
    
    
    
    134,531
    
    
    
    142,611Shares used to compute diluted net income (loss) per share available
to common shareholders
    
    
    134,978
    
    
    
    141,975
    
    
    
    134,531
    
    
    
    142,611Comprehensive income (loss):Net loss
    
    $
    (4,267
    )
    
    $
    (16,837
    )
    
    $
    (216,813
    )
    
    $
    (32,508
    )Unrealized holding losses (gains) on short-term and equity
investments, net of income taxes
    
    
    70
    
    
    
    (1,841
    )
    
    
    3,868
    
    
    
    (2,130
    )Foreign currency translation gains (losses)
    
    
    3,223
    
    
    
    (38,759
    )
    
    
    4,441
    
    
    
    (59,090
    )Comprehensive loss
    
    
    (974
    )
    
    
    (57,437
    )
    
    
    (208,504
    )
    
    
    (93,728
    )Net loss attributable to noncontrolling interest
    
    
    5,787
    
    
    
    12,337
    
    
    
    17,868
    
    
    
    29,129Comprehensive income (loss) attributable to common shareholders
    
    $
    4,813
    
    
    $
    (45,100
    )
    
    $
    (190,636
    )
    
    $
    (64,599
    )(A) Components of net revenue:License fees
    
    $
    23,621
    
    
    $
    28,394
    
    
    $
    74,189
    
    
    $
    82,762Service revenue
    
    
    116,643
    
    
    
    123,561
    
    
    
    342,573
    
    
    
    369,404$
    140,264
    
    
    $
    151,955
    
    
    $
    416,762
    
    
    $
    452,166(B) Components of cost of revenue:License fees
    
    $
    8,113
    
    
    $
    11,137
    
    
    $
    27,228
    
    
    $
    31,139Service revenue
    
    
    45,573
    
    
    
    51,027
    
    
    
    138,093
    
    
    
    142,063$
    53,686
    
    
    $
    62,164
    
    
    $
    165,321
    
    
    $
    173,202
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REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (216,813
    )
    
    $
    (32,508
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    22,881
    
    
    
    38,032Stock-based compensation
    
    
    15,545
    
    
    
    17,475Loss on disposal of equipment, software, and leasehold improvements
    
    
    302
    
    
    
    157Equity in net loss of investments
    
    
    1,197
    
    
    
    198Gain on sale of equity investments, net
    
    
    (809
    )
    
    
    (222
    )Impairment of goodwill
    
    
    175,583
    
    
    
    Excess tax benefit from stock option exercises
    
    
    (9
    )
    
    
    (108
    )Accrued loss on excess office facilities
    
    
    (2,872
    )
    
    
    (2,537
    )Deferred income taxes
    
    
    545
    
    
    
    2,640Gain on sale of interest in Rhapsody America
    
    
    
    
    
    
    (14,502
    )Accrued restructuring and other charges
    
    
    (3,786
    )
    
    
    Other
    
    
    39
    
    
    
    111Net change in certain operating assets and liabilities, net of acquisitions:Trade accounts receivable
    
    
    4,363
    
    
    
    12,696Prepaid expenses and other assets
    
    
    2,072
    
    
    
    (26,066
    )Accounts payable
    
    
    1,276
    
    
    
    (16,766
    )Accrued and other liabilities
    
    
    (16,006
    )
    
    
    386Net cash used in operating activities
    
    
    (16,492
    )
    
    
    (21,014
    )Cash flows from investing activities:Purchases of equipment, software, and leasehold improvements
    
    
    (11,445
    )
    
    
    (24,807
    )Purchases of short-term investments
    
    
    (124,043
    )
    
    
    (151,378
    )Proceeds from sales and maturities of short-term investments
    
    
    93,389
    
    
    
    130,136Purchases of other intangible assets
    
    
    
    
    
    
    (1,808
    )Decrease in restricted cash equivalents and investments
    
    
    1,042
    
    
    
    776Payment of acquisition costs, net of cash acquired
    
    
    (3,324
    )
    
    
    (10,192
    )Purchase of equity investments
    
    
    (2,000
    )
    
    
    (4,500
    )Proceeds from sales of equity investments
    
    
    1,014
    
    
    
    1,225Net cash used in investing activities
    
    
    (45,367
    )
    
    
    (60,548
    )Cash flows from financing activities:Net proceeds from sale of common stock under employee stock purchase plan and
exercise of stock options
    
    
    819
    
    
    
    8,834Payments of convertible debt obligations
    
    
    
    
    
    
    (100,000
    )Excess tax benefit from stock option exercises
    
    
    9
    
    
    
    108Net proceeds from sales of interest in Rhapsody America
    
    
    26,912
    
    
    
    31,640Repurchase of common stock
    
    
    
    
    
    
    (23,062
    )Net cash provided by (used in) financing activities
    
    
    27,740
    
    
    
    (82,480
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    5,928
    
    
    
    (7,512
    )Net decrease in cash and cash equivalents
    
    
    (28,191
    )
    
    
    (171,554
    )Cash and cash equivalents, beginning of period
    
    
    232,968
    
    
    
    476,697Cash and cash equivalents, end of period
    
    $
    204,777
    
    
    $
    305,143Supplemental disclosure of cash flow information:Cash received from income tax refunds
    
    $
    7,432
    
    
    $
    Cash paid for income taxes
    
    $
    4,749
    
    
    $
    11,170
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REALNETWORKS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2009 and 2008
 Note 1. Summary of Significant Accounting Policies
 Description of Business.
  Basis of Presentation.
    Revenue Recognition.
    6




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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 Consolidation
 Noncontrolling Interests.
  Note 2. Recent Accounting Pronouncements
  Business
Combinations Business Combinations
 Determination of the Useful Life of Intangible Assets Intangibles  Goodwill and Other
 7




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Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 Consolidation
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) Debt
 Subsequent Events Subsequent Events
 Recognition and
Presentation of Other-Than-Temporary Impairments Investments  Debt and Equity Securities
 The FASB Accounting Standards
Codification (Codification) and the Hierarchy of Generally Accepted Accounting Principles- a
replacement of Financial Statement No. 162 Generally Accepted Accounting Principles
 Revenue Arrangements with Multiple
Deliverables
 Certain Revenue Arrangements That Include Software Elements)
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Note 3. Stock-Based Compensation
    Quarters
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2009
    
    2008
    
    2009
    
    2008Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    2.02
    %
    
    
    2.95
    %
    
    
    1.75
    %
    
    
    2.65
    %Expected life (years)
    
    
    4.2
    
    
    
    4.2
    
    
    
    4.2
    
    
    
    4.2Volatility
    
    
    63
    %
    
    
    45
    %
    
    
    63
    %
    
    
    45
    %
  Quarters
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cost of revenue
    
    $
    309
    
    
    $
    696
    
    
    $
    1,302
    
    
    $
    1,592Research and development
    
    
    1,788
    
    
    
    2,247
    
    
    
    5,846
    
    
    
    6,307Sales and marketing
    
    
    1,099
    
    
    
    1,458
    
    
    
    3,364
    
    
    
    4,798General and administrative
    
    
    1,532
    
    
    
    1,554
    
    
    
    5,033
    
    
    
    4,778Total stock-based compensation expense
    
    $
    4,728
    
    
    $
    5,955
    
    
    $
    15,545
    
    
    $
    17,475
  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
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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 (primarily codified into ASC 810)
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 (primarily codified into FASB ASC 810  Consolidation). MTVN made payments of $17.0
million and $31.4 million during the quarter and nine months ended September 30, 2008,
respectively. As a result, RealNetworks realized and recorded gains in the condensed
consolidated statements of operations for the quarter and nine months ended September 30,
2008 of $8.7 million and $16.0 million, respectively, as all of the gain criteria were met.
During the quarter and nine months ended September 30, 2009, MTVN made payments of $7.4
million and $21.9 million, respectively, for which the sale of ownership interests in
Rhapsody America have been reflected as an equity transaction and $3.8 million and $11.2
million, respectively, have been recorded directly to shareholders equity. As of September
30, 2009, $91.3 million in payments have been made on the note since the formation of
Rhapsody America.
 Call/Put Rights
      10




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Noncontrolling interest rollforward
  Noncontrolling interest
    
    
    Total EquityBalances, December 31, 2007
    
    $
    19,613
    
    
    $
    875,104Net income (loss)
    
    
    (29,129
    )
    
    
    (3,379
    )Contribution and other transactions with owners
    
    
    15,813
    
    
    
    Unrealized holding losses on short-term and equity investments, net of taxes
    
    
    
    
    
    
    (2,130
    )Foreign currency translation losses
    
    
    
    
    
    
    (59,090
    )Stock-based transactions and compensation expense, net of taxes
    
    
    
    
    
    
    1,965Balances, September 30, 2008
    
    $
    6,297
    
    
    $
    812,470
 Noncontrolling interest
    
    
    Total EquityBalances, December 31, 2008
    
    $
    378
    
    
    $
    553,558Net loss
    
    
    (17,868
    )
    
    
    (198,945
    )Contribution and other transactions with owners
    
    
    17,140
    
    
    
    10,998Accretion of MTVNs equity interest in Rhapsody Amercia
    
    
    3,015
    
    
    
    (3,015
    )Accretion of MTVNs preferred return in Rhapsody Amercia
    
    
    2,775
    
    
    
    (2,775
    )Unrealized holding losses on short-term and equity investments, net of taxes
    
    
    
    
    
    
    3,868Foreign currency translation losses
    
    
    
    
    
    
    4,441Stock-based transactions and compensation expense, net of taxes
    
    
    
    
    
    
    16,140Balances, September 30, 2009
    
    $
    5,440
    
    
    $
    384,270
 Note 5. Fair Value Measurements
  
    
    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
 Items Measured at Fair Value on a Recurring Basis
  11




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Fair Value Measurements as ofSeptember 30, 2009Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(In thousands)Cash equivalentsMoney market funds
    
    $
    148,752
    
    
    $
    148,752
    
    
    $
    
    
    
    $
    Short-term investmentsCorporate notes and bonds
    
    
    86,957
    
    
    
    86,957
    
    
    
    
    
    
    
    U.S. government agency securities
    
    
    81,463
    
    
    
    81,463
    
    
    
    
    
    
    
    Equity investmentsPublicly traded investments
    
    
    16,476
    
    
    
    16,476
    
    
    
    
    
    
    
    Total
    
    $
    333,648
    
    
    $
    333,648
    
    
    $
    
    
    
    $
    
 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
    
    $
    56,025
    
    
    $
    
    
    
    $
    
    
    
    $
    56,025Money market mutual funds
    
    
    148,752
    
    
    
    
    
    
    
    
    
    
    
    148,752Total cash and cash equivalents:
    
    
    204,777
    
    
    
    
    
    
    
    
    
    
    
    204,777Short-term investments:Corporate notes and bonds
    
    
    86,288
    
    
    
    873
    
    
    
    (204
    )
    
    
    86,957U.S. Government agency securities
    
    
    81,325
    
    
    
    167
    
    
    
    (29
    )
    
    
    81,463Total short-term investments:
    
    
    167,613
    
    
    
    1,040
    
    
    
    (233
    )
    
    
    168,420Total cash, cash equivalents and short-term investments
    
    $
    372,390
    
    
    $
    1,040
    
    
    $
    (233
    )
    
    $
    373,197Restricted cash equivalents and investments
    
    $
    13,700
    
    
    $
    
    
    
    $
    
    
    
    $
    13,700
  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
    
    
    
    
    
    
    
    232,968
 12




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueShort-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
    
    $
    32,589
    
    
    $
    32,705Between one year and five years
    
    
    133,504
    
    
    
    134,182Between five years and fifteen years
    
    
    1,520
    
    
    
    1,533Total available-for-sale investments
    
    $
    167,613
    
    
    $
    168,420
 Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns
  Allowance ForDoubtfulAccounts
    
    
    SalesReceivable
    
    
    ReturnsBalances, December 31, 2008
    
    $
    3,532
    
    
    $
    1,099Additions charged to expenses
    
    
    725
    
    
    
    1,207Amounts written off
    
    
    (1,778
    )
    
    
    (1,254
    )Balances, September 30, 2009
    
    $
    2,479
    
    
    $
    1,052
  Note 8. Equity Investments
   September 30, 2009
    
    
    December 31, 2008Carrying
    
    
    
    
    
    
    CarryingCost
    
    
    Value
    
    
    Cost
    
    
    ValuePublicly traded investments
    
    $
    10,765
    
    
    $
    16,476
    
    
    $
    10,765
    
    
    $
    13,903Privately held investments
    
    
    7,109
    
    
    
    5,292
    
    
    
    5,695
    
    
    
    4,679Total equity investments
    
    $
    17,874
    
    
    $
    21,768
    
    
    $
    16,460
    
    
    $
    18,582
 13




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##### Table of Contents



Note 9. Other Intangible Assets
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    35,875
    
    
    $
    26,335
    
    
    $
    9,540Developed technology
    
    
    29,637
    
    
    
    26,840
    
    
    
    2,797Patents, trademarks and tradenames
    
    
    6,628
    
    
    
    6,523
    
    
    
    105Service contracts and other
    
    
    6,026
    
    
    
    5,707
    
    
    
    319Total other intangible assets
    
    $
    78,166
    
    
    $
    65,405
    
    
    $
    12,761
  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 three months)
    
    $
    2,1352010
    
    
    4,4642011
    
    
    2,2812012
    
    
    2,0142013
    
    
    1,609Thereafter
    
    
    258Total
    
    $
    12,761
   Note 10. Goodwill
  Balance, December 31, 2008
    
    $
    175,264Effects of foreign currency translation
    
    
    319Impairment of goodwill
    
    
    (175,583
    )Balance, September 30, 2009
    
    $
    
 14




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##### Table of Contents



Note 11. Accrued and Other Liabilities
  September 30,
    
    
    December 31,2009
    
    
    2008Royalties and other fulfillment costs
    
    $
    49,108
    
    
    $
    55,247Employee compensation, commissions and benefits
    
    
    19,872
    
    
    
    21,679Sales, VAT and other taxes payable
    
    
    15,862
    
    
    
    16,801Legal fees and contingent legal fees
    
    
    4,920
    
    
    
    3,290Other
    
    
    21,533
    
    
    
    21,671Total
    
    $
    111,295
    
    
    $
    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
    
    
    (2,872
    )Accrued loss on excess office facilities, September 30, 2009
    
    
    4,338
 Note 13. Earnings Per Share
  15




---



##### Table of Contents



Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) available to common shareholders:Net income (loss) attributable to common shareholders
    
    $
    1,520
    
    
    $
    (4,500
    )
    
    $
    (198,945
    )
    
    $
    (3,379
    )Less accretion of MTVNs preferred return in Rhapsody America
    
    
    (925
    )
    
    
    
    
    
    
    (2,775
    )
    
    
    Net income (loss) available to common shareholders
    
    $
    595
    
    
    $
    (4,500
    )
    
    $
    (201,720
    )
    
    $
    (3,379
    )Weighted average common shares outstanding used to compute basic net
income (loss) per share available to common shareholders
    
    
    134,793
    
    
    
    141,975
    
    
    
    134,531
    
    
    
    142,611Dilutive potential common shares:Stock options and restricted stock
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    Shares used to compute diluted net income (loss) per share
available to common shareholders
    
    
    134,978
    
    
    
    141,975
    
    
    
    134,531
    
    
    
    142,611Basic net income (loss) per share available to common shareholders
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (1.50
    )
    
    $
    (0.02
    )Diluted net income (loss) per share available to common shareholders
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (1.50
    )
    
    $
    (0.02
    )
  Note 14. Commitments and Contingencies
 Borrowing Arrangements
    Litigation
 16




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##### Table of Contents



17




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##### Table of Contents



Note 15. Segment Information
      18




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##### Table of Contents



MediaSoftware and
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    38,765
    
    
    $
    29,491
    
    
    $
    24,580
    
    
    $
    47,428
    
    
    $
    
    
    
    $
    140,264Cost of revenue
    
    
    23,720
    
    
    
    7,728
    
    
    
    4,090
    
    
    
    18,148
    
    
    
    
    
    
    
    53,686Gross profit
    
    
    15,045
    
    
    
    21,763
    
    
    
    20,490
    
    
    
    29,280
    
    
    
    
    
    
    
    86,578Operating expenses
    
    
    25,150
    
    
    
    27,081
    
    
    
    13,249
    
    
    
    25,535
    
    
    
    (160
    )
    
    
    90,855Operating income (loss)
    
    
    (10,105
    )
    
    
    (5,318
    )
    
    
    7,241
    
    
    
    3,745
    
    
    
    160
    
    
    
    (4,277
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    696
    
    
    
    696Income (loss) before income taxes
    
    
    (10,105
    )
    
    
    (5,318
    )
    
    
    7,241
    
    
    
    3,745
    
    
    
    856
    
    
    
    (3,581
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (686
    )
    
    
    (686
    )Net income (loss)
    
    
    (10,105
    )
    
    
    (5,318
    )
    
    
    7,241
    
    
    
    3,745
    
    
    
    170
    
    
    
    (4,267
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    5,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,787Net income (loss) attributable
to common shareholders
    
    $
    (4,318
    )
    
    $
    (5,318
    )
    
    $
    7,241
    
    
    $
    3,745
    
    
    $
    170
    
    
    $
    1,520
  MediaSoftware and
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    123,270
    
    
    $
    92,088
    
    
    $
    64,189
    
    
    $
    137,215
    
    
    $
    
    
    
    $
    416,762Cost of revenue
    
    
    75,965
    
    
    
    25,093
    
    
    
    10,387
    
    
    
    53,876
    
    
    
    
    
    
    
    165,321Gross profit
    
    
    47,305
    
    
    
    66,995
    
    
    
    53,802
    
    
    
    83,339
    
    
    
    
    
    
    
    251,441Impairment of goodwill
    
    
    37,029
    
    
    
    41,247
    
    
    
    46,776
    
    
    
    50,531
    
    
    
    
    
    
    
    175,583Other operating expenses
    
    
    81,640
    
    
    
    80,993
    
    
    
    51,615
    
    
    
    77,384
    
    
    
    (86
    )
    
    
    291,546Operating income (loss)
    
    
    (71,364
    )
    
    
    (55,245
    )
    
    
    (44,589
    )
    
    
    (44,576
    )
    
    
    86
    
    
    
    (215,688
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,320
    
    
    
    2,320Income (loss) before income taxes
    
    
    (71,364
    )
    
    
    (55,245
    )
    
    
    (44,589
    )
    
    
    (44,576
    )
    
    
    2,406
    
    
    
    (213,368
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,445
    )
    
    
    (3,445
    )Net income (loss)
    
    
    (71,364
    )
    
    
    (55,245
    )
    
    
    (44,589
    )
    
    
    (44,576
    )
    
    
    (1,039
    )
    
    
    (216,813
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    17,868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,868Net income (loss) attributable
to common shareholders
    
    $
    (53,496
    )
    
    $
    (55,245
    )
    
    $
    (44,589
    )
    
    $
    (44,576
    )
    
    $
    (1,039
    )
    
    $
    (198,945
    )
  MediaSoftware
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    and Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    41,591
    
    
    $
    34,200
    
    
    $
    24,531
    
    
    $
    51,633
    
    
    $
    
    
    
    $
    151,955Cost of revenue
    
    
    23,787
    
    
    
    10,251
    
    
    
    4,539
    
    
    
    23,587
    
    
    
    
    
    
    
    62,164Gross profit
    
    
    17,804
    
    
    
    23,949
    
    
    
    19,992
    
    
    
    28,046
    
    
    
    
    
    
    
    89,791Operating expenses
    
    
    42,355
    
    
    
    28,412
    
    
    
    16,064
    
    
    
    29,719
    
    
    
    212
    
    
    
    116,762Operating income (loss)
    
    
    (24,551
    )
    
    
    (4,463
    )
    
    
    3,928
    
    
    
    (1,673
    )
    
    
    (212
    )
    
    
    (26,971
    )Total non-operating income, net
    
    
    7,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,457
    
    
    
    10,862Income (loss) before income taxes
    
    
    (17,146
    )
    
    
    (4,463
    )
    
    
    3,928
    
    
    
    (1,673
    )
    
    
    3,245
    
    
    
    (16,109
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (728
    )
    
    
    (728
    )Net income (loss)
    
    
    (17,146
    )
    
    
    (4,463
    )
    
    
    3,928
    
    
    
    (1,673
    )
    
    
    2,517
    
    
    
    (16,837
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    12,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,337Net income (loss) attributable
to common shareholders
    
    $
    (4,809
    )
    
    $
    (4,463
    )
    
    $
    3,928
    
    
    $
    (1,673
    )
    
    $
    2,517
    
    
    $
    (4,500
    )
 19




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##### Table of Contents



MediaSoftware
    
    
    Technology Products
    
    
    ReconcilingMusic
    
    
    Games
    
    
    and Services
    
    
    and Solutions
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    116,840
    
    
    $
    100,943
    
    
    $
    80,178
    
    
    $
    154,205
    
    
    $
    
    
    
    $
    452,166Cost of revenue
    
    
    65,999
    
    
    
    29,543
    
    
    
    12,222
    
    
    
    65,438
    
    
    
    
    
    
    
    173,202Gross profit
    
    
    50,841
    
    
    
    71,400
    
    
    
    67,956
    
    
    
    88,767
    
    
    
    
    
    
    
    278,964Operating expenses
    
    
    107,978
    
    
    
    79,737
    
    
    
    46,400
    
    
    
    94,683
    
    
    
    1,372
    
    
    
    330,170Operating income (loss)
    
    
    (57,137
    )
    
    
    (8,337
    )
    
    
    21,556
    
    
    
    (5,916
    )
    
    
    (1,372
    )
    
    
    (51,206
    )Total non-operating income, net
    
    
    14,502
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,632
    
    
    
    27,134Income (loss) before income taxes
    
    
    (42,635
    )
    
    
    (8,337
    )
    
    
    21,556
    
    
    
    (5,916
    )
    
    
    11,260
    
    
    
    (24,072
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,436
    )
    
    
    (8,436
    )Net income (loss)
    
    
    (42,635
    )
    
    
    (8,337
    )
    
    
    21,556
    
    
    
    (5,916
    )
    
    
    2,824
    
    
    
    (32,508
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    29,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,129Net income (loss) attributable
to common shareholders
    
    $
    (13,506
    )
    
    $
    (8,337
    )
    
    $
    21,556
    
    
    $
    (5,916
    )
    
    $
    2,824
    
    
    $
    (3,379
    )
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008United States
    
    $
    95,758
    
    
    $
    102,363
    
    
    $
    283,109
    
    
    $
    302,430Europe
    
    
    23,773
    
    
    
    27,151
    
    
    
    69,907
    
    
    
    78,514Rest of the World
    
    
    20,733
    
    
    
    22,441
    
    
    
    63,746
    
    
    
    71,222Total net revenue
    
    $
    140,264
    
    
    $
    151,955
    
    
    $
    416,762
    
    
    $
    452,166
  September 30,
    
    
    December 31,2009
    
    
    2008United States
    
    $
    54,067
    
    
    $
    163,730Republic of Korea
    
    
    7,831
    
    
    
    51,508Europe
    
    
    6,485
    
    
    
    37,315Rest of the World
    
    
    2,908
    
    
    
    4,445Total long-lived assets
    
    $
    71,291
    
    
    $
    256,998
  September 30,
    
    
    December 31,2009
    
    
    2008United States
    
    $
    342,826
    
    
    $
    437,565Republic of Korea
    
    
    10,427
    
    
    
    64,824Europe
    
    
    21,219
    
    
    
    45,845Rest of the World
    
    
    9,798
    
    
    
    5,324Total net assets
    
    $
    384,270
    
    
    $
    553,558
 20




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##### Table of Contents



September 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.
   Transactions with LoEn Entertainment, Inc.
 Note 17. Repurchase of Common Stock
  Note 18. Income Taxes
  21




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##### Table of Contents



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 and other 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 past acquisitions and expectations for future acquisitions;
    
    plans, strategies and expected opportunities for future growth, increased profitability
and innovation;
    
    the creation of new strategic partnerships and broadening of existing strategic
partnerships and the prospects for growth and profitability as a result of such
partnerships;
    
    the expected financial position, performance, growth and profitability of our businesses
and the availability of resources;
    
    the cash position, 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;
    
    our intention to separate our Games business and to distribute shares of the newly
created games company to our shareholders;
    
    our expected introduction of new products and services across our businesses;
    
    the effects of legislation, regulations, administrative proceedings, court rulings,
settlement negotiations and other factors that may impact music publishing royalty rates;
    
    impacts of competition and certain customer relationships on the future financial
performance and growth of our businesses;
    
    the effects of U.S. and foreign income and other taxes on our business, prospects,
financial condition or results of operations;
    
    the impairment of our assets and anticipated effects on our financial condition or
results of operations; and
    
    the effect of economic and market conditions on our business, prospects, financial
condition or results of operations.
 22




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##### Table of Contents



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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##### Table of Contents



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; and
    
    Accounting for income taxes.
 Revenue Recognition.
 24




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##### Table of Contents



Estimating Music Publishing Rights and Music Royalty Accruals.
 Estimating Recoverability of Deferred Costs.
  25




---



##### Table of Contents



Estimating Allowances for Doubtful Accounts and Sales Returns.
 Estimating Losses on Excess Office Facilities.
 Impairment of Investments.
 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.
   26




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Stock-Based Compensation.
 Noncontrolling Interests.
  Accounting for Gains on Sale of Subsidiary Stock. Noncontrolling Interests in Consolidated
Financial Statements, an amendment to ARB No. 51 ( Consolidation
 Accounting for Income Taxes.
 27




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##### Table of Contents



Results of Operations
 Revenue by Segment
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008Music
    
    $
    38,765
    
    
    
    (7
    )%
    
    $
    41,591
    
    
    $
    123,270
    
    
    
    6
    %
    
    $
    116,840Games
    
    
    29,491
    
    
    
    (14
    )
    
    
    34,200
    
    
    
    92,088
    
    
    
    (9
    )
    
    
    100,943Media Software and Services
    
    
    24,580
    
    
    
    
    
    
    
    24,531
    
    
    
    64,189
    
    
    
    (20
    )
    
    
    80,178Technology Products and Solutions
    
    
    47,428
    
    
    
    (8
    )
    
    
    51,633
    
    
    
    137,215
    
    
    
    (11
    )
    
    
    154,205Total net revenue
    
    $
    140,264
    
    
    
    (8
    )%
    
    $
    151,955
    
    
    $
    416,762
    
    
    
    (8
    )%
    
    $
    452,166
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Music
    
    
    28
    %
    
    
    27
    %
    
    
    30
    %
    
    
    26
    %Games
    
    
    21
    
    
    
    23
    
    
    
    22
    
    
    
    22Media Software and Services
    
    
    17
    
    
    
    16
    
    
    
    15
    
    
    
    18Technology Products and Solutions
    
    
    34
    
    
    
    34
    
    
    
    33
    
    
    
    34Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Music
  28




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Games
   Media Software and Services
  29




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##### Table of Contents



Technology Products and Solutions
  Geographic Revenue
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008United States
    
    $
    95,758
    
    
    
    (6
    )%
    
    $
    102,363
    
    
    $
    283,109
    
    
    
    (6
    )%
    
    $
    302,430Europe
    
    
    23,773
    
    
    
    (12
    )
    
    
    27,151
    
    
    
    69,907
    
    
    
    (11
    )
    
    
    78,514Rest of the world
    
    
    20,733
    
    
    
    (8
    )
    
    
    22,441
    
    
    
    63,746
    
    
    
    (10
    )
    
    
    71,222Total net revenue
    
    $
    140,264
    
    
    
    (8
    )%
    
    $
    151,955
    
    
    $
    416,762
    
    
    
    (8
    )%
    
    $
    452,166
   30




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License Fees and Service Revenue
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008License fees
    
    $
    23,621
    
    
    
    (17
    )%
    
    $
    28,394
    
    
    $
    74,189
    
    
    
    (10
    )%
    
    $
    82,762Service revenue
    
    
    116,643
    
    
    
    (6
    )
    
    
    123,561
    
    
    
    342,573
    
    
    
    (7
    )
    
    
    369,404Total net revenue
    
    $
    140,264
    
    
    
    (8
    )%
    
    $
    151,955
    
    
    $
    416,762
    
    
    
    (8
    )%
    
    $
    452,166
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008License fees
    
    
    17
    %
    
    
    19
    %
    
    
    18
    %
    
    
    18
    %Service revenue
    
    
    83
    
    
    
    81
    
    
    
    82
    
    
    
    82Total net revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 License Fees.
   Service Revenue
   31




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##### Table of Contents



Deferred Revenue
  Cost of Revenue by Segment
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008Music
    
    $
    23,720
    
    
    
    (0
    )%
    
    $
    23,787
    
    
    $
    75,965
    
    
    
    15
    %
    
    $
    65,999Games
    
    
    7,728
    
    
    
    (25
    )
    
    
    10,251
    
    
    
    25,093
    
    
    
    (15
    )
    
    
    29,543Media Software and Services
    
    
    4,090
    
    
    
    (10
    )
    
    
    4,539
    
    
    
    10,387
    
    
    
    (15
    )
    
    
    12,222Technology Products and Solutions
    
    
    18,148
    
    
    
    (23
    )
    
    
    23,587
    
    
    
    53,876
    
    
    
    (18
    )
    
    
    65,438Total cost of revenue
    
    $
    53,686
    
    
    
    (14
    )%
    
    $
    62,164
    
    
    $
    165,321
    
    
    
    (5
    )%
    
    $
    173,202
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Music
    
    
    61
    %
    
    
    57
    %
    
    
    62
    %
    
    
    56
    %Games
    
    
    26
    
    
    
    30
    
    
    
    27
    
    
    
    29Media Software and Services
    
    
    17
    
    
    
    19
    
    
    
    16
    
    
    
    15Technology Products and Solutions
    
    
    38
    
    
    
    46
    
    
    
    39
    
    
    
    42Total cost of revenue
    
    
    38
    %
    
    
    41
    %
    
    
    40
    %
    
    
    38
    %
 Cost of Music Revenue.
   32




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Cost of Games Revenue.
  Cost of Media Software and Services Revenue.
   Cost of Technology Products and Solutions.
  Cost of License and Service Revenue
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008License fees
    
    $
    8,113
    
    
    
    (27
    )%
    
    $
    11,137
    
    
    $
    27,228
    
    
    
    (13
    )%
    
    $
    31,139Service revenue
    
    
    45,573
    
    
    
    (11
    )
    
    
    51,027
    
    
    
    138,093
    
    
    
    (3
    )
    
    
    142,063Total cost of revenue
    
    $
    53,686
    
    
    
    (14
    )%
    
    $
    62,164
    
    
    $
    165,321
    
    
    
    (5
    )%
    
    $
    173,202
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008License fees
    
    
    34
    %
    
    
    39
    %
    
    
    37
    %
    
    
    38
    %Service revenue
    
    
    39
    
    
    
    41
    
    
    
    40
    
    
    
    38Total cost of revenue
    
    
    38
    %
    
    
    41
    %
    
    
    40
    %
    
    
    38
    %
 Cost of License Fees
 33




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##### Table of Contents



Cost of Service Revenue
   Operating Expenses
 Research and Development
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    Change
    
    2008
    
    2009
    
    Change
    
    2008Research and development
    
    $
    29,425
    
    
    
    (5
    )%
    
    $
    31,076
    
    
    $
    86,907
    
    
    
    2
    %
    
    $
    85,147As a percentage of total net revenue
    
    
    21
    %
    
    
    
    
    
    
    20
    %
    
    
    21
    %
    
    
    
    
    
    
    19
    %
  Sales and Marketing
  34




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Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    Change
    
    2008
    
    2009
    
    Change
    
    2008Sales and marketing
    
    $
    39,573
    
    
    
    (28
    )%
    
    $
    55,080
    
    
    $
    125,531
    
    
    
    (22
    )%
    
    $
    161,730As a percentage of total net revenue
    
    
    28
    %
    
    
    
    
    
    
    36
    %
    
    
    30
    %
    
    
    
    
    
    
    36
    %
  Advertising with Related Party
  General and Administrative
  Quarters Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    Change
    
    2008
    
    2009
    
    Change
    
    2008General and administrative
    
    $
    13,039
    
    
    
    (16
    )%
    
    $
    15,453
    
    
    $
    55,208
    
    
    
    9
    %
    
    $
    50,874As a percentage of total net revenue
    
    
    9
    %
    
    
    
    
    
    
    10
    %
    
    
    13
    %
    
    
    
    
    
    
    11
    %
  Impairment of Goodwill
   35




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Other Income (Expenses), Net
  Quarters Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    Change
    
    
    2008
    
    
    2009
    
    
    Change
    
    
    2008Interest income, net
    
    $
    1,253
    
    
    
    (56
    )%
    
    $
    2,865
    
    
    $
    3,190
    
    
    
    (72
    )%
    
    $
    11,198Equity in net loss of investments
    
    
    (273
    )
    
    
    21
    
    
    
    (226
    )
    
    
    (1,197
    )
    
    
    182
    
    
    
    (424
    )Gain on sale of equity investments, net
    
    
    604
    
    
    
    n/a
    
    
    
    
    
    
    
    809
    
    
    
    264
    
    
    
    222Gain on sale of interest in Rhapsody America
    
    
    
    
    
    
    (100
    )
    
    
    7,405
    
    
    
    
    
    
    
    (100
    )
    
    
    14,502Other income, net
    
    
    (888
    )
    
    
    (209
    )
    
    
    818
    
    
    
    (482
    )
    
    
    (129
    )
    
    
    1,636Other income, net
    
    $
    696
    
    
    
    (94
    )%
    
    $
    10,862
    
    
    $
    2,320
    
    
    
    (91
    )%
    
    $
    27,134
  Income Taxes
     36




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##### Table of Contents



New Accounting Pronouncements
  Determination of the Useful Life of
Intangible Assets Intangibles 
Goodwill and Other
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51 Consolidation
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) Debt
 Subsequent Events Subsequent Events
 Recognition and Presentation of
Other-Than-Temporary Impairments Investments  Debt and Equity Securities
 37




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##### Table of Contents



The FASB Accounting Standards
Codification (Codification) and the Hierarchy of Generally Accepted Accounting Principles- a
replacement of Financial Statement No. 162 Generally Accepted Accounting Principles
 Revenue Arrangements with Multiple
Deliverables
 Certain Revenue Arrangements That Include Software Elements)
 Liquidity and Capital Resources
  September 30,
    
    December 31,2009
    
    2008Working capital
    
    $
    278,312
    
    
    $
    266,990Cash, cash equivalents, and short-term investments
    
    
    373,197
    
    
    
    370,734Restricted cash
    
    
    13,700
    
    
    
    14,742
   Nine Months EndedSeptember 30,2009
    
    2008Cash used in operating activities
    
    $
    (16,492
    )
    
    $
    (21,014
    )Cash used in investing activities
    
    
    (45,367
    )
    
    
    (60,548
    )Cash provided by financing activities
    
    
    27,740
    
    
    
    (82,480
    )
   38




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39




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##### Table of Contents



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




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   41




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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.
  
    
    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.
 43




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##### Table of Contents



Games.
 Media Software and Services.
 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.
  44




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##### Table of Contents



Copyright Royalty Board decisions 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.
  We may not be successful in maintaining and growing our distribution of digital media products.
  Our Rhapsody America joint venture may not have sufficient funds to continue to support its current
operations.
  45




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##### Table of Contents



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.
  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.
  46




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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.
  The mobile entertainment market is highly competitive.
  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.
  47




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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.
  48




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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.
   49




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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.
   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.
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We may be subject to assessment of sales and other taxes for the sale of our products, license of
technology or provision of services.
    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.
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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.
  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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
 Item 3. Default Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    
    WithheldDirectors Elected:Pradeep Jotwani (Class 2)
    
    
    86,624,492
    
    
    
    35,325,662Robert Glaser (Class 3)
    
    
    85,435,512
    
    
    
    36,514,642
  Eric A. BenhamouEdward BleierJonathan D. KleinKalpana Raina
  VotesFor
    
    
    91,419,562Against
    
    
    6,395,767Broker non-votes
    
    
    21,006,120Abstain
    
    
    3,128,705
  VotesFor
    
    
    119,751,396Against
    
    
    1,418,580Broker non-votes
    
    
    Abstain
    
    
    780,178
 
 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) 56




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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
 57