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, 2010
 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(State of incorporation)
    
    91-1628146(I.R.S. Employer Identification Number)
 2601 Elliott Avenue, Suite 1000
Seattle, Washington(Address of principal executive offices)
    
    98121(Zip Code)
 (206) 674-2700  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    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
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36Part II. Other InformationItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3. Default Upon Senior Securities
    
    
    45Item 4. Removed and Reserved
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    46Signature
    
    
    47
  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)
 June 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    156,155
    
    
    $
    277,030Short-term investments
    
    
    157,065
    
    
    
    107,870Trade accounts receivable, net of allowances for doubtful accounts and sales returns
    
    
    43,805
    
    
    
    60,937Deferred costs, current portion
    
    
    4,541
    
    
    
    5,192Prepaid expenses and other current assets
    
    
    30,001
    
    
    
    30,624Total current assets
    
    
    391,567
    
    
    
    481,653Equipment, software, and leasehold improvements, at cost:Equipment and software
    
    
    142,978
    
    
    
    151,951Leasehold improvements
    
    
    25,308
    
    
    
    31,041Total equipment, software, and leasehold improvements, at cost
    
    
    168,286
    
    
    
    182,992Less accumulated depreciation and amortization
    
    
    121,616
    
    
    
    125,878Net equipment, software, and leasehold improvements
    
    
    46,670
    
    
    
    57,114Restricted cash equivalents and investments
    
    
    10,000
    
    
    
    13,700Equity method investments
    
    
    24,223
    
    
    
    50Available for sale securities
    
    
    17,587
    
    
    
    19,503Other assets
    
    
    3,746
    
    
    
    4,030Deferred costs, non-current portion
    
    
    13,516
    
    
    
    10,182Deferred tax assets, net, non-current portion
    
    
    8,822
    
    
    
    10,001Other intangible assets, net
    
    
    7,804
    
    
    
    10,650Total assets
    
    $
    523,935
    
    
    $
    606,883LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    27,662
    
    
    $
    32,703Accrued and other liabilities
    
    
    88,521
    
    
    
    124,934Deferred revenue, current portion
    
    
    20,740
    
    
    
    31,374Related party payable  Rhapsody
    
    
    459
    
    
    
    Related party payable  MTVN
    
    
    
    
    
    
    11,216Accrued loss on excess office facilities, current portion
    
    
    762
    
    
    
    3,228Total current liabilities
    
    
    138,144
    
    
    
    203,455Deferred revenue, non-current portion
    
    
    879
    
    
    
    1,933Accrued loss on excess office facilities, non-current portion
    
    
    4,047
    
    
    
    Deferred rent
    
    
    3,768
    
    
    
    4,464Deferred tax liabilities, net, non-current portion
    
    
    719
    
    
    
    961Other long-term liabilities
    
    
    12,293
    
    
    
    13,006Total liabilities
    
    
    159,850
    
    
    
    223,819Noncontrolling interest in Rhapsody
    
    
    
    
    
    
    7,253Shareholders 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
135,587 shares in 2010 and 135,057 shares in 2009
    
    
    136
    
    
    
    135Additional paid-in capital
    
    
    690,521
    
    
    
    671,606Accumulated other comprehensive loss
    
    
    (46,577
    )
    
    
    (38,614
    )Retained deficit
    
    
    (279,995
    )
    
    
    (257,316
    )Total shareholders equity
    
    
    364,085
    
    
    
    375,811Total liabilities and shareholders equity
    
    $
    523,935
    
    
    $
    606,883
  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 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenue (A)
    
    $
    88,884
    
    
    $
    135,725
    
    
    $
    217,484
    
    
    $
    276,498Cost of revenue (B)
    
    
    29,149
    
    
    
    55,614
    
    
    
    78,308
    
    
    
    111,635Gross profit
    
    
    59,735
    
    
    
    80,111
    
    
    
    139,176
    
    
    
    164,863Operating expenses:Research and development
    
    
    27,583
    
    
    
    28,923
    
    
    
    62,258
    
    
    
    57,482Sales and marketing
    
    
    27,382
    
    
    
    42,273
    
    
    
    65,209
    
    
    
    85,958Advertising with related party
    
    
    
    
    
    
    6,865
    
    
    
    1,065
    
    
    
    14,288General and administrative
    
    
    14,590
    
    
    
    19,338
    
    
    
    29,511
    
    
    
    42,169Impairment of goodwill
    
    
    
    
    
    
    175,583
    
    
    
    
    
    
    
    175,583Restructuring and other charges
    
    
    4,792
    
    
    
    
    
    
    
    10,407
    
    
    
    794Loss on excess office facilities
    
    
    7,082
    
    
    
    
    
    
    
    7,082
    
    
    
    Total operating expenses
    
    
    81,429
    
    
    
    272,982
    
    
    
    175,532
    
    
    
    376,274Operating loss
    
    
    (21,694
    )
    
    
    (192,871
    )
    
    
    (36,356
    )
    
    
    (211,411
    )Other income (expenses):Interest income, net
    
    
    551
    
    
    
    754
    
    
    
    931
    
    
    
    1,937Equity in net loss of Rhapsody and other investments
    
    
    (5,427
    )
    
    
    (269
    )
    
    
    (5,427
    )
    
    
    (924
    )Gain (loss) on sale of equity investments, net
    
    
    (50
    )
    
    
    68
    
    
    
    (50
    )
    
    
    205Gain on deconsolidation of Rhapsody
    
    
    
    
    
    
    
    
    
    
    10,929
    
    
    
    Other income (expense), net
    
    
    994
    
    
    
    (449
    )
    
    
    1,093
    
    
    
    406Total other income (expenses), net
    
    
    (3,932
    )
    
    
    104
    
    
    
    7,476
    
    
    
    1,624Loss before income taxes
    
    
    (25,626
    )
    
    
    (192,767
    )
    
    
    (28,880
    )
    
    
    (209,787
    )Income taxes benefit (expense)
    
    
    (281
    )
    
    
    (1,210
    )
    
    
    3,291
    
    
    
    (2,759
    )Net loss
    
    
    (25,907
    )
    
    
    (193,977
    )
    
    
    (25,589
    )
    
    
    (212,546
    )Net loss attributable to noncontrolling interest in Rhapsody
    
    
    
    
    
    
    5,648
    
    
    
    2,910
    
    
    
    12,081Net loss attributable to common shareholders
    
    $
    (25,907
    )
    
    $
    (188,329
    )
    
    $
    (22,679
    )
    
    $
    (200,465
    )Basic net income (loss) per share available to common shareholders
    
    $
    (0.19
    )
    
    $
    (1.40
    )
    
    $
    (0.14
    )
    
    $
    (1.51
    )Diluted net income (loss) per share available to common shareholders
    
    $
    (0.19
    )
    
    $
    (1.40
    )
    
    $
    (0.14
    )
    
    $
    (1.51
    )Shares used to compute basic net income (loss) per share available
to common shareholders
    
    
    135,277
    
    
    
    134,420
    
    
    
    135,209
    
    
    
    134,394Shares used to compute diluted net income (loss) per share
available to common shareholders
    
    
    135,277
    
    
    
    134,420
    
    
    
    135,209
    
    
    
    134,394Comprehensive loss:Net loss
    
    $
    (25,907
    )
    
    $
    (193,977
    )
    
    $
    (25,589
    )
    
    $
    (212,546
    )Unrealized holding (gains) losses on short-term and equity
investments, net of income taxes
    
    
    (3,160
    )
    
    
    5,760
    
    
    
    (1,609
    )
    
    
    3,938Foreign currency translation gains (losses)
    
    
    (4,743
    )
    
    
    9,207
    
    
    
    (6,354
    )
    
    
    1,218Comprehensive loss
    
    
    (33,810
    )
    
    
    (179,010
    )
    
    
    (33,552
    )
    
    
    (207,390
    )Net loss attributable to noncontrolling interest
    
    
    
    
    
    
    5,648
    
    
    
    2,910
    
    
    
    12,081Comprehensive loss attributable to common shareholders
    
    $
    (33,810
    )
    
    $
    (173,362
    )
    
    $
    (30,642
    )
    
    $
    (195,309
    )(A) Components of net revenue:License fees
    
    $
    16,644
    
    
    $
    24,389
    
    
    $
    40,816
    
    
    $
    50,568Service revenue
    
    
    72,240
    
    
    
    111,336
    
    
    
    176,668
    
    
    
    225,930$
    88,884
    
    
    $
    135,725
    
    
    $
    217,484
    
    
    $
    276,498(B) Components of cost of revenue:License fees
    
    $
    5,668
    
    
    $
    9,869
    
    
    $
    13,217
    
    
    $
    19,115Service revenue
    
    
    23,481
    
    
    
    45,745
    
    
    
    65,091
    
    
    
    92,520$
    29,149
    
    
    $
    55,614
    
    
    $
    78,308
    
    
    $
    111,635
  4




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##### 



REALNETWORKS, INC. AND SUBSIDIARIES
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months EndedJune 30,2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    (25,589
    )
    
    $
    (212,546
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    13,973
    
    
    
    15,522Stock-based compensation
    
    
    6,692
    
    
    
    10,818Gain on disposal of equipment, software, and leasehold improvements
    
    
    (3
    )
    
    
    (34
    )Equity in net loss of Rhapsody and other investments
    
    
    5,427
    
    
    
    924Loss (gain) on sale of equity investments, net
    
    
    50
    
    
    
    (205
    )Impairment of goodwill
    
    
    
    
    
    
    175,583Excess tax benefit from stock option exercises
    
    
    (18
    )
    
    
    (9
    )Gain on deconsolidation of Rhapsody
    
    
    (10,929
    )
    
    
    Accrued loss on excess office facilities
    
    
    6,470
    
    
    
    Deferred income taxes
    
    
    (1,609
    )
    
    
    (682
    )Accrued restructuring and other charges
    
    
    3,581
    
    
    
    (3,675
    )Other
    
    
    22
    
    
    
    24Net change in certain operating assets and liabilities, net of acquisitions and disposals:Trade accounts receivable
    
    
    7,649
    
    
    
    5,716Prepaid expenses and other assets
    
    
    (7,336
    )
    
    
    (2,268
    )Accounts payable
    
    
    (2,417
    )
    
    
    (2,043
    )Accrued and other liabilities
    
    
    (52,300
    )
    
    
    (5,366
    )Net cash used in operating activities
    
    
    (56,337
    )
    
    
    (18,241
    )Cash flows from investing activities:Purchases of equipment, software, and leasehold improvements
    
    
    (9,507
    )
    
    
    (7,608
    )Purchases of short-term investments
    
    
    (65,754
    )
    
    
    (66,192
    )Proceeds from sales and maturities of short-term investments
    
    
    16,559
    
    
    
    38,692Decrease in restricted cash equivalents and investments, net
    
    
    3,700
    
    
    
    141Payment of acquisition costs, net of cash acquired
    
    
    
    
    
    
    (3,154
    )Purchase of equity investments
    
    
    
    
    
    
    (2,000
    )Payment in connection with the restructuring of Rhapsody
    
    
    (18,000
    )
    
    
    Repayment of temporary funding upon deconsolidation of Rhapsody
    
    
    5,869
    
    
    
    Proceeds from sales of equity investments
    
    
    
    
    
    
    205Net cash used in investing activities
    
    
    (67,133
    )
    
    
    (39,916
    )Cash flows from financing activities:Net proceeds from sale of common stock under employee stock purchase plan and exercise of
stock options
    
    
    1,272
    
    
    
    819Excess tax benefit from stock option exercises
    
    
    18
    
    
    
    9Payments received on MTVN note
    
    
    1,213
    
    
    
    14,537Capital contribution to Rhapsody from MTVN
    
    
    
    
    
    
    5,000Net cash provided by financing activities
    
    
    2,503
    
    
    
    20,365Effect of exchange rate changes on cash and cash equivalents
    
    
    92
    
    
    
    2,316Net decrease in cash and cash equivalents
    
    
    (120,875
    )
    
    
    (35,476
    )Cash and cash equivalents, beginning of period
    
    
    277,030
    
    
    
    232,968Cash and cash equivalents, end of period
    
    $
    156,155
    
    
    $
    197,492Supplemental disclosure of cash flow information:Cash received from income tax refunds
    
    $
    131
    
    
    $
    5,942Cash paid for income taxes
    
    $
    1,818
    
    
    $
    3,336
  5




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REALNETWORKS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2010 and 2009
 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
  Revenue Arrangements with Multiple
Deliverables
 Certain Revenue Arrangements That Include Software Elements)
 7




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##### 



Note 3. Stock-Based Compensation
    Quarters
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    1.65
    %
    
    
    1.76
    %
    
    
    1.91
    %
    
    
    1.64
    %Expected life (years)
    
    
    4.0
    
    
    
    4.2
    
    
    
    4.0
    
    
    
    4.2Volatility
    
    
    62
    %
    
    
    63
    %
    
    
    62
    %
    
    
    63
    %
  Quarters
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of revenue
    
    $
    228
    
    
    $
    363
    
    
    $
    459
    
    
    $
    993Research and development
    
    
    693
    
    
    
    2,234
    
    
    
    2,290
    
    
    
    4,058Sales and marketing
    
    
    811
    
    
    
    1,199
    
    
    
    1,807
    
    
    
    2,265General and administrative
    
    
    1,039
    
    
    
    1,800
    
    
    
    2,136
    
    
    
    3,502Total stock-based compensation expense
    
    $
    2,771
    
    
    $
    5,596
    
    
    $
    6,692
    
    
    $
    10,818
  Note 4. Rhapsody Joint Venture
 Restructuring of Rhapsody
  8




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##### 



Noncontrolling interest rollforward
  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
    
    
    5
    
    
    
    (5
    )Accretion of MTVNs preferred return in Rhapsody
    
    
    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
 9




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##### 



Noncontrolling interest
    
    
    Total EquityBalances, December 31, 2009
    
    $
    7,253
    
    
    $
    375,811Net loss
    
    
    (2,910
    )
    
    
    (22,679
    )Contribution and other transactions with owners
    
    
    616
    
    
    
    619Reversal of MTVNs accretion equity interest in Rhapsody
    
    
    (6,736
    )
    
    
    6,736Reversal of MTVNs preferred return in Rhapsody
    
    
    (3,700
    )
    
    
    3,700Deconsolidation
    
    
    5,477
    
    
    
    Unrealized holding losses on short-term and equity investments, net of taxes
    
    
    
    
    
    
    (1,609
    )Foreign currency translation losses
    
    
    
    
    
    
    (6,354
    )Stock-based transactions and compensation expense, net of taxes
    
    
    
    
    
    
    7,861Balances, June 30, 2010
    
    $
    
    
    
    $
    364,085
 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
  Fair Value Measurements as ofJune 30, 2010Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(In thousands)Cash equivalentsMoney market funds
    
    $
    61,251
    
    
    $
    61,251
    
    
    $
    
    
    
    $
    Corporate notes and bonds
    
    
    40,996
    
    
    
    40,996
    
    
    $
    
    
    
    $
    Short-term investmentsCorporate notes and bonds
    
    
    104,403
    
    
    
    104,403
    
    
    
    
    
    
    
    U.S. government agency securities
    
    
    52,662
    
    
    
    52,662
    
    
    
    
    
    
    
    Restricted cash equivalents and investments
    
    
    10,000
    
    
    
    10,000Available for sale securities
    
    
    17,587
    
    
    
    17,587
    
    
    
    
    
    
    
    Total
    
    $
    286,899
    
    
    $
    286,899
    
    
    $
    
    
    
    $
    
 Fair Value Measurements as ofDecember 31, 2009Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3(In thousands)Cash equivalentsMoney market funds
    
    $
    223,909
    
    
    $
    223,909
    
    
    $
    
    
    
    $
    Short-term investmentsCorporate notes and bonds
    
    
    73,462
    
    
    
    73,462
    
    
    
    
    
    
    
    U.S. government agency securities
    
    
    34,408
    
    
    
    34,408
    
    
    
    
    
    
    
    Restricted cash equivalents and investments
    
    
    13,700
    
    
    
    13,700
    
    
    
    
    
    
    
    Available for sale securities
    
    
    19,503
    
    
    
    19,503
    
    
    
    
    
    
    
    Total
    
    $
    364,982
    
    
    $
    364,982
    
    
    $
    
    
    
    $
    
  10




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##### 



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
    
    $
    53,908
    
    
    $
    
    
    
    $
    
    
    
    $
    53,908Money market mutual funds
    
    
    61,251
    
    
    
    
    
    
    
    
    
    
    
    61,251Corporate notes and bonds
    
    
    40,996
    
    
    
    
    
    
    
    
    
    
    
    40,996Total cash and cash equivalents:
    
    
    156,155
    
    
    
    
    
    
    
    
    
    
    
    156,155Short-term investments:Corporate notes and bonds
    
    
    103,759
    
    
    
    665
    
    
    
    (21
    )
    
    
    104,403U.S. Government agency securities
    
    
    52,420
    
    
    
    243
    
    
    
    (1
    )
    
    
    52,662Total short-term investments:
    
    
    156,179
    
    
    
    908
    
    
    
    (22
    )
    
    
    157,065Total cash, cash equivalents and short-term investments
    
    $
    312,334
    
    
    $
    908
    
    
    $
    (22
    )
    
    $
    313,220Restricted cash equivalents and investments
    
    $
    10,000
    
    
    $
    
    
    
    $
    
    
    
    $
    10,000
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash and cash equivalents:Cash
    
    $
    53,121
    
    
    $
    
    
    
    $
    
    
    
    $
    53,121Money market mutual funds
    
    
    223,909
    
    
    
    
    
    
    
    
    
    
    
    223,909Total cash and cash equivalents
    
    
    277,030
    
    
    
    
    
    
    
    
    
    
    
    277,030Short-term investments:Corporate notes and bonds
    
    
    72,731
    
    
    
    732
    
    
    
    (1
    )
    
    
    73,462U.S. Government agency securities
    
    
    34,560
    
    
    
    5
    
    
    
    (157
    )
    
    
    34,408Total short-term investments
    
    
    107,291
    
    
    
    737
    
    
    
    (158
    )
    
    
    107,870Total cash, cash equivalents and short-term investments
    
    $
    384,321
    
    
    $
    737
    
    
    $
    (158
    )
    
    $
    384,900Restricted cash equivalents and investments
    
    $
    13,700
    
    
    $
    
    
    
    $
    
    
    
    $
    13,700
 11




---



##### 



Amortized
    
    
    EstimatedCost
    
    
    Fair ValueWithin one year
    
    $
    58,626
    
    
    $
    58,730Between one year and five years
    
    
    97,553
    
    
    
    98,335Total available-for-sale investments
    
    $
    156,179
    
    
    $
    157,065
 Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns
  Allowance ForDoubtfulAccounts
    
    
    SalesReceivable
    
    
    ReturnsBalances, December 31, 2009
    
    $
    2,912
    
    
    $
    1,012Additions charged to expenses
    
    
    1,449
    
    
    
    1,995Amounts written off
    
    
    (724
    )
    
    
    (2,064
    )Balances, June 30, 2010
    
    $
    3,637
    
    
    $
    943
  Note 8. Equity Method Investments and Available for Sale Securities
   June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    
    
    
    
    CarryingCost
    
    
    Value
    
    
    Cost
    
    
    ValueAvailable for sale securities
    
    $
    10,765
    
    
    $
    17,587
    
    
    $
    10,765
    
    
    $
    19,503Equity method investments
    
    
    29,650
    
    
    
    24,223
    
    
    
    500
    
    
    
    50Total investments
    
    $
    40,415
    
    
    $
    41,810
    
    
    $
    11,265
    
    
    $
    19,553
 12




---



##### 



Note 9. Other Intangible Assets
  Gross
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    29,397
    
    
    $
    22,528
    
    
    $
    6,869Developed technology
    
    
    28,008
    
    
    
    27,096
    
    
    
    912Patents, trademarks and tradenames
    
    
    5,455
    
    
    
    5,432
    
    
    
    23Service contracts and other
    
    
    5,904
    
    
    
    5,904
    
    
    
    Total other intangible assets, June 30, 2010
    
    $
    68,764
    
    
    $
    60,960
    
    
    $
    7,804Total other intangible assets, December 31, 2009
    
    $
    78,128
    
    
    $
    67,478
    
    
    $
    10,650
   2010 (remaining six months)
    
    $
    1,9222011
    
    
    2,1862012
    
    
    1,9382013
    
    
    1,5412014
    
    
    153Thereafter
    
    
    64Total
    
    $
    7,804
  Note 10. Goodwill
    13




---



##### 



Note 11. Accrued and Other Liabilities
  June 30,
    
    
    December 31,2010
    
    
    2009Royalties and other fulfillment costs
    
    $
    31,224
    
    
    $
    53,693Employee compensation, commissions and benefits
    
    
    22,770
    
    
    
    20,077Sales, VAT and other taxes payable
    
    
    15,019
    
    
    
    16,907Legal fees and contingent legal fees
    
    
    1,873
    
    
    
    5,251Other
    
    
    17,635
    
    
    
    29,006Total
    
    $
    88,521
    
    
    $
    124,934
 Note 12. Loss on Excess Office Facilities
     Accrued loss on excess office facilities, December 31, 2009
    
    $
    3,228Additional accrued loss on excess office facilities resulting
from its June 2010 restructuring
    
    
    7,082Less write-down of leasehold improvements
    
    
    (1,552
    )Less amounts paid, net of sublease income
    
    
    (3,949
    )Accrued loss on excess office facilities, June 30, 2010
    
    $
    4,809Less current portion
    
    
    (762
    )Accrued loss on excess office facilities, non-current portion
    
    $
    4,047
 Note 13. Earnings Per Share
  14




---



##### 



Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss) available to common shareholders:Net income (loss) attributable to common shareholders
    
    $
    (25,907
    )
    
    $
    (188,329
    )
    
    $
    (22,679
    )
    
    $
    (200,465
    )Less accretion of MTVNs preferred return in Rhapsody
    
    
    
    
    
    
    (416
    )
    
    
    3,700
    
    
    
    (1,850
    )Net income (loss) available to common shareholders
    
    $
    (25,907
    )
    
    $
    (188,745
    )
    
    $
    (18,979
    )
    
    $
    (202,315
    )Weighted average common shares outstanding used to compute basic net
income (loss) per share available to common shareholders
    
    
    135,277
    
    
    
    134,420
    
    
    
    135,209
    
    
    
    134,394Dilutive potential common shares:Stock options and restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares used to compute diluted net income (loss) per share
available to common shareholders
    
    
    135,277
    
    
    
    134,420
    
    
    
    135,209
    
    
    
    134,394Basic net income (loss) per share available to common shareholders
    
    $
    (0.19
    )
    
    $
    (1.40
    )
    
    $
    (0.14
    )
    
    $
    (1.51
    )Diluted net income (loss) per share available to common shareholders
    
    $
    (0.19
    )
    
    $
    (1.40
    )
    
    $
    (0.14
    )
    
    $
    (1.51
    )
  Note 14. Commitments and Contingencies
 Borrowing Arrangements
    Litigation
 15




---



##### 



Note 15. Segment Information
      16




---



##### 



MediaTechnology Products
    
    
    Software and
    
    
    
    
    
    
    
    
    
    
    Reconcilingand Solutions
    
    
    Services
    
    
    Games
    
    
    Music
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    41,122
    
    
    $
    19,617
    
    
    $
    28,145
    
    
    $
    
    
    
    $
    
    
    
    $
    88,884Cost of revenue
    
    
    17,526
    
    
    
    4,243
    
    
    
    7,380
    
    
    
    
    
    
    
    
    
    
    
    29,149Gross profit
    
    
    23,596
    
    
    
    15,374
    
    
    
    20,765
    
    
    
    
    
    
    
    
    
    
    
    59,735Loss on excess office facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,082
    
    
    
    7,082Restructuring and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,792
    
    
    
    4,792Operating expenses
    
    
    25,663
    
    
    
    16,132
    
    
    
    27,784
    
    
    
    
    
    
    
    (24
    )
    
    
    69,555Operating income (loss)
    
    
    (2,067
    )
    
    
    (758
    )
    
    
    (7,019
    )
    
    
    
    
    
    
    (11,850
    )
    
    
    (21,694
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,932
    )
    
    
    (3,932
    )Income (loss) before income taxes
    
    
    (2,067
    )
    
    
    (758
    )
    
    
    (7,019
    )
    
    
    
    
    
    
    (15,782
    )
    
    
    (25,626
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (281
    )
    
    
    (281
    )Net income (loss)
    
    
    (2,067
    )
    
    
    (758
    )
    
    
    (7,019
    )
    
    
    
    
    
    
    (16,063
    )
    
    
    (25,907
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) attributable
to common shareholders
    
    $
    (2,067
    )
    
    $
    (758
    )
    
    $
    (7,019
    )
    
    $
    
    
    
    $
    (16,063
    )
    
    $
    (25,907
    )
  MediaTechnology Products
    
    
    Software
    
    
    
    
    
    
    
    
    
    
    Reconcilingand Solutions
    
    
    and Services
    
    
    Games
    
    
    Music
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    83,014
    
    
    $
    40,356
    
    
    $
    58,381
    
    
    $
    35,733
    
    
    $
    
    
    
    $
    217,484Cost of revenue
    
    
    34,179
    
    
    
    7,007
    
    
    
    15,192
    
    
    
    21,930
    
    
    
    
    
    
    
    78,308Gross profit
    
    
    48,835
    
    
    
    33,349
    
    
    
    43,189
    
    
    
    13,803
    
    
    
    
    
    
    
    139,176Loss on excess office facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,082
    
    
    
    7,082Restructuring and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,407
    
    
    
    10,407Operating expenses
    
    
    52,283
    
    
    
    30,496
    
    
    
    55,577
    
    
    
    19,673
    
    
    
    14
    
    
    
    158,043Operating income (loss)
    
    
    (3,448
    )
    
    
    2,853
    
    
    
    (12,388
    )
    
    
    (5,870
    )
    
    
    (17,503
    )
    
    
    (36,356
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,929
    
    
    
    (3,453
    )
    
    
    7,476Income (loss) before income taxes
    
    
    (3,448
    )
    
    
    2,853
    
    
    
    (12,388
    )
    
    
    5,059
    
    
    
    (20,956
    )
    
    
    (28,880
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,291
    
    
    
    3,291Net income (loss)
    
    
    (3,448
    )
    
    
    2,853
    
    
    
    (12,388
    )
    
    
    5,059
    
    
    
    (17,665
    )
    
    
    (25,589
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,910
    
    
    
    
    
    
    
    2,910Net income (loss) attributable
to common shareholders
    
    $
    (3,448
    )
    
    $
    2,853
    
    
    $
    (12,388
    )
    
    $
    7,969
    
    
    $
    (17,665
    )
    
    $
    (22,679
    )
 17




---



##### 



MediaTechnology Products
    
    
    Software and
    
    
    
    
    
    
    
    
    
    
    Reconcilingand Solutions
    
    
    Services
    
    
    Games
    
    
    Music
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    46,208
    
    
    $
    19,291
    
    
    $
    29,774
    
    
    $
    40,452
    
    
    $
    
    
    
    $
    135,725Cost of revenue
    
    
    19,278
    
    
    
    2,590
    
    
    
    8,801
    
    
    
    24,945
    
    
    
    
    
    
    
    55,614Gross profit
    
    
    26,930
    
    
    
    16,701
    
    
    
    20,973
    
    
    
    15,507
    
    
    
    
    
    
    
    80,111Impairment of goodwill
    
    
    50,531
    
    
    
    46,776
    
    
    
    41,247
    
    
    
    37,029
    
    
    
    
    
    
    
    175,583Other operating expenses
    
    
    25,512
    
    
    
    18,417
    
    
    
    26,761
    
    
    
    26,673
    
    
    
    36
    
    
    
    97,399Operating income (loss)
    
    
    (49,113
    )
    
    
    (48,492
    )
    
    
    (47,035
    )
    
    
    (48,195
    )
    
    
    (36
    )
    
    
    (192,871
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    104Income (loss) before income taxes
    
    
    (49,113
    )
    
    
    (48,492
    )
    
    
    (47,035
    )
    
    
    (48,195
    )
    
    
    68
    
    
    
    (192,767
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,210
    )
    
    
    (1,210
    )Net income (loss)
    
    
    (49,113
    )
    
    
    (48,492
    )
    
    
    (47,035
    )
    
    
    (48,195
    )
    
    
    (1,142
    )
    
    
    (193,977
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,648
    
    
    
    
    
    
    
    5,648Net income (loss) attributable
to common shareholders
    
    $
    (49,113
    )
    
    $
    (48,492
    )
    
    $
    (47,035
    )
    
    $
    (42,547
    )
    
    $
    (1,142
    )
    
    $
    (188,329
    )
  MediaTechnology Products
    
    
    Software and
    
    
    
    
    
    
    
    
    
    
    Reconcilingand Solutions
    
    
    Services
    
    
    Games
    
    
    Music
    
    
    Amounts
    
    
    ConsolidatedNet revenue
    
    $
    89,787
    
    
    $
    39,609
    
    
    $
    62,597
    
    
    $
    84,505
    
    
    $
    
    
    
    $
    276,498Cost of revenue
    
    
    35,728
    
    
    
    6,297
    
    
    
    17,365
    
    
    
    52,245
    
    
    
    
    
    
    
    111,635Gross profit
    
    
    54,059
    
    
    
    33,312
    
    
    
    45,232
    
    
    
    32,260
    
    
    
    
    
    
    
    164,863Impairment of goodwill
    
    
    50,531
    
    
    
    46,776
    
    
    
    41,247
    
    
    
    37,029
    
    
    
    
    
    
    
    175,583Restructuring and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    794Other operating expenses
    
    
    51,728
    
    
    
    38,299
    
    
    
    53,607
    
    
    
    56,189
    
    
    
    74
    
    
    
    199,897Operating income (loss)
    
    
    (48,200
    )
    
    
    (51,763
    )
    
    
    (49,622
    )
    
    
    (60,958
    )
    
    
    (868
    )
    
    
    (211,411
    )Total non-operating income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    1,624Income (loss) before income taxes
    
    
    (48,200
    )
    
    
    (51,763
    )
    
    
    (49,622
    )
    
    
    (60,958
    )
    
    
    756
    
    
    
    (209,787
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,759
    )
    
    
    (2,759
    )Net income (loss)
    
    
    (48,200
    )
    
    
    (51,763
    )
    
    
    (49,622
    )
    
    
    (60,958
    )
    
    
    (2,003
    )
    
    
    (212,546
    )Net income (loss)
attributable to
noncontrolling interest in
Rhapsody America
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,081
    
    
    
    
    
    
    
    12,081Net income (loss) attributable
to common shareholders
    
    $
    (48,321
    )
    
    $
    (51,763
    )
    
    $
    (49,622
    )
    
    $
    (48,877
    )
    
    $
    (2,003
    )
    
    $
    (200,465
    )
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009United States
    
    $
    48,351
    
    
    $
    90,685
    
    
    $
    132,901
    
    
    $
    187,351Europe
    
    
    19,316
    
    
    
    23,469
    
    
    
    41,798
    
    
    
    46,134Rest of the World
    
    
    21,217
    
    
    
    21,571
    
    
    
    42,785
    
    
    
    43,013Total net revenue
    
    $
    88,884
    
    
    $
    135,725
    
    
    $
    217,484
    
    
    $
    276,498
  June 30,
    
    
    December 31,2010
    
    
    2009United States
    
    $
    41,399
    
    
    $
    51,367Republic of Korea
    
    
    5,860
    
    
    
    7,196Europe
    
    
    4,241
    
    
    
    5,745Rest of the World
    
    
    2,974
    
    
    
    3,456Total long-lived assets
    
    $
    54,474
    
    
    $
    67,764
 18




---



##### 



June 30,
    
    
    December 31,2010
    
    
    2009United States
    
    $
    305,321
    
    
    $
    320,412Republic of Korea
    
    
    11,892
    
    
    
    10,581Europe
    
    
    35,670
    
    
    
    34,784Rest of the World
    
    
    11,202
    
    
    
    10,034Total net assets
    
    $
    364,085
    
    
    $
    375,811
 Note 16. Related Party Transactions
 Transactions with MTVN.
 Transactions with Rhapsody.
  Transactions with LoEn Entertainment, Inc.
 19




---



##### 



Note 17. Income Taxes
   
 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, operating expenses, income and other taxes, tax benefits, net income
(loss) per diluted share available to common shareholders, acquisition costs and related
amortization, and other measures of 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 prospects for creation and growth of strategic partnerships and the resulting
financial benefits from such partnerships;
    
    the expected financial position, performance, growth and profitability of our businesses
and the availability of resources;
    
    our involvement in potential claims and legal proceedings, the expected course and costs
of existing claims and legal proceedings, and the potential outcomes and effects of both
existing and potential claims and legal proceedings on our business, prospects, financial
condition or results of operations;
    
    our intention to separate our Games business and to restructure our remaining businesses;
    
    the expected benefits and other consequences from
restructuring Rhapsody and from our other strategic initiatives;
    
    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;
 20




---



##### 




    
    the continuation and expected nature of certain customer relationships;
    
    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; and
    
    the effect of economic and market conditions on our business, prospects, financial
condition or results of operations.
 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 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
     21




---



##### 



Risks Related to Our Business in General
 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;
 22




---



##### 




    
    Stock-based compensation;
    
    Noncontrolling interest;
    
    Accounting for gains on sale of subsidiary stock; and
    
    Accounting for income taxes.
 Revenue Recognition.
      Estimating Music Publishing Rights and Music Royalty Accruals.
 Estimating Recoverability of Deferred Costs.
 23




---



##### 



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.
 24




---



##### 



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.
 25




---



##### 



Results of Operations
 Revenue by Segment
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,% Total
    
    
    
    
    
    
    % Total
    
    
    
    
    
    
    
    
    
    
    % Total
    
    
    
    
    
    
    % TotalNet
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    Net2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    Change
    
    
    2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    ChangeTPSLicense
    
    $
    4,869
    
    
    
    
    
    
    $
    4,286
    
    
    
    
    
    
    
    14
    %
    
    $
    10,439
    
    
    
    
    
    
    $
    8,808
    
    
    
    
    
    
    
    19
    %Service
    
    
    36,253
    
    
    
    
    
    
    
    41,923
    
    
    
    
    
    
    
    (14
    )
    
    
    72,575
    
    
    
    
    
    
    
    80,980
    
    
    
    
    
    
    
    (10
    )Total net revenue
    
    $
    41,122
    
    
    
    46
    %
    
    $
    46,209
    
    
    
    34
    %
    
    
    (11
    )%
    
    $
    83,014
    
    
    
    38
    %
    
    $
    89,788
    
    
    
    32
    %
    
    
    (8
    )%MSSLicense
    
    $
    1,729
    
    
    
    
    
    
    $
    1,795
    
    
    
    
    
    
    
    (4
    )%
    
    $
    3,876
    
    
    
    
    
    
    $
    3,848
    
    
    
    
    
    
    
    1
    %ServiceSubscriptions
    
    
    10,619
    
    
    
    
    
    
    
    10,138
    
    
    
    
    
    
    
    5
    
    
    
    19,932
    
    
    
    
    
    
    
    21,250
    
    
    
    
    
    
    
    (6
    )Advertising and other
    
    
    7,269
    
    
    
    
    
    
    
    7,358
    
    
    
    
    
    
    
    (1
    )
    
    
    16,548
    
    
    
    
    
    
    
    14,511
    
    
    
    
    
    
    
    14Total service revenue
    
    
    17,888
    
    
    
    
    
    
    
    17,496
    
    
    
    
    
    
    
    2
    
    
    
    36,480
    
    
    
    
    
    
    
    35,761
    
    
    
    
    
    
    
    2Total net revenue
    
    $
    19,617
    
    
    
    22
    %
    
    $
    19,291
    
    
    
    14
    %
    
    
    2
    %
    
    $
    40,356
    
    
    
    19
    %
    
    $
    39,610
    
    
    
    14
    %
    
    
    2
    %GamesLicense
    
    $
    10,046
    
    
    
    
    
    
    $
    13,006
    
    
    
    
    
    
    
    (23
    )%
    
    $
    22,586
    
    
    
    
    
    
    $
    27,016
    
    
    
    
    
    
    
    (16
    )%ServiceSubscriptions
    
    
    11,379
    
    
    
    
    
    
    
    10,945
    
    
    
    
    
    
    
    4
    
    
    
    23,384
    
    
    
    
    
    
    
    23,072
    
    
    
    
    
    
    
    1Advertising and other
    
    
    6,720
    
    
    
    
    
    
    
    5,823
    
    
    
    
    
    
    
    15
    
    
    
    12,411
    
    
    
    
    
    
    
    12,509
    
    
    
    
    
    
    
    (1
    )Total service revenue
    
    
    18,099
    
    
    
    
    
    
    
    16,768
    
    
    
    
    
    
    
    8
    
    
    
    35,795
    
    
    
    
    
    
    
    35,581
    
    
    
    
    
    
    
    1Total net revenue
    
    $
    28,145
    
    
    
    32
    %
    
    $
    29,774
    
    
    
    22
    %
    
    
    (5
    )%
    
    $
    58,381
    
    
    
    27
    %
    
    $
    62,597
    
    
    
    23
    %
    
    
    (7
    )%MusicLicense
    
    $
    
    
    
    
    
    
    
    $
    5,302
    
    
    
    
    
    
    
    (100
    )%
    
    $
    3,915
    
    
    
    
    
    
    $
    10,896
    
    
    
    
    
    
    
    (64
    )%ServiceSubscriptions
    
    
    
    
    
    
    
    
    
    
    33,275
    
    
    
    
    
    
    
    (100
    )
    
    
    28,482
    
    
    
    
    
    
    
    68,991
    
    
    
    
    
    
    
    (59
    )Advertising and other
    
    
    
    
    
    
    
    
    
    
    1,874
    
    
    
    
    
    
    
    (100
    )
    
    
    3,336
    
    
    
    
    
    
    
    4,617
    
    
    
    
    
    
    
    (28
    )Total service revenue
    
    
    
    
    
    
    
    
    
    
    35,149
    
    
    
    
    
    
    
    (100
    )
    
    
    31,818
    
    
    
    
    
    
    
    73,608
    
    
    
    
    
    
    
    (57
    )Total net revenue
    
    $
    
    
    
    
    
    %
    
    $
    40,451
    
    
    
    30
    %
    
    
    (100
    )%
    
    $
    35,733
    
    
    
    16
    %
    
    $
    84,504
    
    
    
    31
    %
    
    
    (58
    )%Total net revenueLicense
    
    $
    16,644
    
    
    
    
    
    
    $
    24,389
    
    
    
    
    
    
    
    (32
    )%
    
    $
    40,816
    
    
    
    
    
    
    $
    50,568
    
    
    
    
    
    
    
    (19
    )%Service
    
    
    72,240
    
    
    
    
    
    
    
    111,336
    
    
    
    
    
    
    
    (35
    )
    
    
    176,668
    
    
    
    
    
    
    
    225,930
    
    
    
    
    
    
    
    (22
    )Total net revenue
    
    $
    88,884
    
    
    
    100
    %
    
    $
    135,725
    
    
    
    100
    %
    
    
    (35
    )%
    
    $
    217,484
    
    
    
    100
    %
    
    $
    276,498
    
    
    
    100
    %
    
    
    (21
    )%
 Technology Products and Solutions.
  26




---



##### 



Media Software and Services.
   Games.
   27




---



##### 



Music.
  Geographic Revenue
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change
    
    
    2009United States
    
    $
    48,351
    
    
    
    (47
    )%
    
    $
    90,685
    
    
    $
    132,901
    
    
    
    (29
    )%
    
    $
    187,351Europe
    
    
    19,316
    
    
    
    (18
    )
    
    
    23,469
    
    
    
    41,798
    
    
    
    (9
    )
    
    
    46,134Rest of the world
    
    
    21,217
    
    
    
    (2
    )
    
    
    21,571
    
    
    
    42,785
    
    
    
    (1
    )
    
    
    43,013Total net revenue
    
    $
    88,884
    
    
    
    (35
    )%
    
    $
    135,725
    
    
    $
    217,484
    
    
    
    (21
    )%
    
    $
    276,498
    28




---



##### 



Cost of Revenue by Segment
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofSegment
    
    
    
    
    
    
    Segment
    
    
    
    
    
    
    
    
    
    
    Segment
    
    
    
    
    
    
    Segment2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    Change
    
    
    2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    ChangeTPSLicense
    
    $
    27
    
    
    
    
    
    
    $
    87
    
    
    
    
    
    
    
    (69
    )%
    
    $
    37
    
    
    
    
    
    
    $
    193
    
    
    
    
    
    
    
    (81
    )%Service
    
    
    17,499
    
    
    
    
    
    
    
    19,191
    
    
    
    
    
    
    
    (9
    )
    
    
    34,142
    
    
    
    
    
    
    
    35,535
    
    
    
    
    
    
    
    (4
    )Total cost of revenue
    
    $
    17,526
    
    
    
    43
    %
    
    $
    19,278
    
    
    
    42
    %
    
    
    (9
    )%
    
    $
    34,179
    
    
    
    41
    %
    
    $
    35,728
    
    
    
    40
    %
    
    
    (4
    )%MSSLicense
    
    $
    1,941
    
    
    
    
    
    
    $
    572
    
    
    
    
    
    
    
    239
    %
    
    $
    2,647
    
    
    
    
    
    
    $
    1,309
    
    
    
    
    
    
    
    102
    %Service
    
    
    2,302
    
    
    
    
    
    
    
    2,018
    
    
    
    
    
    
    
    14
    
    
    
    4,360
    
    
    
    
    
    
    
    4,988
    
    
    
    
    
    
    
    (13
    )Total cost of revenue
    
    $
    4,243
    
    
    
    22
    %
    
    $
    2,590
    
    
    
    13
    %
    
    
    64
    %
    
    $
    7,007
    
    
    
    17
    %
    
    $
    6,297
    
    
    
    16
    %
    
    
    11
    %GamesLicense
    
    $
    3,700
    
    
    
    
    
    
    $
    4,930
    
    
    
    
    
    
    
    (25
    )%
    
    $
    7,848
    
    
    
    
    
    
    $
    9,394
    
    
    
    
    
    
    
    (16
    )%Service
    
    
    3,680
    
    
    
    
    
    
    
    3,871
    
    
    
    
    
    
    
    (5
    )
    
    
    7,344
    
    
    
    
    
    
    
    7,971
    
    
    
    
    
    
    
    (8
    )Total cost of revenue
    
    $
    7,380
    
    
    
    26
    %
    
    $
    8,801
    
    
    
    30
    %
    
    
    (16
    )%
    
    $
    15,192
    
    
    
    26
    %
    
    $
    17,365
    
    
    
    28
    %
    
    
    (13
    )%MusicLicense
    
    $
    
    
    
    
    
    
    
    $
    4,280
    
    
    
    
    
    
    
    (100
    )%
    
    $
    2,685
    
    
    
    
    
    
    $
    8,219
    
    
    
    
    
    
    
    (67
    )%Service
    
    
    
    
    
    
    
    
    
    
    20,665
    
    
    
    
    
    
    
    (100
    )
    
    
    19,245
    
    
    
    
    
    
    
    44,026
    
    
    
    
    
    
    
    (56
    )Total cost of revenue
    
    $
    
    
    
    
    n/a
    
    
    $
    24,945
    
    
    
    62
    %
    
    
    (100
    )%
    
    $
    21,930
    
    
    
    61
    %
    
    $
    52,245
    
    
    
    62
    %
    
    
    (58
    )%Total cost of revenueLicense
    
    $
    5,668
    
    
    
    
    
    
    $
    9,869
    
    
    
    
    
    
    
    (43
    )%
    
    $
    13,217
    
    
    
    
    
    
    $
    19,115
    
    
    
    
    
    
    
    (31
    )%Service
    
    
    23,481
    
    
    
    
    
    
    
    45,745
    
    
    
    
    
    
    
    (49
    )
    
    
    65,091
    
    
    
    
    
    
    
    92,520
    
    
    
    
    
    
    
    (30
    )Total cost of revenue
    
    $
    29,149
    
    
    
    33
    %
    
    $
    55,614
    
    
    
    41
    %
    
    
    (48
    )%
    
    $
    78,308
    
    
    
    36
    %
    
    $
    111,635
    
    
    
    40
    %
    
    
    (30
    )%
 Cost of Technology Products and Solutions.
  Cost of Media Software and Services Revenue.
  Cost of Games Revenue.
  29




---



##### 



Cost of Music Revenue.
  Operating Expenses
 Research and Development
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change
    
    
    2009Research and development
    
    $
    27,583
    
    
    
    (5
    )%
    
    $
    28,923
    
    
    $
    62,258
    
    
    
    8
    %
    
    $
    57,482As a percentage of total net revenue
    
    
    31
    %
    
    
    
    
    
    
    21
    %
    
    
    29
    %
    
    
    
    
    
    
    21
    %
   Sales and Marketing
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change
    
    
    2009Sales and marketing
    
    $
    27,382
    
    
    
    (35
    )%
    
    $
    42,273
    
    
    $
    65,209
    
    
    
    (24
    )%
    
    $
    85,958As a percentage of total net revenue
    
    
    31
    %
    
    
    
    
    
    
    31
    %
    
    
    30
    %
    
    
    
    
    
    
    31
    %
 30




---



##### 



Advertising with Related Party
  General and Administrative
  Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change
    
    
    2009General and administrative
    
    $
    14,590
    
    
    
    (25
    )%
    
    $
    19,338
    
    
    $
    29,511
    
    
    
    (30
    )%
    
    $
    42,169As a percentage of total net revenue
    
    
    16
    %
    
    
    
    
    
    
    14
    %
    
    
    14
    %
    
    
    
    
    
    
    15
    %
   31




---



##### 



Restructuring and Other Charges
  Loss on excess office facilities
  Impairment of Goodwill
    Other Income (Expenses), Net
  32




---



##### 



Quarters Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change
    
    
    2009Interest income, net
    
    $
    551
    
    
    
    (27
    )%
    
    $
    754
    
    
    $
    931
    
    
    
    (52
    )%
    
    $
    1,937Equity in net loss of Rhapsody and
other investments
    
    
    (5,427
    )
    
    
    n/m
    
    
    
    (269
    )
    
    
    (5,427
    )
    
    
    n/m
    
    
    
    (924
    )Gain on sale of equity investments, net
    
    
    (50
    )
    
    
    n/m
    
    
    
    68
    
    
    
    (50
    )
    
    
    n/m
    
    
    
    205Gain on deconsolidation of Rhapsody
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    10,929
    
    
    
    n/a
    
    
    
    Other income, net
    
    
    994
    
    
    
    n/m
    
    
    
    (449
    )
    
    
    1,093
    
    
    
    n/m
    
    
    
    406Other income, net
    
    $
    (3,932
    )
    
    
    n/m
    %
    
    $
    104
    
    
    $
    7,476
    
    
    
    n/m
    %
    
    $
    1,624
  Income Taxes
    New Accounting Pronouncements
  Liquidity and Capital Resources
  June 30,
    
    
    December 31,2010
    
    
    2009Working capital
    
    $
    253,423
    
    
    $
    278,198Cash, cash equivalents, and short-term investments
    
    
    313,220
    
    
    
    384,900Restricted cash
    
    
    10,000
    
    
    
    13,700
  33




---



##### 



Six Months EndedJune 30,2010
    
    
    2009Cash used in operating activities
    
    $
    (56,336
    )
    
    $
    (18,241
    )Cash used in investing activities
    
    
    (67,133
    )
    
    
    (39,916
    )Cash provided by financing activities
    
    
    2,503
    
    
    
    20,365
        34




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Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
 35




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Investment Risk.
 Foreign Currency Risk.
     
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 36




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Changes in Internal Controls.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  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.
    The mobile entertainment market is evolving rapidly and highly competitive.
  37




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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 and Verizon; any
deterioration of these relationships could materially harm our business.
  Risks Related to Our Media Software and Services and Games Businesses
 Our Media Software and Services and Games 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,
    
    industry-wide changes in content distributions to customers,
    
    pressure to prematurely release products or product enhancements, or
    
    degradation in our stature and reputation in the market.
  Media Software and Services.
 38




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Games.
 The success of our subscription services businesses depends upon our ability to increase
subscription revenue and to license compelling content on commercially reasonable terms.
  We may not be successful in maintaining and growing our distribution of digital media 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.
  39




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
    
    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.
   New products and services may not achieve market acceptance or may be subject to legal challenge
that could negatively affect our operating results.
  40




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We plan to implement significant strategic and operational initiatives to restructure and simplify
our business and operations. If we are not successful in implementing these initiatives, our stock
price and business may be adversely affected, our operating results and financial condition may be
adversely affected by fixed costs we cannot easily reduce in the short-term, and we may not realize
the anticipated benefits of these initiatives.
  The restructuring of Rhapsody may not yield the anticipated benefits to us or to Rhapsody.
  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.
  41




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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.
 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.
  42




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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 managing our international
operations.
  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.
   43




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We may be subject to additional income tax assessments.
  Risks Related to the Securities Markets and Ownership of Our Common Stock
 Our Chairman of the Board beneficially owns more than 38% of our stock, which gives him 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 Chairman 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.
 44




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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. Removed and Reserved
  
 Item 5. Other Information
  45




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Item 6. Exhibits
  ExhibitNumber
    
    Description10.1
    
    Offer Letter dated January 5, 2009 between RealNetworks, Inc. and Hank Skorny10.2
    
    Retention Letter dated April 16, 2010 between RealNetworks, Inc. and Hank Skorny10.3
    
    Change in Control and Severance
Agreement effective February 24, 2010  between RealNetworks, Inc. and Hank Skorny10.4
    
    Separation Letter dated
April 28, 2010 from  RealNetworks, Inc. to Robert Glaser10.5
    
    Separation and Release Agreement dated April 28, 2010 between RealNetworks, Inc. and John Giamatteo31.1
    
    Certification of Robert Kimball, President 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 Kimball, President 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
 
 
    
    Executive compensation plan or agreement 46




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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) 47




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    Offer Letter dated January 5, 2009 between RealNetworks, Inc. and Hank Skorny10.2
    
    Retention Letter dated April 16, 2010 between RealNetworks, Inc. and Hank Skorny10.3
    
    Change in Control and Severance
Agreement effective February 24, 2010 between RealNetworks, Inc. and Hank Skorny10.4
    
    Separation Letter dated
April 28, 2010 from RealNetworks, Inc. to Robert Glaser10.5
    
    Separation and Release Agreement dated April 28, 2010 between RealNetworks, Inc. and John Giamatteo31.1
    
    Certification of Robert Kimball, President 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 Kimball, President 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
 
 
    
    Executive compensation plan or agreement 48