RealNetworks Inc. is buying itself a bigger space on the wireless entertainment playground with a $350 million acquisition of South Korean-based developer WiderThan Co. Ltd.
The Seattle-based digital media company said it will spend $17.05 per share to acquire WiderThan, which provides ringback tones, on-demand music and other entertainment services to more than 50 wireless carriers in roughly two dozen countries. The announcement, which was made following the closing bell Sept. 12, boosted WiderThan shares $2.81, or more than 20 percent, to $13.97 in after-hours trading.
Real has gained significant traction in digital media with its RealPlayer and Rhapsody music service, and its Helix Mobile technology powers mobile-video offerings for carriers including Cingular Wireless L.L.C. and Japan’s NTT DoCoMo Inc. The developer bought its way into mobile gaming last year with the $15 million acquisition of Mr. Goodliving Ltd., a Finnish mobile-game publisher with strong European footing.
WiderThan, which held an initial public offering last December, generated $62 million in revenue during the first half of the year, Real executives said, marking a 39-percent increase from the same period last year. Net income during the six months totaled $7.4 million, up 79 percent from the year-ago period. The company powers on-demand music services for Verizon Wireless’ Vcast Music and Korea’s SK Telecom as well as T-Mobile USA Inc.’s ringback-tones service. WiderThan also provides two-way text messaging and mobile-gaming services.
“(WiderThan’s) financial performance has just been very, very impressive,” said John G. Giamatteo, RealNetworks’ executive vice president of worldwide business products and international operations. “It was nice to see how strong (WiderThan’s) relationships are with T-Mobile and Verizon when, quite frankly, RealNetworks didn’t really have a close relationship with them.”
Indeed, the companies appear to have complementary geographic footprints. While both firms have a substantial presence in the United States–WiderThan bought its way into the American market in 2004 with the acquisition of Ztango, and 150 of its 470 employees are here–WiderThan’s presence in Europe and the Middle East is nearly nonexistent. Real, meanwhile, has a substantial European operation and hopes to tap WiderThan’s impressive distribution network in the Far East.
The deal marks Real’s first major transaction since last year’s blockbuster settlement with Microsoft Corp. Bill Gates’ software giant ended a long-running feud last October by agreeing to pay Real $761 million and promote Rhapsody through its MSN network.
RealNetworks said it intends to keep the WiderThan brand and operate the company as a wholly owned subsidiary.
“We believe the (acquisition) will greatly enhance our digital entertainment products and services and accelerate our reach around the world,” said RealNetworks CEO Rob Glaser.
Just as important to the deal, however, appears to be WiderThan’s mobile-music businesses. The company hopes to build on its operator relationships as more carriers bring full-track, over-the-air download services to market, and WiderThan already boasts nearly 17 million ringback-tone customers.
Ringbacks–music that a caller hears instead of a traditional ring before the person being called answers the phone–have gained early traction in Korea and India, with some carriers crediting the application for increasing ARPU by up to $2.44 a month. And while the service has yet to catch fire in the United States, it appears ringbacks are steadily gaining traction. Roughly 5.7 million U.S. subscribers used ringbacks in June, according to M:Metrics, while only 4.8 million users downloaded a mobile game the previous month.
Analysts expect ringbacks not only to surge in popularity, but also to provide larger revenue margins for carriers. And, because ringbacks are network-based, operators can keep ringback tones on their decks and cut direct-to-consumer vendors out of the equation.
“Ringbacks are the big sleeper in the market,” M:Metrics’ senior analyst Seamus McAteer said last month. “We have yet to reach the takeoff point, but when it happens–at some stage in the next three years–these will become the real focus for labels and owners. Ringbacks could eventually be a more substantial moneymaker than ringtones, as they yield nice, sustainable, repeatable revenue for operators and rights owners.”
Real followed the WiderThan announcement last week with the launch of a direct-to-consumer mobile content subscription service. The site, which is powered by PlayPhone and available for $10 a month, offers more than 150 games and thousands of ringtones and graphics for wireless handsets. The company is targeting its online subscribers with mobile versions of familiar, casual titles including Luxor, Zuma and Jewel Quest.
