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Welcome to Digital's Fantasy Island

By Richard McCaffery (TMF Gibson)
June 20, 2000

Summary: Start-up streaming media company Digital Island got a burst of cash and a trio of new partners today as Intel, Microsoft, and Compaq signed on board. Will the deal spell trouble for RealNetworks?

Shares of streaming media network company Digital Island (Nasdaq: ISLD) stormed up 36% in early trading after a holy triumvirate of technology companies agreed to invest $45 million to support the San Francisco firm's buildout.

Compaq Computer (NYSE: CPQ) , Intel (Nasdaq: INTC) , and Microsoft (Nasdaq: MSFT) are providing hardware, software, and financing to help Digital construct a network that will support up to 7.5 million separate media streams. Digital is constructing a network that will allow entertainment, publishing, and financial services firms to distribute media-rich services over the Web. Terms of the deal were not disclosed.

The deal could speed the distribution of Microsoft's streaming media software, which might make the industry a bit more competitive. A bit of background: The big Kahuna in the streaming media industry is RealNetworks (Nasdaq: RNWK) , an $8.2 billion company based in Seattle. Its RealPlayer product, which allows users to listen and view content from websites, has more than 100 million registered users, according to the company.

Microsoft's streaming media software is RealNetworks' most significant competitor. Today's announcement puts the start-up on better competitive footing, though it's probably too late to turn the tables on a rival as well entrenched as RealNetworks. Why? Roughly 85% of all streaming media Web pages use RealNetworks technology, according to investment bank Robertson Stephens. With uncertainty involving Microsoft's future, it's unlikely the software giant will be able to pull the rug out from RealNetworks the way it did to Netscape.

Of note is that RealNetworks moved slightly higher in trading today. My take is that investors view the investment by Intel, Microsoft, and Compaq as an endorsement of where the streaming media market is headed, and how determined the big guns are to make it happen quickly. Market research firm Jupiter Communications expects the global market for streaming media content delivery to grow to $2.5 billion in 2004, from $78 million in 2000. Investors should view market forecasts with skepticism but the opportunities look impressive.

Today's announcement gives investors a chance to look up and down the food chain in the streaming media industry. Companies like Digital and RealNetworks provide the software that runs on top of the networks. Further upstream is Intel. No matter who wins the software war, Intel will play a part in providing chips for the buildout of servers and PCs.

Your Turn:
As Fool writer Bob Fredeen wrote in this Fool on the Hill Column, investors should be up to speed on a company's position in its industry. That means who it buys from and who it sells to, and how it fits into its competitive universe.

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