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Originally published Friday, February 25, 2005 at 12:00 AM

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Apple's transformation upstages RealNetworks

Apple's profit and stock price nearly tripled over the past year, driven largely by the success of its iPod digital music player and companion iTunes music service.

Seattle Times technology reporter

PHOENIX — RealNetworks pioneered digital media in the 1990s and doubled its music-subscription business last year, but Wall Street's playing a different tune nowadays.

When RealNetworks founder and chief executive, Rob Glaser, pitched his stock yesterday at the Goldman Sachs Technology Symposium, the room was half empty and only a handful of investors stayed around to ask questions.

Digital media is hot, but RealNetworks apparently is not, at least in comparison with Apple. Apple boss Steve Jobs didn't make it to Goldman's conference, but the company's chief financial officer came and drew a standing-room-only crowd of more than 100 institutional investors.

Apple's profit and stock price nearly tripled over the past year, driven largely by the success of its iPod digital music player and companion iTunes music service. Its stock gained 284 percent over the past year and closed yesterday at $88.93, up 70 cents. A 2-for-1 stock split was announced Feb. 11.

Apple investor David Pearl doesn't expect the company to suffer RealNetworks' fate, at least not soon.

"I actually think this goes on for three years,' " Pearl, managing director of Epoch Investment Partners in New York, said of Apple's streak.

Pearl said the stock will continue outperforming the market if Apple keeps selling computers faster than the rest of the PC industry, a phenomenon that's driven by the popularity of the iPod.

"It's really a very simple story — Apple is transforming from a niche computer company into a consumer-electronics company, and the PC is also transforming into a consumer-electronics device, more like a home stereo where you know how to press a few buttons and it works," he said. "If Apple is really doing that and the products are really going that way, then it will be really successful — it will be basically Sony, that's what it will wind up looking like."

Goldman Sachs analyst David Bailey rates Apple stock "in line." During Apple's presentation he said iTunes is "addictive" but his note to clients suggests the company, at its current stock price, is valued high relative to peers.

Apple Chief Financial Officer Peter Oppenheimer acknowledged how the iPod's "halo effect" is helping the company sell additional products.

Oppenheimer reiterated Apple's expectations of a 52 percent sales gain in the coming year, but he cautioned that the growth rate can't continue forever.

"I think we can grow our company to attractive levels in the future, but I don't think that people should rely on the levels of growth we're seeing today," he said.

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Goldman Sachs, which owns Apple stock, estimates Apple's profit will grow 187 percent in 2005, 14 percent in 2006 and 13 percent in 2009. Five years ago RealNetworks was enjoying similar buzz and its stock was priced about the same as Apple's, closing at $86.25 on Feb. 24, 2000.

Yesterday it closed at $6.34, up 10 cents. Goldman Sachs is less enthusiastic about RealNetworks, rating it "underperform." Analyst Anthony Noto presented a report at the conference saying RealNetworks' business is moving in the right direction, but its lower rating is due to "weaker relative fundamentals, the lack of visibility on its long-term profitability profile and its premium valuation versus the sector average."

Goldman Sachs has done investment banking and other business with both RealNetworks and Apple.

Glaser was undaunted by Apple stealing the limelight.

"Apple's got a hot product right now so obviously people are focused on that," he said. "But in terms of being one of the core companies up there, they look at us in digital media in the same sentence as Apple or Microsoft."

Glaser noted the company leads in music subscriptions, with more than 700,000 subscribers, up from 350,000 a year ago.

"We had a great year in 2004," he said. "The fact that Apple also grew a lot, that didn't end up being a zero sum. ... [T]here's opportunities for us to grow ... as well as opportunities for Apple and other companies."

Glaser also downplayed the threat from music services such as Napster that are based on Microsoft's digital-media technology. He told investors that because RealNetworks' service uses its own media player, "we have the ability to differentiate and add features and technology."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

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