Earlier this summer RealNetworks' chairman, Rob Glaser, complained before a Senate hearing that Microsoft tried to deliberately "break" his Internet multimedia software.
Microsoft denied spite was the motive, but acknowledged its relationship with RealNetworks had soured.
"I think it's fair to characterize it as a fairly rocky relationship for some time," said Anthony Bay, general manager of Microsoft's Commercial Systems Division.
"A company like Microsoft makes a decision for a million different reasons and a million different circumstances," said Rob Glaser, RealNetworks' chairman. "I don't think they needed the cash. But I think it's pretty clear that the companies are not marching in lockstep."
RealNetworks makes RealPlayer and other products for watching video and hearing audio over the Internet. It competes directly with Microsoft's Windows Media Player. RealNetworks says it has about an 85 percent share of the market.
In July, Glaser appeared before a Senate committee and demonstrated his RealPlayer software. The software worked fine at first, but failed after he installed Media Player.
Microsoft engineers later said a bug in RealNetworks' software caused the incompatibility, an argument supported by some industry experts who ran independent tests.
Glaser is one of a string of executives, including representatives of Netscape Communications Corp. and Apple Computer Inc., testifying at the government's antitrust trial of Microsoft alleging that Redmond, Washington-based giant wrote software to be incompatible with their products. Microsoft denies the allegations.
"We're proud to be one of Microsoft's most profitable Internet ventures," added Glaser, who was vice president of multimedia at Microsoft before founding RealNetworks in 1994.
In July 1997, Microsoft invested $30 million to buy 3.3 million shares of RealNetworks. Bay said Microsoft needed to license technology from the Seattle company to ensure its products were compatible with those of RealNetworks, whose software was being rapidly adopted across the World Wide Web.
Before long, it was obvious the two companies were headed in different directions, Bay said. "We had a combination of a competitive and cooperative relationship and the balance had sort of moved toward the competitive side."
Bay said Microsoft notified RealNetworks in June, a month before Glaser's testimony, that it was considering selling its 3.3 million shares, and this fall offered to work with RealNetworks to sell more stock.
The two companies could not agree so Microsoft decided to sell its shares on the open market, Bay said.
The decision to sell should result in a tidy profit for Microsoft. It paid about $30 million for its stake in RealNetworks in July 1997, and the stock today is worth about $141 illion.
Shares of the Seattle-based RealNetworks closed at $42.87, in trading on the Nasdaq Stock Market.
Bay said Microsoft would begin selling the shares Thursday, and had no time frame for completing its divestiture.
Written By George Tibbits