RealNetworks, CNET, and Judo Strategy

Both companies successfully outmaneuvered bigger competitors to lead their markets. But can they still win when the rules have changed?
by Jim Aisner

RealNetworks founder Rob Glaser, a veteran of doing battle with much larger Microsoft, has some words of wisdom on competing against a market giant: "If you want to beat Bobby Fischer, don't play chess."

Glaser, president and CEO of the streaming media company, was part of the Electronic Commerce and Strategy panel at the 2001 Global Alumni Conference.

He told alumni that fighting against a larger, stronger rival means not playing the game that your opponents want you to play. "Instead, figure out a different way to go about your business, with new rules and a dedication that will help make you a winner."

Glaser's success story in fending off intense competition from Bill Gates & Co. and turning his seven-year old company into a prime purveyor of streaming video, audio, and music services on the Web was paralleled by the experiences of fellow panelist Shelby Bonnie (MBA '90), CEO of CNET, whose Web sites—not to mention a radio station and several print magazines—provide a wealth of information to technology buffs and buyers alike. Founded in 1992, CNET has fared so well in the marketplace that last summer it bought the online properties of giant rival Ziff-Davis and is now the ninth largest network on the Internet.

The tales of these two firms (along with that of Donna Dubinsky, a member of the HBS Class of 1981 and CEO of Handspring, the maker of Visor personal organizers) are the subject of Masters of Judo Strategy (Harvard Business School Publishing), a soon-to-be-published book by HBS Professor David Yoffie, who served as moderator of the panel.

"Judo is the art of hand-to-hand fighting in which the weight and efforts of one's opponents are used to bring about their defeat," Yoffie explained to the audience. "Size and power mean nothing. In the book we talk a great deal about how Rob, Shelby, and Donna have used these techniques to beat much larger players in their business."

The business environment has changed completely, since the capital markets no longer subsidize a free ride for consumers.
—Rob Glaser

But with the bursting of the bubble, Yoffie asked, will the future be much less rosy?

An often-used comparison with the tulip mania that overwhelmed Holland in the seventeenth century, he asserted, is not the right way to think about the Internet fever that began hitting the United States in 1995. Sure, the price of tulips in the Netherlands skyrocketed to such outlandish heights that one flower sold for the equivalent of several hundred dollars before the market crashed in 1637, taking the Dutch economy down with it for many years to come. And sure, US Internet companies with modest-at-best sales and no earnings went public with market valuations in the billions of dollars before falling to the ground little more than a year ago. But that's as far as the analogy goes, according to Yoffie.

'no Room For Error'

"Post-crash pessimism notwithstanding, the fundamentals remain very much intact for the Internet, and there is enormous growth potential," Yoffie said. "We still expect 700 million users by 2005 and somewhere between $7 and 8 trillion in e-commerce sales within that time frame. With the likes of online auctions and downloaded music, the Internet offers opportunities to do new things that would otherwise be impossible," he continued, "all the while providing organizations with the power to personalize their services and create communities in unprecedented fashion.

"What's different from the environment that prevails today as opposed to just a short time ago is that there is now no room for error. You need real businesses, real revenue, real profits, and real cash flows."

Yoffie asked the panelists to consider three questions: Since click-through rates on Internet ads have been almost non-existent, is advertising a viable part of people's plans? Second, will consumers tolerate fees for what they've formerly received for free? And finally, has competitive advantage returned to bricks-and-mortar operations?

CNET's Bonnie was bullish on the future of Internet advertising.

"The Internet has surpassed magazines, newspapers, brochures, direct mail, and trade shows as a source of information," he remarked. "We have 60 million unique users a month looking at our coverage of the technology sector." Given that kind of momentous shift toward the Internet, he said, enterprises "cannot accept the fact that there is no way to influence people in this new medium."

For its part, CNET has been experimenting since January with ads that are considerably bigger than the banners traditionally found at the top of most commercial Web sites. "Unlike television," Bonnie said, "the Internet is an active medium. Larger ads become part of the user's experience, because they allow for much richer information delivery."

Glaser: Surfers Will Pay

RealNetworks, which achieved ubiquity on personal computers around the world by giving away its basic audio and video software, has been successful in selling upgraded versions of its products to customers eager for more features. But beyond that, said Glaser, "the business environment has changed completely, since the capital markets no longer subsidize a free ride for consumers. Given the considerable amount of money that approximately 70 percent of American homes pay for cable and satellite TV," he added, "it's clear that people are willing to pay for choice, convenience, and special programming that meets their needs and interests."

For his company, Glaser said, online music provides especially fertile ground.

"Legal issues and broadband access aside," he said, "Napster showed that there are tens of millions of customers who want the ability to search for music on the Web, find what they like, and then download it. Based on survey results, I think that more than half of them would be willing to pay for that service. Thus, the opportunities I see ahead are extraordinary."

In the midst of the fallout, neither Bonnie nor Glaser was of a mind to concede advantage to old-economy companies.

"Whether we're talking about firms with physical or virtual assets," Glaser said, "what's most important is the strategy and how it's executed. The people who concentrate on creating a true quality experience for users and advertisers will be successful."

About the Author

Jim Aisner is Director of Media Relations for Harvard Business School.