RealNetworks Inc. was once the darling of the digital media world, a pioneer in a marketplace that few were embracing. Founded by former Microsoft executive Rob Glaser, the company broke new ground in bringing audio and video streaming over the Internet to the masses. But the company soon hit a rough spot. Its core streaming business faced increasing competition, not only from Microsoft's Windows Media offerings and upstart media companies, but also from a rapidly changing model for delivering music over the Internet, now exemplified by Apple Inc.'s iPod and its iTunes music store.

But RealNetworks got a rare second chance. Thanks in part to new investments made with $761 million from a legal settlement with Microsoft in 2005, the company is back on a growth path, diversifying into new markets and keeping ahead of obsolescence. While its core streaming business continues to shrink, its revenues are increasing thanks to an influx of cash from its new music subscription, mobile phone content, and casual games offerings.

The settlement money has also allowed RealNetworks to go on an acquisitions spree to bolster these new ventures. To strengthen its game offerings in Europe, the Seattle company acquired the Netherlands-based PC and casual games developer and publisher Zylom Media Group BV last year in a deal valued at up to $21 million. It also bought WiderThan, a South Korean wireless services company, whose technology allows customers to download music and other mobile services, including custom ringtones, to their cell phones. The goal is to make RealNetworks' games, music and other offerings available on a broad range of electronic devices.

"As more bandwidth comes up, as the technology gets better, the more applications and services that consumers are going to look to consume over wireless and wireline networks," says Richard Wolpert, RealNetworks' former chief strategy officer and now a strategic planning consultant, who has worked with CEO Glaser for the past several years.

"We're right in the heart of the digital media that goes over the pipes, and that is a cool place to be right now."

So far, the strategy seems to be working. Last year, sales rose 22 percent to $395.3 million, and the company expects sales to grow at least 37 percent this year. The company's net income last year was over $145 million, a 53.5 percent boost over the previous year. Adjusted net income for 2006, which excludes money from the Microsoft settlement and other one-time fees, but includes revenue from some of the companies RealNetworks purchased that year, was $26.8 million, more than four times what it was in 2005.

The company has come a long way across some tough terrain. Rob Glaser introduced the world to real-time audio broadcasts over the Internet in 1994 when he developed compression software that allowed people to start playing a file while it was being downloaded from a website. The company gave away the player to consumers and then sold the backend server software to website operators. In 1995, RealNetworks sent out the first Internet broadcast via Real Audio - a New York Yankees-Seattle Mariners game. Their growth was exponential. But stiff competition from Microsoft, whose competing Windows Media player was built into its operating system, and the burst of the dot-com bubble cut into RealNetworks' performance and sent its stock price plunging.

STREAMING RHAPSODY

RealNetworks' first effort at diversification was to reinvent itself as a kind of Internet broadcaster, says Alan Davis, a research analyst in the Oregon office of the D.A. Davidson brokerage house. RealNetworks offered some video services with different partners, bought Listen.com in 2003, and launched its first music offering, Rhapsody. Rhapsody allows subscribers to listen to an unlimited number of songs on computers, MP3 players and music-ready cell phones for rates starting at $9.95 per month. It also allows consumers to purchase individual tracks.