[Federal Register Volume 72, Number 128 (Thursday, July 5, 2007)]
[Notices]
[Pages 36740-36742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-12943]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27877; 812-13399]


RealNetworks, Inc.; Notice of Application

June 28, 2007.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 3(b)(2) of the Investment 
Company Act of 1940 (the ``Act'').

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    Summary of Application: RealNetworks, Inc. (``RealNetworks'') seeks 
an order under section 3(b)(2) of the Act declaring it to be primarily 
engaged in a business other than that of investing, reinvesting, 
owning, holding or trading in securities. RealNetworks, directly and 
through its wholly-owned subsidiaries, creates digital media services 
and software.
    Filing Date: The application was filed on June 22, 2007.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on July 23, 2007, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-9303. Applicant, 2601 Elliott Avenue, Suite 
1000, Seattle, Washington 98121.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
551-6870, or Nadya B. Roytblat, Assistant Director, at (202) 551-6821 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicant's Representations

    1. RealNetworks, a Washington corporation, is in the business of 
creating digital media services and software. Consumers use 
RealNetworks' services and software to discover, play, purchase and 
manage digital content, including music, games and video. Broadcasters, 
cable and wireless communications companies, media companies and 
enterprises use RealNetworks' products and services to create, secure 
and deliver digital media to personal computers, MP3 players, mobile 
phones and other consumer electronic devices and to provide 
entertainment services to their subscribers.
    2. RealNetworks states that the market for software and services 
for media delivery over the Internet is relatively new, constantly 
changing and intensely competitive. RealNetworks states that it 
requires substantial liquid capital to fund operations, fund research 
and development, license content and technology for its subscription 
service and software products, and fund acquisitions. Because of the 
pace of technological change in the industry sectors in which 
RealNetworks competes, RealNetworks needs to use cash to develop new 
products and fund capital expenditures, enhance its existing products 
and technology, and make strategic acquisitions. In addition, from time 
to time, RealNetworks also makes non-controlling investments in 
entities that complement or enhance RealNetworks' media delivery and 
digital distribution business (``Strategic Investments''). RealNetworks 
seeks to preserve its capital and maintain liquidity, pending the use 
of such capital for its current and future operations, by investing in 
short-term investment grade and liquid fixed income and money market 
investments that earn competitive market returns and provide a low 
level of credit risk (``Capital Preservation Investments''). 
RealNetworks' board of directors (``Board'') has approved a corporate 
investment policy establishing limits and guidelines governing its cash 
management investments, consistent with the goal of capital 
preservation (``Policy''). RealNetworks states that it does not invest 
in securities for short-term speculative purposes.

Applicant's Legal Analysis

    1. RealNetworks seeks an order under section 3(b)(2) of the Act 
declaring that it is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding or trading in securities, and 
therefore not an investment company as defined in the Act.
    2. Under section 3(a)(1)(C) of the Act, an issuer is an investment 
company if it is engaged or proposes to engage in the business of 
investing, reinvesting, owning, holding, or trading in securities, and 
owns or proposes to acquire investment securities having a value in 
excess of 40 percent of the value of the issuer's total assets 
(exclusive of Government securities and cash items) on an 
unconsolidated basis. Section 3(a)(2) of the Act defines ``investment 
securities'' to include all securities except Government securities, 
securities issued by employees' securities companies, and securities 
issued by majority-owned subsidiaries of the owner which (a) are not 
investment companies, and (b) are not relying on the exclusions from 
the definition of investment company in section 3(c)(1) or 3(c)(7) of 
the Act. RealNetworks states that as of December 31, 2006, 
approximately 18% of its total assets (exclusive of Government 
securities and cash items), on an unconsolidated basis, consisted of 
investment securities as defined in section 3(a)(2) of the Act.

[[Page 36741]]

    3. Rule 3a-1 provides an exemption from the definition of 
investment company if no more than 45% of a company's total assets 
consist of, and not more than 45% of its net income over the last four 
quarters is derived from, securities other than Government securities, 
securities of majority-owned subsidiaries and primarily controlled 
companies. RealNetworks states that it cannot rely upon rule 3a-1 under 
the Act because the percentage of its total assets invested in 
securities fluctuates and may, from time to time, exceed 45% of its 
total assets.
    4. Rule 3a-8 under the Act provides an exemption from the 
definition of investment company if, among other factors, a company's 
research and development expenses are a substantial percentage of its 
total expenses for the last four fiscal quarters combined. While Real 
Networks believes it could satisfy the other factors in the rule, 
RealNetworks' research and development expenses, as a percentage of its 
total expenses, fluctuate and may not account for a substantial 
percentage of its total expenses. For the last four fiscal quarters 
ended on December 31, 2006, RealNetworks' research and development 
expenses represented approximately 18% of its total expenses, including 
cost of goods sold. RealNetworks also states that as its revenues 
increase its research and development expenses as a percentage of its 
total expenses are expected to decline even if research and development 
expenses increase on an absolute basis because sales and marketing 
expense and cost of goods sold, which are closely related to revenues, 
are likely to increase faster than research and development expenses.
    5. Section 3(b)(2) of the Act provides that, notwithstanding 
section 3(a)(1)(C) of the Act, the Commission may issue an order 
declaring an issuer to be primarily engaged in a business or businesses 
other than that of investing, reinvesting, owning, holding, or trading 
in securities either directly or through majority-owned subsidiaries or 
through controlled companies conducting similar types of businesses. 
RealNetworks requests an order under section 3(b)(2) of the Act 
declaring that it is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding or trading in securities, and 
therefore not an investment company as defined in the Act.
    6. In determining whether a company is primarily engaged in a non-
investment company business under section 3(b)(2), the Commission 
considers: (a) The issuer's historical development; (b) its public 
representations of policy; (c) the activities of its officers and 
directors; (d) the nature of its present assets; and (e) the sources of 
its present income.\1\
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    \1\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    a. Historical Development. RealNetworks states that since its 
inception in 1994 it has been developing and providing media delivery 
and digital distribution products and services for the Internet. Since 
its initial public offering in 1997, RealNetworks has used its revenue 
and raised cash to expand its operations into foreign countries, to 
expand its product and service lines, to license content and to acquire 
companies with complementary products or services.
    b. Public Representations of Policy. RealNetworks states that it 
has never represented that it is involved in any business other than 
developing and providing branded software products and services that 
enable the creation, delivery and consumption of streaming media 
content. RealNetworks asserts that it has consistently stated in its 
annual reports to stockholders, press releases, filings with the 
Commission, marketing materials and website that it is a digital media 
technology and digital media distribution company. RealNetworks states 
that it generally does not make public representations regarding its 
investment securities except as required by its obligation to file 
periodic reports to comply with federal securities laws. RealNetworks 
further states that it has never emphasized either its investment 
income or the possibility of significant appreciation from its cash 
management investment strategies as a material factor in its business 
or future growth.
    c. Activities of Officers and Directors. RealNetworks states that 
its directors and officers spend substantially all of their time 
managing RealNetworks core digital media technology and digital media 
distribution business. Other than establishing the Policy and receiving 
periodic reports on its implementation, the Board's involvement with 
RealNetworks' cash management investments is minimal. Applicant states 
that the Board is more actively involved in RealNetworks' Strategic 
Investments, but the amount of time dedicated to such matters is small 
relative to the amount of time dedicated to RealNetworks' direct 
ongoing business activities. Only three of RealNetworks' employees 
oversee the cash management process: RealNetworks' Treasurer is the 
only employee involved in the day-to-day management of cash management 
investments, and spends from 25-75% of his time doing so; one other 
member of the Treasurer's staff is involved in trade settlement and 
portfolio accounting, representing 15-20% of this person's time; and 
one member of the Treasurer's staff spends approximately 5% of his time 
on cash management in Korea. RealNetworks has approximately 1,500 
employees worldwide.
    d. Nature of Assets. RealNetworks states that as of December 31, 
2006, its investment securities (as defined in Section 3(a)(2) of the 
Act) constituted approximately 18% of its total assets (excluding 
Government securities and cash items) on an unconsolidated basis. On a 
consolidated basis, that figure was 27%. RealNetworks states that in 
the future, the percentage of its total assets (other than Government 
securities and cash items) that will consist of investment securities 
other than Capital Preservation Investments will not exceed ten 
percent. RealNetworks further states that a significant portion of its 
assets consist of intangible assets, such as intellectual property and 
goodwill, which, with limited exceptions, do not appear on its balance 
sheet and are not included in the value of RealNetworks total assets 
for purposes of determining its status under the Act. RealNetworks 
states that the asset tests used in connection with sections 3(a)(1)(C) 
and 3(b) of the Act therefore significantly understate the relative 
value of RealNetworks' non-investment security assets.
    e. Sources of Income and Revenue. RealNetworks states that for the 
year ended December 31, 2005, it had net income of $312.3 million, of 
which net investment income was $33.9 million or approximately 11%. 
RealNetworks states that for the year ended December 31, 2006, it had 
net income of $145.2 million, of which net investment income was $37.4 
million, or approximately 26%. RealNetworks states that its net 
investment income was 9% of its total revenue for each of its last two 
fiscal years. In the future, RealNetworks expects substantially all of 
its revenues to come from operations and less than 10% from investment 
securities. RealNetworks states that since substantially all of its 
revenue is attributable to its operations, rather than investments, 
RealNetworks' revenue supports a determination that RealNetworks is 
primarily engaged in a business other than that of investing, 
reinvesting, owning, holding or trading in securities.
    7. RealNetworks thus asserts that it satisfies the standards for an 
order under section 3(b)(2) of the Act.

[[Page 36742]]

Applicant's Conditions

    RealNetworks agrees that any order granted pursuant to the 
application will be subject to the following conditions:
    1. RealNetworks will continue to allocate and utilize its 
accumulated cash and investment securities for bona fide business 
purposes.
    2. RealNetworks will refrain from investing or trading in 
securities for short-term speculative purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-12943 Filed 7-3-07; 8:45 am]
BILLING CODE 8010-01-P