10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2019

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-37745

	RealNetworks, Inc.
	(Exact name of registrant as specified in its charter)
Washington		91-1628146
(State of incorporation)		(I.R.S. Employer Identification Number)
1501 First Avenue South, Suite 600 Seattle, Washington		98134
(Address of principal executive offices)		(Zip Code)
	(206) 674-2700
	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨	Smaller reporting company	ý
		Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   ý

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.001 per share	RNWK	The NASDAQ Stock Market
Preferred Share Purchase Rights	RNWK	The NASDAQ Stock Market

The number of shares of the registrant’s Common Stock outstanding as of October 29, 2019 was 38,120,035.

TABLE OF CONTENTS

	Page
Part I. Financial Information	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
Item 4. Controls and Procedures	38
Part II. Other Information	39
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3. Default Upon Senior Securities	48
Item 4. Mine Safety Disclosures	48
Item 5. Other Information	48
Item 6. Exhibits	48
Signature	49
Index to Exhibits	50

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	18,101		$	35,561
Short-term investments	—			24
Trade accounts receivable, net of allowances of $616 and $560	27,947			11,751
Deferred costs, current portion	950			331
Prepaid expenses and other current assets	18,931			5,911
Total current assets	65,929			53,578
Equipment, software, and leasehold improvements, at cost:
Equipment and software	31,853			37,458
Leasehold improvements	3,255			3,292
Total equipment, software, and leasehold improvements, at cost	35,108			40,750
Less accumulated depreciation and amortization	32,171			37,996
Net equipment, software, and leasehold improvements	2,937			2,754
Operating lease assets	12,499			—
Restricted cash equivalents	5,374			1,630
Other assets	2,842			3,997
Deferred costs, non-current portion	957			528
Deferred tax assets, net	831			851
Other intangible assets, net	20,309			26
Goodwill	65,154			16,955
Total assets	$	176,832		$	80,319
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,692		$	3,910
Accrued royalties, fulfillment and other current liabilities	92,529			11,312
Commitment to Napster	—			2,750
Deferred revenue, current portion	6,134			2,125
Notes payable	3,599			—
Total current liabilities	106,954			20,097
Deferred revenue, non-current portion	139			268
Deferred rent	—			986
Deferred tax liabilities, net	1,225			1,168
Long-term lease liabilities	9,486			—
Long-term debt	3,900			—
Other long-term liabilities	11,195			960
Total liabilities	132,899			23,479
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.001 par value, no shares issued and outstanding:
Series A: authorized 200 shares	—			—
Undesignated series: authorized 59,800 shares	—			—
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 38,067 shares in 2019 and 37,728 shares in 2018	38			37
Additional paid-in capital	643,573			641,930
Accumulated other comprehensive loss	(61,929		)	(61,118		)
Retained deficit	(537,646		)	(524,009		)
Total shareholders’ equity	44,036			56,840
Noncontrolling interests	(103		)	—
Total equity	43,933			56,840
Total liabilities and equity	$	176,832		$	80,319

See accompanying notes to unaudited condensed consolidated financial statements.

3

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net revenue	$	44,993		$	17,579		$	128,713		$	52,953
Cost of revenue	26,278			4,239			78,430			14,000
Gross profit	18,715			13,340			50,283			38,953
Operating expenses:
Research and development	8,687			8,052			26,396			23,398
Sales and marketing	8,470			4,998			24,972			15,878
General and administrative	7,132			4,586			23,888			15,526
Restructuring and other charges	691			632			1,587			1,320
Lease exit and related benefit	—			—			—			(454		)
Total operating expenses	24,980			18,268			76,843			55,668
Operating loss	(6,265		)	(4,928		)	(26,560		)	(16,715		)
Other income (expenses):
Interest expense	(220		)	—			(429		)	—
Interest income	—			72			117			270
Gain (loss) on equity investment, net	—			—			12,338			—
Equity in net loss of Napster investment	—			(737		)	—			(737		)
Other income (expenses), net	541			(112		)	851			(195		)
Total other income (expenses), net	321			(777		)	12,877			(662		)
Income (loss) before income taxes	(5,944		)	(5,705		)	(13,683		)	(17,377		)
Income tax expense	310			272			812			708
Net income (loss) including noncontrolling interests	(6,254		)	(5,977		)	(14,495		)	(18,085		)
Net income (loss) attributable to noncontrolling interests	(286		)	—			(858		)	—
Net income (loss) attributable to RealNetworks	$	(5,968	)	$	(5,977	)	$	(13,637	)	$	(18,085	)
Net income (loss) per share attributable to RealNetworks- Basic	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)
Net income (loss) per share attributable to RealNetworks- Diluted	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)
Shares used to compute basic net income (loss) per share	38,062			37,618			37,944			37,549
Shares used to compute diluted net income (loss) per share	38,062			37,618			37,944			37,549
Comprehensive income (loss):
Unrealized investment holding gains (losses), net of reclassification adjustments	$	—		$	(3	)	$	—		$	—
Foreign currency translation adjustments, net of reclassification adjustments	(232		)	(322		)	(811		)	(1,530		)
Total other comprehensive income (loss)	(232		)	(325		)	(811		)	(1,530		)
Net income (loss) including noncontrolling interests	(6,254		)	(5,977		)	(14,495		)	(18,085		)
Comprehensive income (loss) including noncontrolling interests	(6,486		)	(6,302		)	(15,306		)	(19,615		)
Comprehensive income (loss) attributable to noncontrolling interests	(286		)	—			(858		)	—
Comprehensive income (loss) attributable to RealNetworks	$	(6,200	)	$	(6,302	)	$	(14,448	)	$	(19,615	)

See accompanying notes to unaudited condensed consolidated financial statements.

4

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss) including noncontrolling interests	$	(14,495	)	$	(18,085	)
Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:
Depreciation and amortization	4,397			1,738
Stock-based compensation	2,420			2,113
Equity in net loss of Napster	—			737
Deferred income taxes, net	—			5
(Gain) loss on equity investment, net	(12,338		)	—
Foreign currency (gain) loss	(804		)	—
Fair value adjustments to contingent consideration liability	700			—
Mark to market adjustment of warrants	—			78
Net change in certain operating assets and liabilities:
Trade accounts receivable	4,036			16,754
Prepaid expenses, operating lease and other assets	1,379			(979		)
Accounts payable	(64		)	(15,235		)
Accrued, lease and other liabilities	(5,528		)	(2,754		)
Net cash used in operating activities	(20,297		)	(15,628		)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements	(1,068		)	(698		)
Proceeds from sales and maturities of short-term investments	24			7,607
Acquisition, net of cash acquired	12,260			(4,192		)
Net cash provided by investing activities	11,216			2,717
Cash flows from financing activities:
Proceeds from issuance of common stock (stock options and stock purchase plan)	144			114
Tax payments from shares withheld upon vesting of restricted stock	(289		)	(243		)
Proceeds from notes payable and revolving credit facility	31,337			—
Repayments of notes payable and revolving credit facility	(35,768		)	—
Payment of financing fees	(569		)	—
Other financing activities	900			—
Net cash used in financing activities	(4,245		)	(129		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(390		)	(962		)
Net increase (decrease) in cash, cash equivalents and restricted cash	(13,716		)	(14,002		)
Cash, cash equivalents and restricted cash, beginning of period	37,191			53,596
Cash, cash equivalents, and restricted cash end of period	$	23,475		$	39,594

See accompanying notes to unaudited condensed consolidated financial statements.

5

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Non-controlling Interests		Total Equity
	Shares	Amount
Balances, January 1, 2018	37,341	$	37	$	638,727		$	(59,547	)	$	(500,044	)	$	79,173		$	—	$	79,173
Cumulative effect of revenue recognition accounting change	—	—		—			—			1,024			1,024			—		1,024
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	223	—		(232		)	—			—			(232		)	—		(232		)
Stock-based compensation	—	—		1,157			—			—			1,157			—		1,157
Investments unrealized gains (losses), net of tax effects of $0	—	—		—			1			—			1			—		1
Foreign currency translation adjustments	—	—		—			396			—			396			—		396
Net income (loss)	—	—		—			—			(5,178		)	(5,178		)	—		(5,178		)
Balances, March 31, 2018	37,564	$	37	$	639,652		$	(59,150	)	$	(504,197	)	$	76,342		$	—	$	76,342
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	48	—		103			—			—			103			—		103
Stock-based compensation	—	—		457			—			—			457			—		457
Investments unrealized gains (losses), net of tax effects of $1	—	—		—			2			—			2			—		2
Foreign currency translation adjustments	—	—		—			(1,604		)	—			(1,604		)	—		(1,604		)
Net income (loss)	—	—		—			—			(6,930		)	(6,930		)	—		(6,930		)
Balances, June 30, 2018	37,612	$	37	$	640,212		$	(60,752	)	$	(511,127	)	$	68,370		$	—	$	68,370
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	40	—		1			—			—			1			—		1
Share of Napster equity transactions	—	—		737			—			—			737			—		737
Stock-based compensation	—	—		499			—			—			499			—		499
Investments unrealized gains (losses), net of tax effects of ($1)	—	—		—			(3		)	—			(3		)	—		(3		)
Foreign currency translation adjustments	—	—		—			(322		)	—			(322		)	—		(322		)
Net income (loss)	—	—		—			—			(5,977		)	(5,977		)	—		(5,977		)
Balances, September 30, 2018	37,652	$	37	$	641,449		$	(61,077	)	$	(517,104	)	$	63,305		$	—	$	63,305

6

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Deficit)			Total Shareholders’ Equity			Non-controlling Interests			Total Equity
	Shares	Amount
Balances, January 1, 2019	37,728	$	37	$	641,930		$	(61,118	)	$	(524,009	)	$	56,840		$	—		$	56,840
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	190	—		(271		)	—			—			(271		)	—			(271		)
Napster acquisition	—	—		(1,346		)	—			—			(1,346		)	570			(776		)
Stock-based compensation	—	—		1,384			—			—			1,384			—			1,384
Foreign currency translation adjustments	—	—		—			(87		)	—			(87		)	—			(87		)
Net income (loss)	—	—		—			—			1,533			1,533			(319		)	1,214
Other equity transactions	—	—		362			—			—			362			88			450
Balances, March 31, 2019	37,918	$	37	$	642,059		$	(61,205	)	$	(522,476	)	$	58,415		$	339		$	58,754
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	131	—		128			—			—			128			—			128
Stock-based compensation	—	—		533			—			—			533			—			533
Foreign currency translation adjustments	—	—		—			(492		)	—			(492		)	—			(492		)
Net income (loss)	—	—		—			—			(9,202		)	(9,202		)	(253		)	(9,455		)
Balances, June 30, 2019	38,049	$	37	$	642,720		$	(61,697	)	$	(531,678	)	$	49,382		$	86		$	49,468
Common stock issued for exercise of stock options, employee stock purchase plan, and vesting of restricted shares, net of tax payments from shares withheld upon vesting of restricted stock	18	1		(3		)	—			—			(2		)	—			(2		)
Stock-based compensation	—	—		503			—			—			503			—			503
Foreign currency translation adjustments	—	—		—			(232		)	—			(232		)	—			(232		)
Net income (loss)	—	—		—			—			(5,968		)	(5,968		)	(286		)	(6,254		)
Other equity transactions	—	—		353			—			—			353			97			450
Balances, September 30, 2019	38,067	$	38	$	643,573		$	(61,929	)	$	(537,646	)	$	44,036		$	(103	)	$	43,933

See accompanying notes to unaudited condensed consolidated financial statements.

7

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Quarters and Nine Months Ended September 30, 2019 and 2018

Note 1 Description of Business and Summary of Significant Accounting Policies

Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play, and share digital media. The Company also develops and markets software products and services that enable the creation, distribution, and consumption of digital media, including audio and video. Our Napster music business, which we acquired on January 18, 2019, offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. For more information on Napster, see Note 5Acquisitions.

Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services, and the ability to generate related revenue and cash flow.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.

Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company’s financial statements. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2019. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 10-K).

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2 Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance related to the accounting for leases. A major change in the new guidance is that lessees are now required to present right-of-use assets and lease liabilities on the balance sheet. Enhanced disclosures are also required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. We adopted the new guidance effective January 1, 2019 and elected to apply the new guidance at the beginning of the year of adoption, rather than applying the new guidance retrospectively to each prior reporting period presented. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. We have finalized our assessment of the impacts resulting from the new standard, including the impact on our internal controls. As a result of our evaluation, we have modified certain accounting policies and practices and existing controls. Adoption of the standard resulted in the recognition of $12.5 million of operating lease assets and $14.6 million of current and long-term operating lease liabilities as of January 1, 2019. The difference between the operating lease assets and lease liabilities recorded upon adoption relates to previously accrued deferred rent and lease exit and related charges included on our balance sheet as of December 31, 2018. Lease exit and related charges previously recorded pertain to the reduction in use of RealNetworks' office space and included estimates of sublease income expected to be received. The new guidance did not materially impact our consolidated statement of operations in the quarter of adoption or in the third quarter of 2019 and did not cause revision to

8

previously recorded estimates for lease exit charges. See Note 14Leases for additional information about the new accounting standard.

In June 2018, the FASB issued new guidance related to the measurement and classification for share-based awards to non-employees. The new guidance essentially aligns the measurement and classification for these awards with that for share-based awards to employees. We adopted the new guidance effective January 1, 2019, with no material impact on our consolidated financial statements and related disclosures.

Recently issued accounting pronouncements not yet adopted

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact of this guidance, but do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.

Note 3 Revenue Recognition

On January 1, 2018, we adopted the new revenue recognition standard by applying the modified retrospective approach to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard.

We recorded a net decrease to opening retained deficit of $1.0 million as of January 1, 2018 due to the cumulative impact of adopting the new revenue recognition standard. This impact primarily related to licensing of our RealPlayer product and full recognition of non-recurring engineering fees, which were previously deferred and amortized over the life of the contract.

We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less.

Napster revenue arrangements include subscription services to the Napster music streaming service sold either directly to end users (direct to consumer) or through partners (business to business), who are generally telecommunications companies, that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Napster also sells subscriptions to third parties to provide access to the Napster platform that is typically embedded in the third party's branded or co-branded service. Such subscriptions are included in the business to business sales channel.

For services sold through third parties to end customers, we evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”). In our Napster business to business revenue stream, we generally operate as a principal in arrangements with end customers as we maintain control over the service prior to being transferred to the end customer.

Certain business to business customer arrangements include variable consideration based on usage. We estimate variable consideration as part of the total transaction price that is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative standalone selling price basis.

Revenues related to Napster subscription services are recognized ratably over the contract period, typically 30 days. Direct to consumer subscriptions are paid in advance, typically on a monthly basis. Subscription services offered to businesses are invoiced on a monthly basis and the timing of payment generally does not vary significantly from the timing of invoice.

9

Disaggregation of Revenue

The following table presents our disaggregated revenue by source and segment (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	1,987	$	888	$	—	$	—	$	3,666	$	2,444	$	—	$	—
Subscription Services	1,028		6,007		3,056		27,302		3,156		18,387		9,114		80,222
Product Sales	207		—		3,078		—		632		—		7,243		—
Advertising and Other	410		—		1,030		—		1,284		—		2,565		—
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	2,746	$	520	$	—	$	—	$	7,891	$	2,324	$	—	$	—
Subscription Services	1,232		6,828		2,744		—		3,742		20,447		8,126		—
Product Sales	281		—		2,280		—		920		—		6,635		—
Advertising and Other	474		—		474		—		1,547		—		1,321		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

The following table presents our disaggregated revenue by sales channel (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	2,398	$	6,784	$	1,362	$	13,084	$	4,951	$	20,482	$	3,513	$	38,983
Direct to Consumer	1,234		111		5,802		14,218		3,787		349		15,409		41,239
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	3,220	$	7,209	$	806	$	—	$	9,438	$	22,312	$	2,393	$	—
Direct to Consumer	1,513		139		4,692		—		4,662		459		13,689		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to our customers. We record accounts receivable when the right to consideration becomes unconditional, except for the passage of time. For certain contracts, payment schedules may exceed one year; for those contracts we recognize a long-term receivable. As of September 30, 2019 and December 31, 2018, our balance of long-term accounts receivable was $0.3 million and $0.7 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The decrease in this balance from December 31, 2018 to September 30, 2019 is primarily due to the timing of expected cash receipts. During the quarter and nine months ended September 30, 2019, we recorded no impairments to our contract assets.

We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of September 30, 2019, we had a deferred revenue balance of $6.3 million, an increase of $3.9 million from December 31, 2018, primarily due to deferred revenue associated with Napster.

10

Practical Expedients

For those contracts for which we recognize revenue at the amount to which we have the right to invoice for service performed, we do not disclose the value of any unsatisfied performance obligations. We also do not disclose the remaining unsatisfied performance obligations which have an original duration of one year or less. Additionally, we immediately expense sales commissions when incurred as the amortization period would have been less than one year. These costs are recorded within sales and marketing expense.

Note 4 Stock-Based Compensation

Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total stock-based compensation expense	$	503	$	499	$	2,420	$	2,113

The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Expected dividend yield	0	%	0	%	0	%	0	%
Risk-free interest rate	1.71	%	2.78	%	2.16	%	2.69	%
Expected life (years)	3.8		3.8		4.1		3.9
Volatility	41	%	35	%	41	%	35	%

The total stock-based compensation amounts for 2019 and 2018 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Included in the expense for the nine months ended September 30, 2019 and 2018 was stock compensation expense recorded in the first quarter of 2019 and 2018 related to our 2018 and 2017 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of 2019 and 2018, respectively.

As of September 30, 2019, $2.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3.0 years.

Note 5 Acquisitions

Napster

On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) bringing our aggregate ownership to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest. Napster's music streaming service provides users with broad access to digital music, offering on-demand streaming and conditional downloads through unlimited access to a catalog of millions of music tracks. Napster offers music services worldwide and generates revenue primarily through subscriptions to its music services either directly to consumers or through distribution partners.

Initially formed in 2007 and branded then as Rhapsody, Napster began as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc. Prior to the acquisition of the additional 42% interest in Napster, we accounted for our investment using the equity method of accounting.

Following the January 2019 acquisition, RealNetworks has the right to nominate directors constituting a majority of the Napster board of directors, however, Napster will continue to operate as an independent business with its own board of directors, strategy and leadership team. We are consolidating Napster's financial results into our financial statements for fiscal periods following the closing of the acquisition, and Napster is reported as a separate segment in RealNetworks' consolidated financial statements. Napster, however, remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster.

11

We have preliminarily recorded 100% of the estimated fair value of the assets acquired and liabilities assumed as of January 18, 2019 based on the results of an independent valuation. The 16% of Napster that we do not own is accounted for as a noncontrolling interest in our consolidated financial statements, and as part of this consolidation, the carrying value of our previous 42% equity method investment was remeasured to fair value on the acquisition date. The remeasurement to fair value of the historical 42% ownership interest resulted in the recognition of a $2.7 million gain in the first quarter of 2019, which is a component of the overall gain recognized as a part of this transaction. Our consolidated balance sheet reflects Napster's working capital deficit, which results in a consolidated working capital deficit. RealNetworks does not have any contractual or implied obligation to provide funding or other financial support to Napster, or to guarantee or provide other such support related to Napster's third party borrowing or Napster's other obligations on our consolidated balance sheet, except as discussed in Note 15Commitments and Contingencies.

The terms of the transaction included initial cash consideration of $1.0 million and additional contingent consideration. Initial cash consideration of $0.2 million was paid at closing and the remainder of the initial cash consideration is included in accrued royalties, fulfillment and other current liabilities and will be paid when due with existing cash balances. With regards to contingent consideration, over the five years following the acquisition, RealNetworks will pay the lesser of the following:

(a) an additional $14.0 million to seller, or

(b) if RealNetworks sells the interest to a third party for less than $15.0 million, the actual amount received by RealNetworks, minus the $1.0 million initial payment.

In the event that RealNetworks sells such equity interest for consideration in excess of $15.0 million, RealNetworks will pay seller additional consideration, dependent on the sale price, which shall in no event exceed an additional $25.0 million. In order for seller to receive the full $40.0 million, the proceeds from the sale of Napster received by RealNetworks for the 42% equity interest acquired would have to exceed $60.0 million. These contingent consideration amounts were part of the total consideration at estimated fair value, as described in more detail below.

12

The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of the assets acquired and liabilities assumed as of January 18, 2019 (in thousands):

Consideration, at estimated fair value:
Cash	$	1,000
Contingent consideration	11,600
RealNetworks' preexisting 42% equity interest in Napster	2,700
Effective settlement of Napster debt and warrants, held by RealNetworks	6,408
Total consideration	$	21,708
Assets acquired and liabilities assumed, at estimated fair value:
Cash and cash equivalents	$	10,138
Accounts receivable	20,838
Prepaid expenses and other current assets	12,879
Restricted cash	2,322
Equipment, software and leasehold improvements	474
Operating lease assets	2,314
Other long-term assets	77
Deferred tax assets, net	5,942
Intangible assets	23,700
Goodwill	48,474
Total assets acquired	127,158
Accounts payable	937
Accrued royalties and fulfillment	71,980
Accrued and other current liabilities	7,475
Deferred revenue, current portion	3,600
Notes payable	12,115
Deferred tax liabilities, net	6,061
Long-term lease liabilities	1,197
Other long-term liabilities	1,515
Total liabilities assumed	104,880
Total net assets acquired	22,278
Noncontrolling interests	570
Net assets acquired	$	21,708

Under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. Due to the complexity and limited time since closing the transaction, the purchase price allocation is subject to change, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. Such changes could impact estimated fair values of intangible assets, accrued royalties and fulfillment, deferred revenue, and assets and liabilities assumed, as well as the contingent consideration, noncontrolling interests, and gain recognized from consolidation. Purchase price allocation adjustments may be recorded during the measurement period (a period not to exceed 12 months from the acquisition date). The final purchase price allocation could result in material differences, which could have a material impact on our financial statements.

13

Acquired intangible assets have a total weighted average useful life of approximately 8 years, are being amortized using the straight line method, and are comprised of the following (in thousands):

Intangible category	Estimated fair value		Method used to calculate fair value	Estimated remaining useful life
Trade name and trademarks	$	6,800	Relief-from-royalty	15 years
Developed technology	5,900		Excess earnings	4 years
Customer relationships	5,900		Cost-to-replace	3 years
Partner relationships	5,100		Distributor method	8 years
Total	$	23,700

The estimated fair value amounts for each of these intangibles were determined using a fair value measurement categorized within Level 3 of the fair value hierarchy.

The fair value of the trade name and trademarks intangible asset was estimated using the income approach, utilizing the relief from royalty method, which values the assets by estimating the savings achieved by ownership of trade name and trademarks when compared with the cost of licensing them from an independent owner.

The fair value of developed technology was estimated using the income approach, utilizing the excess earnings method. Under this method, cash flows attributable to the asset are estimated by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated by the asset.

The fair value of customer relationships was estimated using a cost-to-replace approach, whereby the number of subscribers and the cost to acquire subscribers are key estimates utilized in the valuation.

The fair value of partner relationships was estimated using the income approach, which uses market-based distributor data to value underlying distributor relationships. Revenue, earnings, and cash flow estimates associated with these underlying distributor relationships are key estimates in determining the fair value of the partner relationships intangibles.

The fair value of deferred revenue was estimated using the income approach, utilizing a cost to fulfill analysis by estimating the direct and indirect costs related to supporting remaining obligations plus an assumed operating margin.

The fair value of our preexisting 42% equity method investment has been remeasured to an estimated fair value of $2.7 million, which resulted in a pretax gain of $2.7 million, as our existing carrying value was zero. This gain, as well as the settlement of preexisting relationships and other purchase accounting adjustments discussed below, comprise the total gain of $12.3 million recognized in Other income (expenses) in the Consolidated statement of operations in the first quarter of 2019.

The fair value of our preexisting equity method investment was calculated using an average of the income and market approach to arrive at estimated total enterprise value. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of Napster's business. The discount rate applied was based on Napster's weighted-average cost of capital and included a small-company risk premium. The market approach fair value measurement was based on a market comparable methodology. We used a group of comparable companies and selected an appropriate EBITDA and revenue multiple to apply to Napster's trailing twelve months and projected 2019, 2020 and 2021 EBITDA (weighted 90%) and revenues (weighted 10%). Assumptions in both the income and market approaches are significant to the overall valuation of Napster and changes to these assumptions could materially impact the preliminary fair values of assets acquired and liabilities assumed, noncontrolling interests, total consideration, and gain on consolidation.

The fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to estimated fair value of $11.6 million. This fair value calculation is directly impacted by the estimated total enterprise value described above. After the completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, the contingent consideration will be adjusted quarterly to fair value through earnings. Of the total amount of $11.6 million, we accrued $2.6 million and $9.0 million in Accrued royalties, fulfillment and other current liabilities, and Other long-term liabilities, respectively, as of March 31, 2019. See Note 6Fair Value Measurements for details on the adjustment to this liability.

The effective settlement of Napster's debt and warrants totaling $6.4 million represents the estimated fair value of debt and warrants held between RealNetworks and Napster as of the acquisition date. The estimated fair value is derived from the estimated total enterprise value described above. The resulting net gain of $5.5 million is included in Other income (expenses) in the Consolidated statement of operations.

14

As discussed in Note 15Commitments and Contingencies, the preexisting $2.8 million guarantee related to Napster's outstanding indebtedness on their revolving credit facility was eliminated upon the consolidation of Napster. This resulted in RealNetworks recording a gain of $2.8 million, which is included in Other income (expenses) in the Consolidated statement of operations.

Prior to our acquisition of Napster, we accounted for our investment under the equity method of accounting and recorded Napster 's foreign currency translation adjustments in our equity. As part of the acquisition method of accounting, we released these amounts and recorded a gain of $1.3 million, which is included in Other income (expenses) in the Consolidated statement of operations.

We recorded the fair value of noncontrolling interests on the acquisition date, estimated at $0.6 million, using the estimated total enterprise value described above.

We also recorded goodwill of $48.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes, including the expected growth in Napster's business to business model and the assembled workforce. The goodwill is reported in our Napster segment and is not deductible for income tax purposes. As discussed above, during the measurement period, purchase price allocation adjustments or changes in assumptions used in determining the total estimated enterprise value of Napster could materially impact goodwill recognized. Moreover, future performance of the Napster business will factor into our goodwill impairment analysis.

We began consolidating Napster's results of operations and cash flows into our consolidated financial statements after January 18, 2019. For the quarter ended September 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $27.3 million and $1.0 million, respectively. For the nine months ended September 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $80.2 million and $4.3 million, respectively.

The following table provides the supplemental pro forma revenue and net results of the combined entity had the acquisition date of Napster been the first day of our first quarter of 2018 rather than during our first quarter of 2019 (in thousands):

	Quarter Ended - Pro Forma (Unaudited) September 30,						Nine Months Ended - Pro Forma (Unaudited) September 30,
	2019			2018			2019			2018
Net revenue	$	45,074		$	52,888		$	135,267		$	165,033
Net income (loss) attributable to RealNetworks (1)	(5,386		)	(3,748		)	(23,358		)	(1,453		)

⁽¹⁾ The pro forma net earnings attributable to RealNetworks for the quarter ended September 30, 2018 include $0.1 million of transaction costs, and for the nine months ended September 30, 2018, pro forma net earnings attributable to RealNetworks include the acquisition related gain of $12.3 million and $1.3 million of transaction costs. The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions and conform Napster's accounting policies to RealNetworks'. These pro forma results also reflect amortization of acquisition-related intangibles and fair value adjustments to deferred revenue and contingent consideration.

The unaudited pro forma amounts are based upon the historical financial statements of RealNetworks and Napster and were prepared using the acquisition method of accounting and are not necessarily indicative of results for any current or future period. The purchase price allocation is preliminary and is subject to change prior to finalization. The final purchase price allocation could result in material differences, which could have a material impact on the accompanying pro forma amounts.

For the quarter and nine months ended September 30, 2019, we incurred approximately $0.1 million and $1.3 million, respectively, in acquisition-related costs, including regulatory, legal, and other advisory fees, which we have recorded within general and administrative expenses.

Games

As described in more detail in our 2018 10-K, in order to acquire a full workforce, we purchased 100% of the shares of a small, privately-held Netherlands-based game development studio for net cash consideration of $4.2 million in April 2018.

15

Note 6 Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following tables present information about our financial assets that have been measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):

	Fair Value Measurements as of								Amortized Cost as of
	September 30, 2019								September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	16,980	$	—	$	—	$	16,980	$	16,980
Money market funds	1,121		—		—		1,121		1,121
Total cash and cash equivalents	18,101		—		—		18,101		18,101
Restricted cash equivalents	—		5,374		—		5,374		5,374
Total assets	$	18,101	$	5,374	$	—	$	23,475	$	23,475
Liabilities:
Accrued royalties, fulfillment and other current liabilities
Napster acquisition contingent consideration	$	—	$	—	$	2,746	$	2,746	N/A
Other long-term liabilities
Napster acquisition contingent consideration	—		—		9,554		9,554		N/A
Total liabilities	$	—	$	—	$	12,300	$	12,300	N/A

	Fair Value Measurements as of								Amortized Cost as of
	December 31, 2018								December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	22,853	$	—	$	—	$	22,853	$	22,853
Money market funds	12,708		—		—		12,708		12,708
Total cash and cash equivalents	35,561		—		—		35,561		35,561
Short-term investments:
Corporate notes and bonds	—		24		—		24		24
Total short-term investments	—		24		—		24		24
Restricted cash equivalents	—		1,630		—		1,630		1,630
Warrants issued by Napster (included in Other assets)	—		—		865		865		—
Total assets	$	35,561	$	1,654	$	865	$	38,080	$	37,215

Restricted cash equivalents as of September 30, 2019 and December 31, 2018 relate to cash pledged as collateral against letters of credit in connection with certain lease agreements and, as of September 30, 2019, our recently entered into Loan and Security Agreement ("Loan Agreement") requires us to maintain a minimum balance of $3.5 million unrestricted cash at the bank. See Note 10Notes Payable and Long-term debt for additional details.

Accrued royalties, fulfillment and other current liabilities and Other long-term liabilities as of September 30, 2019 include the estimated fair value of the contingent consideration for the Napster acquisition, which was determined using a fair value measurement categorized within Level 3 of the fair value hierarchy. As discussed in Note 5Acquisitions, after completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, this liability is adjusted quarterly to fair value through earnings. During the quarter and nine months ended September 30, 2019, we recorded the change in fair value of the contingent consideration of $0.4 million and $0.7 million, respectively, as an increase to the total liability on the consolidated balance sheet and as general and administrative expense on the consolidated statement of operations.

16

Items Measured at Fair Value on a Non-recurring Basis

Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the nine months ended September 30, 2019 and 2018, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.

Note 7 Other Intangible Assets

Other intangible assets (in thousands):

		September 30, 2019						December 31, 2018
		Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Amortizing intangible assets:
	Customer relationships	$	40,050	$	31,075	$	8,975	$	30,993	$	30,993	$	—
	Developed technology	29,446		24,591		4,855		24,446		24,446		—
	Patents, trademarks and tradenames	10,345		3,866		6,479		3,765		3,765		—
	Service contracts	5,344		5,344		—		5,538		5,512		26
	Total	$	85,185	$	64,876	$	20,309	$	64,742	$	64,716	$	26

Amortization expense related to other intangible assets during the quarters ended September 30, 2019, and September 30, 2018, was $1.1 million and insignificant. Amortization expense related to other intangible assets during the nine months ended September 30, 2019, and September 30, 2018, was $3.2 million and $0.3 million, respectively.

Estimated future amortization of other intangible assets (in thousands):

	Future Amortization
2019 (Excluding the nine months ended September 30, 2019)	$	1,125
2020	4,501
2021	4,501
2022	2,617
2023	1,121
Thereafter	6,444
	$	20,309

See Note 5Acquisitions for details on our acquisitions. No impairments of other intangible assets were recognized in either of the nine months ended September 30, 2019 or 2018.

17

Note 8 Goodwill

The following table presents changes in goodwill (in thousands):

Balance, December 31, 2018	$	16,955
Increases due to current year acquisitions	48,474
Effects of foreign currency translation	(275		)
Balance, September 30, 2019	$	65,154

See Note 5Acquisitions for details on our acquisitions and the impact to goodwill.

The following table presents goodwill by segments (in thousands):

	September 30, 2019
Consumer Media	$	580
Mobile Services	1,959
Games	14,141
Napster	48,474
Total goodwill	$	65,154

No impairment of goodwill was recognized in either of the nine months ended September 30, 2019 or in 2018.

18

Note 9 Accrued royalties, fulfillment and other current liabilities

Accrued royalties, fulfillment and other current liabilities (in thousands):

	September 30, 2019		December 31, 2018
Royalties and other fulfillment costs	$	70,371	$	1,989
Employee compensation, commissions and benefits	6,750		4,444
Sales, VAT and other taxes payable	3,423		785
Operating Lease Liabilities - Current	4,804		—
Other	7,181		4,094
Total accrued royalties, fulfillment and other current liabilities	$	92,529	$	11,312

Included in royalties and other fulfillment costs are Napster's accrued music royalties totaling $68.7 million at September 30, 2019. Napster’s agreements and arrangements with rights holders for the content used in its business are complex and the determination of royalty accruals involves significant judgments, assumptions, and estimates of the amounts to be paid.

The variables involved in determining royalty accruals include unmatched royalty accruals, revenue to be recognized, the type of content used and the country it is used in, outstanding royalty audits, and identification of appropriate license holders, among other variables. In addition, some rights holders have allowed the use of their content while negotiations of the terms and conditions are ongoing. In certain jurisdictions, rights holders have several years to claim royalties for musical composition.

While Napster bases its estimates on historical experience and on various assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates in the event of modified assumptions or conditions.

Related to Napster's accrued music royalties are amounts that are advanced to certain music publishers for royalty amounts that have been agreed as being owed, but for which the underlying rights holder have not yet been specifically matched. These prepaid royalty amounts totaling $13.5 million at September 30, 2019 are included in Prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets. When these amounts are ultimately matched and invoiced to Napster, the prepaid royalty amount and the related accrued royalty liability are offset on the unaudited condensed consolidated balance sheets.

Note 10 Notes Payable and Long-term debt

In August 2019, RealNetworks and Napster entered into a Loan and Security Agreement (Loan Agreement) with a third-party financial institution. Under the terms of the Loan Agreement, the bank extended a revolving line of credit not to exceed $10 million in the aggregate. Available advances on the revolving line of credit, which will be used for working capital and general corporate purposes, are based on a borrowing base that comprises accounts receivable and direct to consumer deposits. Borrowings under the Loan Agreement are secured by a first priority security interest in the assets of RealNetworks and Napster. Advances bear interest at a rate equal to one-half of one percent point (0.5%) above the greater of the prime rate or 5.5%, with monthly payments of interest only and principal due at the end of the two-year term. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels, and maintaining a minimum balance of $3.5 million unrestricted cash at the bank. 

As of September 30, 2019, RealNetworks drew down $3.9 million from the revolving line of credit, which was loaned to Napster bearing interest and fees commensurate with our costs. See Note 18Related Party Transactions for additional details.

We paid and capitalized $0.6 million of financing fees to enter into the revolving line of credit, and the financing fees will be amortized over the term of the debt. The current and non-current unamortized fees were $0.3 million and $0.2 million at September 30, 2019, respectively, and are included in Deferred costs, current and non-current on our condensed consolidated balance sheets.

In 2017, Napster entered into a Non-Recourse Purchase of Eligible Receivables Agreement (NRP Agreement) with an international bank (Purchaser) in which Napster will sell and assign on a continuing basis its eligible receivables to the Purchaser in return for 90% of the receivables upfront, up to a maximum amount of $15.0 million in advances. The interest rate is 2.25% above the 1-month-EURIBOR with a minimum 0.0% rate applying to the 1-month-EURIBOR rate. As of September 30, 2019, Napster had $3.6 million borrowings outstanding with an interest rate of 2.25%.

19

In 2015, Napster entered into a Loan and Security Agreement (Revolver LSA) with a bank. The available borrowing on the Revolver LSA was based upon Napster's accounts receivable and direct to consumer subscription deposits. The Revolver LSA had a maximum available balance of $7.0 million. The Revolver LSA matured and the loan balance was paid in full on April 30, 2019. The Revolver LSA required Napster to maintain a balance of unrestricted cash at the bank of not less than $1.5 million plus 5% of the total amount outstanding under the NRP Agreement. As the loan was paid off on April 30, 2019, this amount is no longer restricted.

Note 11 Restructuring Charges

Restructuring and other charges in 2019 and 2018 consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts, which primarily relate to severance costs due to workforce reductions. Asset related and other costs primarily relate to the termination of certain contracts in the second quarter of 2019 as we continue to shift focus onto free-to-play games that offer in-game purchases of virtual goods and away from the premium mobile games that require a one-time purchase.

Restructuring charges are as follows (in thousands):

	Employee Separation Costs		Asset Related and Other Costs		Total
Costs incurred and charged to expense for the nine months ended September 30, 2019	$	1,050	$	537	$	1,587
Costs incurred and charged to expense for the nine months ended September 30, 2018	$	1,320	$	—	$	1,320

Changes to the accrued restructuring liability (which is included in Accrued royalties, fulfillment and other current liabilities) for 2019 are as follows (in thousands):

	Employee Separation Costs			Asset Related and Other Costs		Total
Accrued liability at December 31, 2018	$	755		$	—	$	755
Costs incurred and charged to expense for the nine months ended September 30, 2019, excluding noncash charges	1,050			174		1,224
Cash payments	(1,292		)	—		(1,292		)
Accrued liability at September 30, 2019	$	513		$	174	$	687

Note 12 Income Taxes

As of September 30, 2019, RealNetworks has $4.5 million in uncertain tax positions, of which $4.1 million of unrecognized tax positions was recorded through purchase accounting on January 18, 2019 as a result of the acquisition of Napster. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.

We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

20

Note 13 Income (Loss) Per Share

Basic net income (loss) per share (EPS) is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):

	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss) attributable to RealNetworks	$	(5,968	)	$	(5,977	)	$	(13,637	)	$	(18,085	)
Weighted average common shares outstanding used to compute basic EPS	38,062			37,618			37,944			37,549
Dilutive effect of stock based awards	—			—			—			—
Weighted average common shares outstanding used to compute diluted EPS	38,062			37,618			37,944			37,549
Basic EPS attributable to RealNetworks	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)
Diluted EPS attributable to RealNetworks	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)

During the quarter and nine months ended September 30, 2019, 8.0 million and 7.6 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.

During the quarter and nine months ended September 30, 2018, 6.7 million and 6.3 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.

Note 14 Leases

We have commitments for future payments related to office facilities leases. We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease assets, Other current liabilities, and Long-term lease liabilities on our consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Operating lease assets also exclude lease incentives and initial direct costs incurred. Some of our leases include options to extend or terminate the lease. Our leases generally include one or more options to renew; however, the exercise of lease renewal options is at our sole discretion. For nearly all of our operating leases, upon adoption of the new guidance, we have not assumed any options to extend will be exercised as part of our calculation of the lease liability. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have operating leases for office space and data centers with remaining lease terms of 1 year to 5 years.

Details related to lease expense and supplemental cash flow were as follows (in thousands):

	Quarter Ended September 30,			Nine Months Ended September 30,
	2019			2019
Operating lease expense	$	1,396		$	4,199
Variable lease expense	165			676
Sublease income	(511		)	(1,497		)
Net lease expense	$	1,050		$	3,378
Operating cash outflows for lease liabilities	$	1,274		$	4,147

21

Details related to lease term and discount rate were as follows:

	September 30, 2019
Weighted-average remaining lease term (in years)	4 years
Weighted-average discount rate	5.14	%

Future minimum lease payments as of September 30, 2019 were as follows (in thousands):

	Operating Leases
2019 (Excluding the nine months ended September 30, 2019)	$	1,481
2020	4,922
2021	3,266
2022	2,422
2023	2,347
Thereafter	1,634
Total minimum payments(a)	16,072
Less: Imputed interest	1,782
Present value of total minimum payments(b)	$	14,290

^(a)Total minimum payments exclude executory costs, inclusive of insurance, maintenance, and taxes, of $6.5 million; minimum payments also have not been reduced by sublease rentals of $5.8 million due in the future under noncancelable subleases.

^(b)$9.5 million is included in Long-term lease liabilities and $4.8 million is included in Accrued royalties, fulfillment, and other current liabilities on the condensed consolidated balance sheets.

As of December 31, 2018, future minimum lease payments were $15.9 million in the aggregate, which consisted of the following: $3.7 million in 2019; $3.0 million in 2020; $2.7 million in 2021; $2.4 million in 2022; $2.3 million in 2023; and $1.6 million thereafter.

Note 15 Commitments and Contingencies

We have been in the past and could become in the future subject to legal proceedings, governmental investigations, and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks, and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements.  

In 2017, we entered into an arrangement whereby we may be required to guarantee up to $2.8 million of Napster's outstanding indebtedness on their revolving credit facility. At that time and as a result of the guaranty, RealNetworks recognized previously suspended Napster losses up to the full $2.8 million guaranty in our consolidated statement of operations and as a Commitment to Napster in our consolidated balance sheets. Given the controlling interest RealNetworks acquired in Napster in the first quarter of 2019, we have eliminated the previously recorded guaranty from RealNetworks' balance sheet in consolidation. RealNetworks has not been required to pay any portion of this commitment, and, as discussed in Note 10Notes Payable and Long-term debt, Napster fully repaid this loan balance on April 30, 2019, thus releasing RealNetworks' previously made guaranty.    

In March 2016, Napster was notified of a putative consumer class action lawsuit relating to an alleged failure to pay so-called “mechanical royalties” on behalf of the plaintiffs and “other similarly-situated holders of mechanical rights in copyrighted musical works.” On April 7, 2017, the plaintiffs and Napster agreed to settlement terms during a mediation session. The long form Settlement Agreement was executed effective on January 16, 2019. The damages payable under the Settlement Agreement will be calculated on a claims made basis, subject to an overall maximum of $10.0 million. We have not recorded an accrual related to this settlement as of September 30, 2019 as the amount payable is not reasonably estimable. In May 2019, public notice was posted about the settlement informing purported class members that they can make claims or object to the settlement. The claims period ends on December 31, 2019, on which date (or shortly thereafter), Napster expects to know the total amount of damages payable in respect to validly made claims. Damages for valid claims are expected to be paid in the second quarter of 2020.

22

Note 16 Guarantees

In the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have received in the past, and may receive in the future, claims for indemnification from some of our carrier customers.

In the ordinary course of business, Napster enters into agreements with various content providers that guarantee a minimum amount of royalty payments in a given period. These minimum payments are generally based on targets and, based on our historical experience and expectations under relevant contracts, we anticipate that actual royalty accruals and payments will exceed minimum guarantees and, accordingly, we do not maintain accruals for these minimum guarantees.

In relation to certain patents and other technology assets we sold to Intel in the second quarter of 2012, we have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to in the asset purchase agreement for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations to Intel will not be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale.

Note 17 Segment Information

We manage our business and report revenue and operating income (loss) in four segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products; (2) Mobile Services, which includes our SaaS services and our integrated RealTimes® platform which is sold to mobile carriers; (3) Games, which includes all our games-related businesses, including sales of mobile games, games licenses, in-game virtual goods, subscription services, and advertising on games and social network sites; and (4) Napster, which includes our on-demand music streaming and music services.

RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also include restructuring charges and stock compensation charges. As stated in Note 5Acquisitions, Napster is operating as an independent company and includes all their corporate expenses in their segment results, and RealNetworks does not allocate any expenses to the Napster segment.

RealNetworks reports four reportable segments based on factors such as how we manage our operations and how the Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.

23

Segment results for the quarters and nine months ended September 30, 2019 and 2018 (in thousands):

Consumer Media	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Revenue	$	3,632	$	4,733	$	8,738		$	14,100
Cost of revenue	705		955		2,341			2,976
Gross profit	2,927		3,778		6,397			11,124
Operating expenses	2,692		3,448		8,688			10,805
Operating income (loss)	$	235	$	330	$	(2,291	)	$	319

Mobile Services	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	6,895		$	7,348		$	20,831		$	22,771
Cost of revenue	1,721			2,052			5,634			6,502
Gross profit	5,174			5,296			15,197			16,269
Operating expenses	7,143			6,825			22,142			21,160
Operating income (loss)	$	(1,969	)	$	(1,529	)	$	(6,945	)	$	(4,891	)

Games	Quarter Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Revenue	$	7,164	$	5,498		$	18,922		$	16,082
Cost of revenue	1,934		1,228			5,259			4,501
Gross profit	5,230		4,270			13,663			11,581
Operating expenses	5,151		5,447			15,476			15,459
Operating income (loss)	$	79	$	(1,177	)	$	(1,813	)	$	(3,878	)

Napster	Quarter Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Revenue	$	27,302		$	—	$	80,222		$	—
Cost of revenue	21,986			—		65,408			—
Gross profit	5,316			—		14,814			—
Operating expenses	6,472			—		18,642			—
Operating income (loss)	$	(1,156	)	$	—	$	(3,828	)	$	—

Corporate	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Cost of revenue	$	(68	)	$	4		$	(212	)	$	21
Operating expenses	3,522			2,548			11,895			8,244
Operating income (loss)	$	(3,454	)	$	(2,552	)	$	(11,683	)	$	(8,265	)

24

Our customers consist primarily of consumers and corporations located in the U.S., Europe, and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	22,015	$	9,026	$	62,307	$	28,106
Europe	16,425		3,005		48,906		9,040
Rest of the World	6,553		5,548		17,500		15,807
Total net revenue	$	44,993	$	17,579	$	128,713	$	52,953

Long-lived assets (consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets) by geographic region (in thousands) are as follows:

	September 30, 2019		December 31, 2018
United States	$	88,043	$	11,823
Europe	10,359		6,761
Rest of the World	2,497		1,151
Total long-lived assets	$	100,899	$	19,735

Note 18 Related Party Transactions

 As described in Note 5Acquisitions, on January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc., (doing business as Napster), bringing our aggregate ownership interest to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest in Napster. Following this acquisition of a controlling interest, we consolidate Napster's financial results into our financial statements for fiscal periods beginning with our first quarter of 2019. Rhapsody America LLC was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc., to own and operate a business-to-consumer digital audio music service originally branded as Rhapsody. The service has been significantly expanded and was re-branded in 2016 as Napster.

Following certain restructuring transactions effective March 31, 2010, we began accounting for the investment using the equity method of accounting. As part of the 2010 restructuring transactions, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events. Although we now consolidate Napster for reporting purposes, our convertible preferred stock and the related rights remain contractually binding instruments between RealNetworks and Napster.

In December 2016, RealNetworks and the other then-owner of 42% of Napster each entered into an agreement to loan up to $5.0 million to Napster for general operating purposes, which loans were fully funded as of the end of January 2017 for an aggregate of $10.0 million. Included in RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the seller's $5.0 million note, resulting in RealNetworks holding $10.0 million of notes receivable from Napster. The terms of the notes were modified subsequent to the original December 2016 execution, including a provision, effective July 2018, that requires repayment at the greater of (a) principal plus accrued interest at an annual rate of 15% or (b) a preference of three times the principal amount.

In May 2019, RealNetworks extended a short-term loan to Napster in the principal amount of $1.1 million. In August 2019, RealNetworks established a two-year term on this short-term loan and, as discussed in Note 10Notes Payable and Long-term debt, loaned Napster an additional $3.9 million and charged Napster for associated fees. As a result, the principal amount on this two-year note is $5.4 million. Both the two-year note and the $10.0 million loan are subordinate to RealNetworks' and Napster's third party debt.

In each of February 2015 and February 2017, Napster issued warrants to purchase shares of its common stock to each of RealNetworks and the other then-owner of 42% of Napster. The warrants have a 10-year contractual term and were issued as compensation for past services provided by these two significant stockholders of Napster. As part of RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the warrants held by the seller.

Upon our acquisition of a controlling interest in Napster, the notes and warrants were effectively settled and eliminated in our consolidated financial statements as they represent preexisting relationships between RealNetworks and Napster. However, the notes and warrants remain contractually binding instruments between RealNetworks and Napster.

25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks’ industry, products, management’s beliefs, and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:

• the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings;

• our expected introduction, and related monetization, of new and enhanced products, services and technologies across our businesses;

• future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations;

• the effects of our past acquisitions, including our January 18, 2019 acquisition of a controlling interest in Napster, and expectations for future acquisitions and divestitures;

• plans, strategies and expected opportunities for future growth, increased profitability and innovation;

• our expected financial position, including liquidity, cash usage and conservation, and the availability of funding or other resources;

• the performance, growth and profitability of, and investment in, our businesses;

• the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses;

• the continuation and expected nature of certain customer relationships;

• impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;

• our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations;

• the effects of U.S. and foreign income and other taxes on our business, prospects, financial condition or results of operations; and

• the effect of economic and market conditions on our business, prospects, financial condition or results of operations.

These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item 1A of Part II “Risk Factors.” RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview

RealNetworks creates innovative technology products and services that make it easy to connect with and enjoy digital media. We manage our business and report revenue and operating income (loss) in four segments: (1) Consumer Media, (2) Mobile Services, (3) Games, and (4) Napster. See Note 17Segment Information, and Note 5Acquisitions to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q for more information regarding our reportable segments and the first quarter of 2019 acquisition of Napster.

Within our Consumer Media segment, revenue is primarily derived from the software licensing of our video compression, or codec, technology, including our latest technology, RealMedia High Definition, or RMHD. We also generate revenue from the sale of our PC-based RealPlayer products, including RealPlayer Plus and related products. These products and services are delivered directly to consumers and through partners, such as OEMs and mobile device manufacturers.

Our Mobile Services business generates revenue primarily from the sale of subscription services, which includes our messaging platform services and ringback tones, as well as through software licenses for the integration of our RealTimes platform and certain system implementations. We generate a significant portion of our revenue from sales within our Mobile Services business to a few mobile carriers. The loss of these contracts, whether by termination or non-renewal or renegotiation of contract terms that are less favorable to us could result in the loss of future revenues and anticipated profits. Our Mobile Services segment also includes our facial recognition platform, SAFR (Secure, Accurate Facial Recognition), which detects and matches millions of faces by leveraging artificial intelligence-based machine learning.

Our Games business generates revenue primarily through the development, publishing, and distribution of casual games under the GameHouse and Zylom brands. Games are offered via mobile devices, digital downloads, and subscription play. In

26

addition to the sale of individual games and subscription offerings, we also derive revenue from player purchases of in-game virtual goods within our free-to-play games and from advertising on games sites and social network sites.

As described in Note 5Acquisitions, RealNetworks acquired an additional 42% interest in Napster on January 18, 2019 resulting in our having a majority voting interest, owning 84% of Napster's outstanding equity. We consolidate Napster's financial results into our financial statements for fiscal periods following the closing of the acquisition, and Napster is reported as a separate segment in RealNetworks financial statements and related disclosures following the acquisition.

Our Napster segment provides music products and services that enable consumers to have access to digital music content from a variety of devices. The Napster unlimited subscription service offers unlimited access to a catalog of tens of millions of music tracks by way of on-demand streaming and conditional downloads. Napster currently offers music services worldwide and generates revenue primarily through subscriptions to its music services either directly to consumers or distribution partners. We generate a significant portion of our revenue from sales within our Napster business to a few partners. The loss of these contracts, whether by termination or non-renewal or renegotiation of contract terms that are less favorable to us could result in the loss of future revenues and anticipated profits.

RealNetworks allocates to its Consumer Media, Mobile Services, and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, IT, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also can include restructuring charges and stock compensation expense. As stated in Note 5Acquisitions, Napster is operating as an independent company and their corporate expenses are all included in Napster's segment results, and RealNetworks does not allocate any expenses to the Napster segment.

As of September 30, 2019, we had $18.1 million in unrestricted cash and cash equivalents, compared to $35.6 million as of December 31, 2018. The 2019 decrease in cash and cash equivalents compared to the prior year end amount was due to our ongoing cash flows used in operating activities, which totaled $20.3 million in the first nine months of 2019, and Napster's net repayment of debt of $8.3 million. These decreases were partially offset by the January 2019 acquisition of Napster, which added $9.9 million of cash, and the draw down of $3.9 million from the revolving line of credit we entered into in August 2019.

Condensed consolidated results of operations were as follows (in thousands):

	Quarter Ended September 30,											Nine months ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Total revenue	$	44,993		$	17,579		$	27,414		156	%	$	128,713		$	52,953		$	75,760		143	%
Cost of revenue	26,278			4,239			22,039			520	%	78,430			14,000			64,430			460	%
Gross profit	18,715			13,340			5,375			40	%	50,283			38,953			11,330			29	%
Gross margin	42		%	76		%						39		%	74		%
Operating expenses	24,980			18,268			6,712			37	%	76,843			55,668			21,175			38	%
Operating loss	$	(6,265	)	$	(4,928	)	$	(1,337	)	(27	)%	$	(26,560	)	$	(16,715	)	$	(9,845	)	(59	)%

In the third quarter of 2019, our total consolidated revenue increased $27.4 million as compared with the year-earlier period, primarily due to the acquisition of Napster on January 18, 2019, and the resulting consolidation of their results from the acquisition date forward. Napster's revenues for the third quarter of 2019 totaled $27.3 million. For the third quarter of 2019 compared to the prior year period, our Games segment revenues increased by $1.7 million, offset by declines in our Consumer Media and Mobile Services segments of $1.1 million and $0.5 million, respectively. See below for further discussion of our segment results.

Cost of revenue increased by $22.0 million for the quarter ended September 30, 2019 as compared with the year-earlier period, primarily due to the consolidation of Napster's results from the acquisition date forward. Napster's cost of revenue for the third quarter of 2019 totaled $22.0 million and its gross margin was 19 percent.

Operating expenses increased by $6.7 million in the quarter ended September 30, 2019 as compared with the year-earlier period, primarily due to the consolidation of Napster's results from the acquisition date forward. Napster operating expenses for the third quarter of 2019 totaled $6.5 million. Operating expenses within Corporate in the third quarter of 2019 included the change in fair value of the Napster contingent consideration liability of $0.4 million.

For the nine months ended September 30, 2019, our total consolidated revenue increased $75.8 million as compared to the prior year, primarily due to the consolidation of Napster's results from the acquisition date forward. Napster's revenue for the nine months ended September 30, 2019 totaled $80.2 million. For the nine months ended September 30, 2019 compared to the prior year period, our Games segment revenue increased by $2.8 million, offset by declines in our Consumer Media segment and Mobile Services segment of $5.4 million and $1.9 million, respectively. See below for further discussion of our segment results.

27

Cost of revenue increased by $64.4 million in the nine months ended September 30, 2019 as compared to the prior year period primarily due to the consolidation of Napster's results from the acquisition date forward. Napster's cost of revenue for the nine months ended September 30, 2019 totaled $65.4 million and its gross margin was 18 percent. This increase was offset by a $0.6 million decrease in our Consumer Media segment and a $0.9 million decrease in our Mobile Services segment.

Operating expenses increased by $21.2 million in the nine months ended September 30, 2019 as compared with the prior year primarily due to the consolidation of Napster's results from the acquisition date forward. Napster's operating expenses for the nine months ended September 30, 2019 totaled $18.6 million, including $0.2 million of acquisition-related costs. Operating expenses within Corporate in the nine months ended September 30, 2019 included an additional $1.1 million of acquisition-related costs and $0.7 million of change in fair value of the Napster contingent consideration liability. Also contributing to the overall increase was $0.3 million increase in facilities expense. Included in the results for the nine months ended September 30, 2018 was a benefit of $0.5 million in lease exit and related charges following the renegotiation of certain leases.

Segment Operating Results

Consumer Media

Consumer Media segment results of operations were as follows (in thousands):

	Quarter Ended September 30,											Nine Months Ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Revenue	$	3,632		$	4,733		$	(1,101	)	(23	)%	$	8,738		$	14,100		$	(5,362	)	(38	)%
Cost of revenue	705			955			(250		)	(26	)%	2,341			2,976			(635		)	(21	)%
Gross profit	2,927			3,778			(851		)	(23	)%	6,397			11,124			(4,727		)	(42	)%
Gross margin	81		%	80		%						73		%	79		%
Operating expenses	2,692			3,448			(756		)	(22	)%	8,688			10,805			(2,117		)	(20	)%
Operating income (loss)	$	235		$	330		$	(95	)	(29	)%	$	(2,291	)	$	319		$	(2,610	)	NM

Total Consumer Media revenue for the quarter ended September 30, 2019 decreased $1.1 million as compared to the same quarter in 2018, due primarily to continued lower software license revenues of $0.8 million and subscription services revenues of $0.2 million, described more fully below. The overall decrease in revenues was also impacted by lower product sales, advertising and other revenues of $0.1 million.

Software License

For our software license revenues, the $0.8 million decrease was primarily due to the continuing decline of shipments by our customers and the timing of contract renewals. The bulk of these licenses are in China and, in the near term, we expect to see further declines. Partially offsetting the decline from the prior year was the non-recurring recognition of revenue on a contract that was effectuated in the third quarter of 2019.

Subscription Services

For our subscription services revenues, the $0.2 million decrease was primarily due to continuing declines in our legacy subscription products, which will continue to organically decline.

Cost of revenue for the quarter ended September 30, 2019 decreased $0.3 million compared with the year-earlier period. This was primarily due to reductions in salaries and benefits.

Operating expenses decreased $0.8 million as compared with the year-earlier period, primarily due to reductions in salaries, benefits and professional services fees.

Total Consumer Media revenue for the nine months ended September 30, 2019 decreased $5.4 million as compared to the prior year, due primarily to lower software license revenues of $4.2 million and subscription services revenues of $0.6 million, described more fully below. The overall decrease in revenues was also impacted by lower product sales, advertising and other revenues of $0.6 million.

Software License

For our software license revenues, the $4.2 million decrease was primarily due to the continuing decline of shipments by our customers and the timing of contract renewals. The bulk of these licenses are in China and, in the near term, we expect to see further declines. Partially offsetting the decline from the prior year was the non-recurring recognition of revenue on a contract that was effectuated in the third quarter of 2019.

28

Subscription Services

For our subscription services revenues, the $0.6 million decrease was primarily due to continuing declines in our legacy subscription products, which will continue to organically decline.

Cost of revenue for the nine months ended September 30, 2019 decreased $0.6 million compared with the prior-year period. This was primarily due to reductions in salaries, benefits, bandwidth and license royalty costs.

Operating expenses decreased $2.1 million as compared with the prior-year period, primarily due to reductions in salaries, benefits, professional services fees and marketing expenses.

Mobile Services

Mobile Services segment results of operations were as follows (in thousands):

	Quarter Ended September 30,											Nine Months Ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Revenue	$	6,895		$	7,348		$	(453	)	(6	)%	$	20,831		$	22,771		$	(1,940	)	(9	)%
Cost of revenue	1,721			2,052			(331		)	(16	)%	5,634			6,502			(868		)	(13	)%
Gross profit	5,174			5,296			(122		)	(2	)%	15,197			16,269			(1,072		)	(7	)%
Gross margin	75		%	72		%						73		%	71		%
Operating expenses	7,143			6,825			318			5	%	22,142			21,160			982			5	%
Operating loss	$	(1,969	)	$	(1,529	)	$	(440	)	(29	)%	$	(6,945	)	$	(4,891	)	$	(2,054	)	(42	)%

Total Mobile Services revenue decreased by $0.5 million in the quarter ended September 30, 2019 compared with the prior-year period. The revenue decrease was due to lower subscription services revenues of $0.8 million, offset in part by a $0.3 million increase in software license revenues, described more fully below.

Software License

For our software license revenues, the increase was primarily due to revenue from sales of our SAFR product in the third quarter of 2019.

Subscription Services

The decline in our subscription services revenue was due to lower revenue of $1.0 million in our ringback tones business and $0.1 million in professional services fees, partially offset by an increase in our messaging platform business of $0.3 million.

Cost of revenue decreased by $0.3 million in the quarter ended September 30, 2019 compared with the prior-year period, due primarily to reductions in salaries, benefits and infrastructure costs.

Operating expenses increased by $0.3 million for the quarter ended September 30, 2019 compared with the year-earlier period primarily due to increased salaries and benefits related to increased efforts towards our growth initiatives, partially offset by decreases in marketing and infrastructure expenses.

Total Mobile Services revenue decreased by $1.9 million in the nine months ended September 30, 2019 compared with the prior-year period. The revenue decrease was due to declines of $2.0 million in subscription services revenues, offset in part by a $0.1 million increase in software license revenues, described more fully below.

Software License

For our software license revenues, the increase was primarily the result of revenue from sales of our SAFR product in 2019; this was partially offset by revenue recognition timing which caused more revenue to be recognized in the first quarter of 2018 for our integrated RealTimes products offered to mobile carriers.

Subscription Services

For our subscription services, the decrease was primarily the result of lower revenue of $2.7 million in our ringback tones business and $0.3 million in professional services fees, partially offset by an increase in our messaging platform business of $1.0 million.

Cost of revenue decreased by $0.9 million in the nine months ended September 30, 2019 compared with the prior-year period, due primarily to reductions in salaries, benefits, and infrastructure costs.

29

Operating expenses increased by $1.0 million for the nine months ended September 30, 2019 compared with the year-earlier period primarily due to increased salaries and benefits related to increased efforts towards our growth initiatives.

Games

Games segment results of operations were as follows (in thousands):

	Quarter Ended September 30,											Nine Months Ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change		% Change
Revenue	$	7,164		$	5,498		$	1,666		30	%	$	18,922		$	16,082		$	2,840	18	%
Cost of revenue	1,934			1,228			706			57	%	5,259			4,501			758		17	%
Gross profit	5,230			4,270			960			22	%	13,663			11,581			2,082		18	%
Gross margin	73		%	78		%						72		%	72		%
Operating expenses	5,151			5,447			(296		)	(5	)%	15,476			15,459			17		—	%
Operating income (loss)	$	79		$	(1,177	)	$	1,256		NM		$	(1,813	)	$	(3,878	)	$	2,065	53	%

Total Games revenue increased $1.7 million for the quarter ended September 30, 2019 as compared with the year-earlier period due primarily to increases of $0.8 million in product sales revenues, $0.6 million in advertising and other revenues and $0.3 million in our subscription services revenues, described more fully below. Our Games segment continues to shift its focus toward free-to-play games that offer in-game purchases of virtual goods, the revenue from which is included within product sales, and away from premium mobile games that require a one-time purchase.

Subscription Services

Our subscription sales increased $0.3 million as a result of new subscription offerings for our Original Stories games.

Product Sales

Our product sales increased $0.8 million as a result of higher in-game purchases of $1.9 million compared to the prior-year period, partially offset by lower sales of games of $1.1 million as we continue to shift toward free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games that require a one-time purchase.

Advertising and Other

Our advertising and other revenues increased $0.6 million as compared to the prior-year period primarily as a result of offering more in-game advertising within our free-to-play and other mobile games.

Cost of revenue increased $0.7 million in the quarter ended September 30, 2019 when compared with the prior-year period due to higher app store fees of $0.4 million and publisher license and service royalties of $0.3 million.

Operating expenses decreased $0.3 million in the quarter ended September 30, 2019 when compared with the prior-year period, due to lower professional services fees of $0.5 million and salaries and benefits of $0.3 million, partially offset by higher marketing expenses of $0.5 million.

Total Games revenue increased $2.8 million for the nine months ended September 30, 2019 as compared with the year-earlier period due primarily to increases of $1.2 million in advertising and other revenues, $1.0 million in our subscription services revenues and $0.6 million in product sales revenues, described more fully below.

Subscription Services

Our subscription sales increased $1.0 million as a result of new subscription offerings for our Original Stories games.

Product Sales

Our product sales increased $0.6 million as a result of higher in-game purchases of $3.3 million compared to the prior-year period, partially offset by lower sales of games revenue of $2.7 million as we continue to shift toward free-to-play games that offer in-game purchases of virtual goods and away from premium mobile games that require a one-time purchase.

Advertising and Other

Our advertising and other revenues increased $1.2 million as compared to the prior-year period primarily as a result of offering more in-game advertising within our free-to-play and other mobile games.

Cost of revenue increased $0.8 million in the nine months ended September 30, 2019 when compared with the prior-year period due to higher app store fees of $0.9 million, partially offset by lower publisher license and service royalties.

30

Operating expenses were flat in the nine months ended September 30, 2019 when compared with the prior-year period, primarily due to higher marketing fees of $0.9 million offset by lower salaries, benefits, professional services fees and infrastructure expenses.

Napster

Napster segment results of operations were as follows (in thousands):

	Quarter Ended September 30,									Nine Months Ended September 30,
	2019			2018			$ Change			2019			2018			$ Change
Revenue	$	27,302		$	—		$	27,302		$	80,222		$	—		$	80,222
Cost of revenue	21,986			—			21,986			65,408			—			65,408
Gross profit	5,316			—			5,316			14,814			—			14,814
Gross margin	19		%	—		%				18		%	—		%
Operating expenses	6,472			—			6,472			18,642			—			18,642
Operating loss	$	(1,156	)	$	—		$	(1,156	)	$	(3,828	)	$	—		$	(3,828	)

As described in Note 5Acquisitions, we acquired control and began consolidating Napster effective January 18, 2019. Our consolidated results include Napster from the acquisition date forward.

Napster's revenues relate to subscription services and include $14.2 million of direct to consumer revenues and $13.1 million of revenues resulting from services sold through distribution partners in the quarter ended September 30, 2019.

Cost of revenues primarily consist of content royalties related to music label and publishing rights for the domestic and international music streaming services. These costs can vary materially from period to period due to the significant judgments, assumptions, and estimates of the amounts to be paid. Napster's cost of revenues for the quarter ended September 30, 2019 included $0.4 million of amortization expense related to intangible assets acquired.

Operating expenses primarily include salaries, benefits, and professional services fees. In the quarter ended September 30, 2019, Napster's operating expenses included $0.7 million of amortization expense related to intangible assets acquired.

For the nine months ended September 30, 2019 Napster's revenues included $41.2 million in direct to consumer revenues and $39.0 million of revenues resulting from services sold through distribution partners. Napster's direct to consumer revenues in the nine months ended September 30, 2019 were reduced by $0.8 million of unfavorable impact from the fair value measurement of Napster deferred revenue upon acquisition.

Napster's cost of revenues for the nine months ended September 30, 2019 included $1.1 million of amortization expense related to intangible assets acquired.

In the nine months ended September 30, 2019, Napster's operating expenses included $2.1 million of amortization expense related to intangible assets acquired and $0.2 million of acquisition-related costs.

Corporate

Corporate results of operations were as follows (in thousands):

	Quarter Ended September 30,											Nine Months Ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Cost of revenue	$	(68	)	$	4		$	(72	)	NM		$	(212	)	$	21		$	(233	)	NM
Operating expenses	3,522			2,548			974			38	%	11,895			8,244			3,651			44	%
Operating loss	$	(3,454	)	$	(2,552	)	$	(902	)	(35	)%	$	(11,683	)	$	(8,265	)	$	(3,418	)	(41	)%

Operating expenses increased by $1.0 million in the quarter ended September 30, 2019 compared with the year-earlier period. The increase was primarily from $0.6 million of higher salaries, benefits and professional service fees in the third quarter of 2019 and $0.1 million of costs associated with our acquisition of Napster. Note there are no other costs within Corporate related to our Napster segment. In addition, as described in more detail in Note 6 Fair Value Measurements, in the third quarter of 2019, we recorded the change in fair value of the Napster contingent consideration liability of $0.4 million as an expense.

Operating expenses increased by $3.7 million in the nine months ended September 30, 2019 compared with the year-earlier period, primarily due to professional fees driven by $1.1 million of costs associated with our acquisition of Napster and higher salaries and benefits of $1.0 million. The overall increase was also impacted by $0.7 million related to the Napster

31

contingent consideration liability described above and $0.3 million of higher restructuring costs in the first nine months of 2019. Included in the results for the nine months ended September 30, 2018 was a benefit of $0.5 million in lease exit and related charges following the renegotiation of certain leases.

Consolidated Operating Expenses

Our operating expenses consist primarily of salaries and related personnel costs including stock-based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, restructuring charges, and lease exit costs. Operating expenses were as follows (in thousands):

	Quarter Ended September 30,								Nine Months Ended September 30,
	2019		2018		$ Change		% Change		2019		2018			$ Change		% Change
Research and development	$	8,687	$	8,052	$	635	8	%	$	26,396	$	23,398		$	2,998	13	%
Sales and marketing	8,470		4,998		3,472		69	%	24,972		15,878			9,094		57	%
General and administrative	7,132		4,586		2,546		56	%	23,888		15,526			8,362		54	%
Restructuring and other charges	691		632		59		9	%	1,587		1,320			267		20	%
Lease exit and related charges	—		—		—		NM		—		(454		)	454		(100	)%
Total consolidated operating expenses	$	24,980	$	18,268	$	6,712	37	%	$	76,843	$	55,668		$	21,175	38	%

Research and development expenses increased by $0.6 million in the quarter ended September 30, 2019 as compared with the year-earlier period, primarily due to the acquisition of Napster on January 18, 2019, and the resulting consolidation of their results from the acquisition date forward. Napster's research and development expenses for the third quarter of 2019 totaled $1.8 million. This increase was offset by a decrease in salaries, benefits, professional services fees and infrastructure expenses of $1.2 million related to our other segments.

Research and development expenses increased by $3.0 million in the nine months ended September 30, 2019 as compared with the year-earlier period, primarily due to the acquisition of Napster as discussed above. Napster's research and development expenses for the nine months ended September 30, 2019 totaled $5.0 million. This increase was offset by a decrease in salaries, benefits, and professional services of $2.0 million related to our other segments.

Sales and marketing expenses increased $3.5 million in the quarter ended September 30, 2019 as compared with the year-earlier period, primarily due to the acquisition of Napster as discussed above. Napster's sales and marketing expenses for the third quarter of 2019 totaled $2.8 million. The overall increase in sales and marketing expenses was also impacted by $0.4 million increase in salaries and benefits and $0.3 million in marketing expenses due to increased efforts towards our growth initiatives.

Sales and marketing expenses increased $9.1 million in the nine months ended September 30, 2019 as compared with the year-earlier period, primarily due to the acquisition of Napster as discussed above. Napster's sales and marketing expenses for the nine months ended September 30, 2019 totaled $7.5 million. The overall increase in sales and marketing expenses was also impacted by $0.9 million increase in salaries and benefits and $0.7 million in marketing expenses due to increased efforts towards our growth initiatives.

General and administrative expenses increased by $2.5 million in the quarter ended September 30, 2019 as compared with the year-earlier period. The increase was primarily due to the acquisition of Napster as discussed above. Napster's general and administrative expenses for the third quarter of 2019 totaled $1.9 million. We also incurred expenses of $0.1 million in the third quarter of 2019 for costs associated with our acquisition of Napster. In addition, as described in more detail in Note 6 Fair Value Measurements, in the third quarter of 2019 we recorded the change in fair value of the Napster contingent consideration liability of $0.4 million as an expense.

General and administrative expenses increased by $8.4 million in the nine months ended September 30, 2019 as compared with the year-earlier period. The increase was primarily due to the acquisition of Napster as discussed above. Napster's general and administrative expenses for the first nine months of 2019 totaled $6.3 million. We also incurred expenses of $1.1 million in the first nine months of 2019 for costs associated with our acquisition of Napster and recorded the change in fair value of the Napster contingent consideration liability of $0.7 million as an expense.

Restructuring and other charges consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts. For additional details on these charges, see Note 11Restructuring Charges.

32

Other Income (Expense)

Other income (expense), net was as follows (in thousands):

	Quarter Ended September 30,									Nine Months Ended September 30,
	2019			2018			$ Change			2019			2018			$ Change
Interest expense	$	(220	)	$	—		$	(220	)	$	(429	)	$	—		$	(429	)
Interest income	—			72			(72		)	117			270			(153		)
Gain (loss) on equity investment, net	—			—			—			12,338			—			12,338
Equity in net loss of Napster	—			(737		)	737			—			(737		)	737
Other income (expense), net	541			(112		)	653			851			(195		)	1,046
Total other income (expense), net	$	321		$	(777	)	$	1,098		$	12,877		$	(662	)	$	13,539

Interest expense relates to RealNetworks and Napster's notes payable and long-term debt, described in detail in Note 10Notes Payable and Long-term debt.

Total other income (expense), net, for the nine months ended September 30, 2019 includes $12.3 million related to RealNetworks' gain on consolidation of Napster, as described in more detail in Note 5Acquisitions.

Income Taxes

We recognized income tax expense of $0.3 million during the quarters endedSeptember 30, 2019 and 2018, respectively, related to U.S. and foreign income taxes. During the nine months ended September 30, 2019 and 2018, we recognized income tax expense of $0.8 million and $0.7 million, respectively, related to U.S. and foreign income taxes.

As of September 30, 2019, RealNetworks has $4.5 million in uncertain tax positions, of which $4.1 million of unrecognized tax positions was recorded through purchase accounting on January 18, 2019 as a result of the acquisition of Napster. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.

The majority of our tax expense is due to income in our foreign jurisdictions and we have not benefitted from losses in the U.S. and certain foreign jurisdictions in the third quarter of 2019. We generate income in a number of foreign jurisdictions, some of which have higher or lower tax rates relative to the U.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is less than anticipated in countries with lower statutory tax rates and more than anticipated in countries with higher statutory tax rates. For the quarter ended September 30, 2019, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate was offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to the U.S. federal statutory rate. The effect of differences in foreign tax rates on the Company's tax expense for the third quarter of 2019 was minimal.

We file numerous consolidated and separate income tax returns in the U.S., including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject to United States federal income tax examinations for tax years prior to 2013 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

New Accounting Pronouncements

See Note 2Recent Accounting Pronouncements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q.

Liquidity and Capital Resources

The following summarizes working capital, cash, cash equivalents, short-term investments, and restricted cash (in thousands):

	September 30, 2019			December 31, 2018
Working capital	$	(41,025	)	$	33,481
Cash, cash equivalents, and short-term investments	18,101			35,585
Restricted cash equivalents	5,374			1,630

33

The 2019 decrease in working capital from December 31, 2018 was due primarily to the consolidation of Napster, which has a negative working capital position, due in part to its accrued music royalties, which totaled $68.7 million at September 30, 2019.

Cash and cash equivalents, and short-term investments decreased from December 31, 2018 due to our ongoing negative cash flow from operating activities, which totaled $20.3 million in the first nine months of 2019, Napster's net repayment of debt of $8.3 million, and amounts required to be restricted, as discussed below. These decreases were partially offset by proceeds from borrowing on our revolving credit facility of $3.9 million and our January 2019 acquisition of Napster, which added $9.9 million of net cash and cash equivalents. In the near term, we expect to see continued net negative cash flow from operating activities.

The increase in restricted cash equivalents is due to the restricted amounts required by the Loan Agreement we entered into in August 2019. See Note 6Fair Value Measurements for additional details.

The following summarizes cash flow activity (in thousands):

	Nine Months Ended September 30,
	2019			2018
Cash used in operating activities	$	(20,297	)	$	(15,628	)
Cash provided by investing activities	11,216			2,717
Cash used in financing activities	(4,245		)	(129		)

Cash used in operating activities consisted of net income (loss) including noncontrolling interests adjusted for certain non-cash items such as depreciation and amortization, stock-based compensation, gain on equity investment, fair value adjustments to contingent consideration liability and the effect of changes in certain operating assets and liabilities.

Cash used in operating activities was $4.7 million higher in the nine months ended September 30, 2019 as compared to the same period in 2018. Cash used in operations was higher due to our higher operating loss recorded for the nine months ended September 30, 2019 compared to the prior year period, partially offset by the net change in operating assets and liabilities.

For the nine months ended September 30, 2019, cash provided by investing activities of $11.2 million was primarily due to our acquisition of Napster on January 18, 2019. Our initial cash consideration paid at closing of $0.2 million was offset by the cash, cash equivalents and restricted cash on Napster's balance sheet at that date. As fully described below, we are obligated to make further cash payments relating to the acquisition. The increase was offset in part by fixed asset purchases of $1.1 million.

For the nine months ended September 30, 2018, cash provided by investing activities of $2.7 million was due to sales and maturities of short-term investments, which totaled $7.6 million. The maturities were offset by our purchase of a Netherlands-based game development studio in the second quarter of 2018 for net cash consideration of $4.2 million and by fixed asset purchases of $0.7 million.

Cash used by financing activities for the nine months ended September 30, 2019 was $4.2 million. This cash outflow was primarily due to Napster's net repayment of debt of $8.3 million, partially offset by proceeds from borrowing on our revolving credit facility of $3.9 million. See Note 10Notes Payable and Long-term debt for additional details.

Cash used in financing activities for the nine months ended September 30, 2018 was $0.1 million. This cash outflow was due to tax payments on shares withheld upon vesting of restricted stock, net of proceeds received from the employee stock purchase plan.

Three customers accounted for more than 10% of trade accounts receivable as of September 30, 2019, with the customers accounting for 20%, 13% and 11% each. Three customers individually comprised more than 10% of trade accounts receivable at December 31, 2018, with the customers accounting for 23%, 11% and 10% each. One customer in our Napster segment accounted for 14% of consolidated revenue, or $18.1 million, during the nine months ended September 30, 2019. No individual customer accounted for 10% or more of our consolidated revenue during the nine months ended September 30, 2018.

While we currently have no planned significant capital expenditures for the remainder of 2019 other than those in the ordinary course of business, we do have contractual commitments for future payments related to office leases. See Note 14Leases for additional details.

As discussed in Note 5Acquisitions, we acquired a controlling interest in Napster on January 18, 2019. We paid initial cash consideration of $0.2 million in the first quarter of 2019 and have accrued $0.8 million as a current liability as of September 30, 2019. We also have recognized a liability for the estimated fair value of the contingent consideration. As discussed in Note 5Acquisitions, this fair value amount was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to arrive at an estimated fair value. This fair

34

value calculation is directly impacted by the total estimated enterprise value of Napster. After the completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, the contingent consideration will be adjusted quarterly to fair value through earnings. As of September 30, 2019, the estimated fair value of the contingent consideration was $12.3 million, with $2.7 million recognized as a current liability and $9.6 million as a long-term liability. Any future amounts RealNetworks pays for contingent consideration could vary materially from the estimated amounts we have accrued as of September 30, 2019.

In August 2019, RealNetworks and Napster entered into the Loan Agreement with a third-party financial institution. Under the terms of the Agreement, which are further described in Note 10Notes Payable and Long-term debt, the bank extended a two-year revolving line of credit not to exceed $10.0 million in the aggregate. Advances on the revolving line of credit will be used for working capital and general corporate purposes.

In the near term, we expect to see continued net negative cash flow from operating activities. As a result of entering into the Loan Agreement, we believe that RealNetworks' current unrestricted cash and cash equivalents, including availability on our revolving line of credit, will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Notwithstanding this availability of cash and access to additional funding, management has considered and will continue to evaluate implementation of a variety of cash conservation measures. For Napster to meet its future liquidity needs, it will need additional financing to fund its operations and growth. RealNetworks has no contractual or implied legal obligation to provide funding or other financial support to Napster, and any funding to Napster under the Loan Agreement must be effectuated by RealNetworks.

In the future, we may seek to raise additional funds through public or private equity financing or through other sources. Such sources of funding may or may not be available to us at commercially reasonable terms. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.

Our cash equivalents consist of money market funds.

We conduct our operations primarily in three functional currencies: the U.S. dollar, the euro and the Chinese yuan. We currently do not actively hedge our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Our exposure to foreign exchange rate fluctuations also arises from intercompany payables and receivables to and from our foreign subsidiaries.

As of September 30, 2019, $10.5 million of the $18.1 million of cash and cash equivalents was held by our foreign subsidiaries.

Off-Balance Sheet Arrangements

We do not maintain accruals associated with certain guarantees, as discussed in Note 16Guarantees, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q, thus these guarantee obligations constitute off-balance sheet arrangements.

As disclosed in Note 14Leases, we adopted the new accounting requirement for leases on January 1, 2019 and thus our operating lease obligations are now recorded on our consolidated balance sheet, rather than disclosed as off-balance sheet items.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting policies and estimates are as follows:

• Revenue recognition;

• Music Royalties;

• Valuation of definite-lived assets and goodwill; and

• Accounting for income taxes.

Revenue Recognition. We recognize revenue from contracts with customers as control of the promised good or service is transferred. Please refer to Note 3Revenue Recognition in both this 10-Q and our 2018 10-K for further details regarding our recognition policies.

Music Royalties. In certain circumstances, Napster estimates the amounts of royalties payable to record labels, music publishers, or other rights-holders in relation to Napster’s use of music content on its music services (both domestic and international). Material differences in these estimates and the actual amounts ultimately determined to be payable may impact the amount and timing of expense in future periods. Napster’s license agreements with rights-holders for the content used on its music service are often complex, and the determination of royalty accruals can involve significant judgments, assumptions, and

35

estimates of the amounts to be paid. The variables involved in determining royalty payments or accruals may include the applicable revenue, the type of content used, the country it is used in, the number of plays, the number of subscribers, the rights granted to trial or promotional users, and identification of the appropriate license holder, among other variables. In addition, some rights-holders have allowed the use of their content prior to finalizing the applicable license agreement. In these circumstances, royalties are accrued based on our best estimate of the expected amount.

In certain jurisdictions, rights-holders may have several years to claim royalties for musical compositions, in respect of which ownership has not already been claimed. While Napster bases its estimates on contractual rates, historical experience and on various other assumptions that management believes to be reasonable, actual results may differ materially from these estimates under different assumptions or conditions.

Many of our content license agreements give the rights-holders the right to audit our royalty payments. Given the complexity of the licensing arrangements, any such audit could result in disputes over whether Napster has correctly reported and paid the proper royalties. If such a dispute were to occur, we could be required to pay additional royalties, and the amounts involved could be material.

Napster may occasionally be involved in legal actions or other third-party assertions related to use of content on our platform. These actions might be costly and could adversely impact our financial position, results of operations, or cash flows. Napster records a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated. Determining whether a loss is probable and estimable requires management to use significant judgment. Given the uncertainties associated with any litigation, the actual outcome can be different than our estimates and could adversely affect our results of operations, financial position, and cash flows.

Valuation of Definite-Lived Assets and Goodwill. Assets acquired and liabilities assumed in a business acquisition are measured at fair value under the purchase accounting method and any goodwill is recognized as the excess of the total purchase price over the fair value of assets acquired and liabilities assumed. The fair value estimates are based upon estimates and assumptions relating to future revenues, cash flows, operating expenses and costs of capital. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of long-term operating plans and risk-commensurate discount rates and cost of capital. In addition, the size, scope, and complexity of an acquisition will affect the time it takes to obtain the necessary information to record the acquired assets and liabilities at fair value. It may take up to one year to finalize the initial fair value estimates used in the preliminary purchase accounting. Accordingly, it is reasonably likely that our initial estimates will be subsequently revised, which could affect carrying amounts of goodwill, intangibles, noncontrolling interests, contingent consideration, and potentially other assets and liabilities in our financial statements.

Our definite-lived assets consist primarily of amortizable intangible assets acquired in business combinations, property, plant and equipment, and right-of-use operating lease assets. Definite-lived assets are amortized on a straight line basis over their estimated useful lives. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate. If definite-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value.

We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. As part of this test, we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates it is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value.

The impairment analysis of definite-lived assets and goodwill is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the cash flows of our long-term operating plans, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our definite-lived and goodwill assets could result in the need to perform an impairment analysis in future periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimate of future cash flows and related fair values of these assets and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations. For further discussion, please see the risk

36

factor entitled, "Any impairment to our goodwill and definite-lived assets could result in a significant charge to our earnings" under Item 1A Risk Factors.

Accounting for Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred income tax expense and deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled. We must make assumptions, judgments and estimates to determine the current and deferred provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Each reporting period, we must periodically assess the likelihood that our deferred tax assets will be recovered from future sources of taxable income, and to the extent that recovery is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance result in either increases to income tax expense or reduction of income tax benefit in the statement of operations and comprehensive income. In certain instances, changes in the valuation allowance may be allocated directly to the related components of shareholders' equity on the consolidated balance sheet. Factors we consider in making such an assessment include, but are not limited to, past performance and our expectation of future taxable income, macroeconomic conditions and issues facing our industry, existing contracts, our ability to project future results and any appreciation of our investments and other assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk involves forward-looking statements. All statements that do not relate to matters of historical fact should be considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements.

Interest Rate Risk. Our exposure to interest rate risk from changes in market interest rates relates primarily to RealNetworks and Napster's notes payable and long-term debt. RealNetworks and Napster's borrowing arrangements have floating rate interest payments and thus have a degree of interest rate risk, if interest rates increase. Based on the outstanding notes payable and long-term debt as of September 30, 2019, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest expense or cash flows by more than a nominal amount.

Foreign Currency Risk. We conduct business internationally in several currencies and thus are exposed to adverse movements in foreign currency exchange rates.

Our exposure to foreign exchange rate fluctuations arise in part from: (1) translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2) the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3) non-U.S. dollar denominated sales to foreign customers.

Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements.

We have cash balances denominated in foreign currencies which are subject to foreign currency fluctuation risk. The majority of our foreign currency denominated cash is held in euro, Chinese yuan and Japanese yen. A hypothetical 10% increase or decrease in those currencies relative to the U.S. dollar as of September 30, 2019 would not result in a material impact on our financial position, results of operations or cash flows.

37

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

As disclosed in Note 5Acquisitions, on January 18, 2019, RealNetworks acquired an additional 42% interest in Napster from its former joint venture partner resulting in RealNetworks having a controlling interest, owning 84% of Napster's outstanding equity. Napster is included in RealNetworks' condensed consolidated financial statements from the date of acquisition to September 30, 2019. As of September 30, 2019, our management has not fully assessed Napster's internal controls over financial reporting and will be testing Napster's internal controls for design and operating effectiveness throughout 2019. The Securities and Exchange Commission permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and our management has elected to exclude Napster from our assessment. Napster accounted for approximately 69% of total assets as of September 30, 2019 and approximately 62% of total revenues of the Company for the nine months ended September 30, 2019. We have performed additional analysis and procedures to enable management to conclude that we believe the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.

Except for the change related to Napster, there have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

38

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 15Commitments and Contingencies, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q.

Item 1A. Risk Factors

You should carefully consider the risks described below together with all of the other information included in this Form 10-Q. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results, and the trading price of our common stock, could be materially harmed.

Our growth initiatives could take longer than planned, be unsuccessful, or deplete our cash resources, any of which would have a material adverse effect on the performance of our businesses and financial results, and could cause us to pursue additional debt or other funding sources.

In recent years, we have developed new products and technologies, and funded initiatives, intended to create growth in our businesses, while simultaneously taking steps to reduce costs and increase profitability. These growth initiatives, several of which have been unsuccessful over recent years, have impacted all segments of our organization, requiring us to allocate limited resources among our diverse business units.

Given the ambitious and significant nature of our growth initiatives, there is substantial risk that we may be unsuccessful in implementing our plans in a timely manner, our cash reserves may be depleted or insufficient to fully implement our plans, our growth initiatives may not gain adequate momentum, or the combination of our growth initiatives and cost reductions may not prove to be profitable. In any such case, our business would suffer, and our operational and financial results would be negatively impacted to a significant degree.

In August 2019, RealNetworks and Napster entered into a loan agreement with a third-party financial institution. Under the terms of that agreement, the bank extended a revolving line of credit not to exceed $10 million in the aggregate. The loan agreement contains customary covenants, including financial covenants, minimum EBITDA levels, and maintaining an unrestricted cash balance of $3.5 million. We have not had a debt facility in place in our recent past, therefore the entry into this facility introduces new risks to the company, including the risk that constraints around covenants may lead to less flexibility in operational decision making, the risk of default and various implications thereof, and the potential increase in liabilities on our balance sheet in the event that we draw down the line of credit.

The inability to obtain additional debt, whether through draws on our current line of credit or through a new debt facility, or the raising of funds through other means, could negatively impact our going concern assessment or our governance structure in the future. The occurrence of these or any of the risks described above would impair our financial results and stock price.

Our 84% equity interest in Napster could result in material negative implications to our financial condition and stock price.

From March 31, 2010, when we completed the restructuring of our digital audio music service joint venture, Rhapsody America LLC, now doing business under the Napster brand, until January 18, 2019, we did not have a majority voting interest in Napster. During that period, we accounted for Napster using the equity method of accounting and disclosed only strategic, business and financial information regarding Napster in our financial statements and disclosures, in accordance with accounting principles generally accepted in the United States, or GAAP. Historically, Napster generated significant accounting losses and, applying the equity method of accounting, we recognized our share of such losses on our investment. As we had no implicit or explicit commitment to provide future financial support to Napster, we did not record any further share of Napster losses that would reduce our carrying value of Napster below zero.

On January 18, 2019, we acquired an additional 42% of the outstanding equity of Rhapsody International, Inc., which we refer to as Napster as noted above, from a third party in a distressed sale resulting in our ownership of an aggregate of 84% of Napster's outstanding stock. See Note 5Acquisitions, for additional information. We also now have the right to nominate directors constituting a majority of the Napster board of directors, however, Napster will continue to operate as an independent business with its own board of directors, strategy, and leadership team. Accordingly, although we have no legal or constructive obligation to fund Napster losses and it is our intention to have Napster continue to operate as an independent company, RealNetworks has in the past extended loans to Napster and may do so in the future.

Due to our majority voting interest and the consolidation of Napster's results and financial position with ours, Napster's current liabilities are included in RealNetworks' consolidated balance sheet, including accrued but unbilled music royalties related to past services, the ultimate payment of which is uncertain. These liabilities, although not a legal or constructive

39

obligation of RealNetworks, result in consolidated working capital being negative, which causes management to consider whether liquidity risks exist. While we believe that these liabilities are separate obligations of Napster and RealNetworks assumes no responsibility for these liabilities, in the remote event that any such liquidity issues become significant or are deemed material to our consolidated financial statements, there could be material negative implications to our financial condition and the trading price of our stock.

As discussed in Note 5Acquisitions, under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. The estimated fair values of the assets and liabilities, as well as the contingent consideration and noncontrolling interests, all involve the application of judgments and estimates, including but not limited to, estimation of expected future cash flows and related discount rates. The purchase price allocation is preliminary and is subject to change prior to finalization, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. The final purchase price allocation could result in material differences, which could have a material impact on our operating results and financial condition.

In addition, now that we are consolidating Napster’s quarterly financial results beginning with our first quarter of 2019, we will need to receive Napster’s quarterly financial statements and related information in order to timely prepare our quarterly and annual consolidated financial statements and disclosures in our quarterly reports on Form 10-Q and annual reports on Form 10-K. Any failure in receiving Napster's financial statements and related information in a timely and materially accurate manner could cause our reports to be filed in an untimely and/or inaccurate manner, which would preclude us from utilizing certain registration statements and could negatively impact our stock price. See Note 5Acquisitions, for further information related to Napster.

We need to successfully monetize our new products and services in order to sustain and grow our businesses, and manage our cash resources.

In order to sustain our current level of business and to implement our growth initiatives, we must successfully monetize our new products and services, including through existing and new relationships with distribution partners. Our digital media products and services must be attractive and useful to distribution partners and end users. The successful acceptance and monetization of these products and services, therefore, is subject to unpredictable and volatile factors beyond our control, including end-user preferences, competing products and services, the rapid pace of change in the market and the effectiveness of our distribution channels. Any failure by us to timely and accurately anticipate consumers’ changing needs and preferences, emerging technological trends and data privacy norms, or changes in the competitive or regulatory landscape for our products and services could result in a failure to monetize our new products or the loss of market opportunities, both of which we have experienced at various times in our past.

Moreover, in order to grow our new businesses, we must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether the products and services that we are developing or have introduced will meet the demands of the relevant market. As we have experienced, we may not realize a sufficient return, or may experience losses, on these investments, thereby further straining our limited cash resources and negatively affecting our ability to pursue other needed growth or strategic opportunities.

Sustaining and growing our businesses, and managing our constrained cash resources, are subject to these risks inherent in developing, distributing and monetizing our new products and services. Our failure to manage these risks could further impair our operations and financial results to a material degree.

Furthermore, our products and services have been in the past and may be in the future subject to legal challenge. Responding to any such claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop distributing or selling, or to redesign our products or services, or to pay damages, any of which could constrain our growth plans and cash resources.

Our businesses, including in connection with our growth initiatives, face substantial competitive challenges that may impair our success, thus negatively impacting our future growth.

Our digital media products and services, including legacy and products/services central to our growth initiatives, face a wide variety of competitors, many of which have longer operating histories, greater name or brand recognition, more employees and significantly greater resources than we do. In addition, current and potential competitors may include relatively new businesses that develop or use innovative technologies, products or features that could disrupt the market for technologies, products or features we currently market or are seeking to develop. In attempting to compete with any or all of these competitors, we may experience, as we have in the past, some or all of the following consequences, any of which would adversely affect our operating results and the trading price of our stock:

• reduced prices or margins;

40

• loss of current and potential customers, or partners and potential partners who distribute our products and services or who provide content that we distribute to our customers;

• changes to our products, services, technologies, licenses or business practices or strategies;

• lengthened sales cycles;

• inability to meet demands for more rapid sales or development cycles;

• industry-wide changes in content distribution to customers or in trends in consumer consumption of digital media products and services;

• pressure to prematurely release products or product enhancements; or

• degradation in our stature or reputation in the market.

Our Consumer Media technologies for media playback and production (RealPlayer, RealMedia VB and RealMedia HD) compete with alternative media playback technologies and audio and video content formats that have obtained broad market penetration. RealMedia VB and RealMedia HD are codecs, technology that enables compression and decompression of the media content in a (usually proprietary) format. We license our codec technology primarily to computer, smartphone and other mobile device manufacturers, and also to other partners that can support our efforts to build a strong ecosystem, like content providers and integrated circuit developers. To compete effectively, codec technologies must appeal to, and be adopted for use by, a wide range of parties: producers and providers of media content, consumers of media content, and device manufacturers who pre-load codec technologies into their devices. Our ability to sustain or grow this business, which has recently experienced some downward pressure, is dependent on the successful promotion and adoption of our codec technologies to a wide and diverse target market, which is a complex and highly uncertain undertaking. If we are unable to compete successfully, our Consumer Media business could continue to decline.

The market for our Mobile Services business is highly competitive and continues to rapidly evolve. Our SaaS services face competition from a proliferation of applications and services, many of which carriers can deploy or offer to their subscribers, or which consumers can acquire independently of their carrier. We expect pricing pressure in this business to continue to materially impact our operating results in this business.

The branded services in our Games business compete with other developers, aggregators and distributors of mobile, online, and downloadable games. Our competitors vary in size and capabilities, some of which have high volume distribution channels and greater financial resources than we do; while others may be smaller and more able to quickly or efficiently adjust to market conditions. We also face significant price competition in the casual games market, and some of our competitors may be able to offer games for free, or reduce prices more aggressively. We expect competition to continue to intensify in this market. Our games development studios compete primarily with other developers of mobile, online, and downloadable games, and must continue to develop popular and high-quality game titles. Our Games business must also continue to execute on opportunities to expand the play of our games on a variety of non-PC platforms, including mobile, in order to maintain our competitive position and to grow the business.

The distribution and license of our technology products and services are governed by contracts with third parties, the terms of which subject us to significant risks that could negatively impact our revenue, expenses and assumption of liability related to such contracts.

In our Consumer Media and Mobile Services segments, we distribute and license most of our technology products and services pursuant to contracts with third parties, such as mobile carriers and their partners, online service providers, and OEMs and device manufacturers, many of whom may have stronger negotiating leverage due to their size and reach. These contracts govern the calculation of revenue generated and expenses incurred, how we recognize revenue and expenses in our financial statements, and the allocation of risk and liabilities arising from the product or service or distribution thereof. Terms impacting revenue, over which we may have limited if any control, may involve revenue sharing arrangements, end user pricing, usage levels, and exclusivity, all of which significantly affect the level of revenue that we may realize from the relationship. Moreover, contract terms around marketing and promotion of our products and other expense allocation could result in us bearing higher expenses or achieving weaker performance than we had anticipated from the relationship.

In addition, although our contracts with third parties are typically for a fixed duration, they could be terminated early; and they may be renegotiated on less favorable terms or may not be renewed at all by the other party. We must, therefore, seek additional contracts with third parties on an ongoing basis to sustain and grow our business. We expect to face continuing and increased competition for the technology products and services we provide, and there is no assurance that the parties with which we currently have contracts will continue or extend current contracts on the same or more favorable terms, or that we will obtain alternative or additional contracts for our technology products and services. As we have recently experienced in our China business, the further loss of existing contracts, the failure to enter new contracts, or the deterioration of terms in our contracts with third parties could materially harm our operating results and financial condition.

Nearly all of our contracts in which we provide to another party services or rights to use our technology include some form of obligation by us to indemnify the other party for certain liabilities and losses incurred by them, including liabilities

41

resulting from third party claims for damages that arise out of the use of our technology. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. We have in the past incurred costs to defend and settle such claims. Claims against which we may be obligated to defend others pursuant to our contracts could in the future result in payments that could materially harm our business and financial results.

Our operating results are difficult to predict and may fluctuate, which may contribute to continued weakness in our stock price.

The trading price for our common stock has a history of volatility although, more recently, has been in decline. As a result of the rapidly changing markets in which we compete, and restructuring, impairment and other one-time events specific to us, our operating results may fluctuate or continue to decline from period to period, which may contribute to further volatility or continued weakness of our stock price. Moreover, the general difficulty in forecasting our operating results and metrics, especially when factoring in our growth initiatives, could result in actual results that differ materially from expected results, again causing further volatility and continued weakness in our stock price.

The difficulty in forecasting our operating results may also cause over or under investment in certain growth initiatives, as such investment is often planned based on expected financial results, thus causing more severe fluctuations in operating results and, likely, further volatility in our stock price.

Any impairment to our goodwill and definite-lived assets could result in a material charge to our earnings.

In accordance with GAAP, we test goodwill for possible impairment on an annual basis or more frequently in the event of certain indications of possible impairment. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s fair value, changes in our operating plans and forecasts, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, a significant sustained decline in our market capitalization and other factors. If we were to determine that an impairment had occurred, we would be required to record an impairment charge, which could have a material negative, and unpredicted, impact on our financial results. We recorded goodwill and definite-lived intangibles upon the acquisition of Napster that totaled $72.2 million on the acquisition date. See Note 5Acquisitions, for further information related to Napster. The total carrying value of our goodwill and definite-lived intangible assets as of September 30, 2019 was $85.5 million.

Continued loss of revenue from our subscription services is likely to continue to harm our operating results.

Our operating results have been and will continue to be adversely impacted by the loss of subscription revenue related to our more traditional products and services. Subscribers cancel their subscriptions to our services for many reasons, including a perception that they do not use the services sufficiently or that the service does not provide enough value, a lack of attractive or exclusive content generally or as compared with competitive service offerings, or because customer service issues are not satisfactorily resolved. Revenue from our SuperPass subscription service, for example, has continued to decline over several periods, due to changes in consumer preferences and changes on our part to focus on other products and services we offer, and we expect this trend to continue.

Government regulation of the Internet, facial recognition technology, and other related technologies is evolving, and unfavorable developments could have an adverse effect on our operating results.

We are subject to regulations and laws specific to the marketing, sale and delivery of goods and services. These laws and regulations, which continue to evolve, cover taxation, user privacy, data collection and protection, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, digital games distribution, broadband Internet access and content restrictions. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, taxation and consumer protection apply or will be enforced with respect to the products and services we sell. Moreover, as Internet commerce continues to evolve, increasing regulation and/or enforcement efforts by federal, state and foreign agencies and the prospects for private litigation claims related to our data collection, privacy policies or other e-commerce practices become more likely. In addition, the adoption of any laws or regulations or the imposition of other legal requirements that adversely affect our ability to market, sell, and deliver our products and services could decrease our ability to offer or customer demand for our service offerings, resulting in lower revenue. For example, the European Union's General Data Protection Regulation (GDPR), effective in May 2018, created a varietyof new compliance obligations, with significant penalties for noncompliance. Moreover, in the U.S., states may impose stricter privacy laws that may impact accepted business practices. We cannot provide assurance that the changes that we have adopted to our business practices will be compliant or that new compliance frameworks such as this will not have a negative impact on our financial results.

42

In addition, through the operation of our SAFR product, we are subject to regulations and laws generally and specifically applicable to the provision of facial recognition technology. New laws and regulations are under discussion and those that exist are untested, thus we cannot guarantee that we have been or will be fully compliant in every jurisdiction.

Future regulations, or changes in laws and regulations or their existing interpretations or applications, could require us to further change our business practices, raise compliance costs or other costs of doing business and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our operating results.

As a consumer-facing business, we receive complaints from our customers regarding our consumer marketing efforts and our customer service practices. Some of these customers may also complain to government agencies, and from time to time, those agencies have made inquiries to us about these practices. In addition, we may receive complaints or inquiries directly from governmental agencies that have not been prompted by consumers. We cannot provide assurance that governmental agencies will not bring future claims, as they have on occasion in the past, regarding our marketing, or consumer services or other practices.

We face financial and operational risks associated with doing business in non-U.S. jurisdictions and operating a global business, that have in the past and could in the future have a material adverse impact on our business, financial condition and results of operations.

A material portion of our revenue is derived from sales outside of the U.S. and most of our employees are located outside of the U.S. Consequently, our business and operations depend significantly on global and national economic conditions and on applicable trade regulations and tariffs. For example, our business in China could be negatively affected by an actual or perceived lack of stability or consistency in U.S.-China trade policy. The growth of our business is also dependent in part on successfully managing our international operations. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:

• periodic local or geographic economic downturns and unstable political conditions;

• price and currency exchange controls;

• fluctuation in the relative values of currencies;

• difficulty in repatriating money, whether as a result of tax laws or otherwise;

• compliance with current and changing tax laws, and the coordination of compliance with U.S. tax laws and the laws of any of the jurisdictions in which we do business;

• difficulties protecting intellectual property;

• compliance with labor laws and other laws governing employees;

• local labor disputes;

• changes in trading policies, regulatory requirements, tariffs and other barriers, or the termination or renegotiation of    existing trade agreements;

• impact of changes in immigration or other policies impacting our ability to attract, hire, and retain key talent; and

• difficulties in managing a global enterprise, including staffing, collecting accounts receivable, and managing suppliers, distributors and representatives.

Because consumers may consider the purchase of our digital entertainment products and services to be a discretionary expenditure, their decision whether to purchase our products and services may be influenced by macroeconomic factors that affect consumer spending such as unemployment, access to credit, negative financial news, and declines in income. In addition, mobile telecommunication carriers and other business partners may reduce their business or advertising spending with us or for our products and services they distribute to users in the face of adverse macroeconomic conditions, such as financial market volatility, government austerity programs, tight credit, and declines in asset values. We have in the past recorded material asset impairment charges due in part to weakness in the global economy, and we may need to record additional impairments to our assets in future periods in the event of renewed weakness and uncertainty in the global or a relevant national economy. Accordingly, any significant weakness in the national and/or global economy could materially impact our business, financial condition and results of operations in a negative manner.

Our international operations involve risks inherent in doing business globally, including difficulties in managing operations due to distance, language, and cultural differences, local economic conditions, different or conflicting laws and regulations, taxes, and exchange rate fluctuations. The functional currency of our foreign subsidiaries is typically the local currency of the country in which each subsidiary operates. We translate our subsidiaries’ revenues into U.S. dollars in our financial statements, and continued volatility in foreign exchange rates, particularly if the U.S. dollar strengthens against the euro, may result in lower reported revenue or net assets in future periods. If we do not effectively manage any of the risks inherent in running our international businesses, our operating results and financial condition could be harmed.

Our business is conducted in accordance with existing international trade relationships, and trade laws and regulations. Changes in geopolitical relationships and laws or policies governing the terms of foreign trade, such as the recent rise in protectionist politics and economic nationalism, could create uncertainty regarding our ability to operate and

43

conduct commercial relationships in affected jurisdictions, which could have a material adverse effect on our business and financial results. Additionally, our global operations may also be adversely affected by political events, domestic or international terrorist events and hostilities or complications due to natural or human-caused disasters. These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.

The loss of key personnel at RealNetworks or our material subsidiaries, or difficulty recruiting and retaining them, could significantly harm our business or jeopardize our ability to meet our growth objectives.

Our success depends substantially on the contributions and abilities of certain key executives and employees, and we cannot provide assurance that we will be able to retain such executives and employees in the future. Executive-level turnover, as we have experienced in the past and could experience in the future, could impact our ability to retain key executives and employees, which could then harm our business and operations to the extent there is customer or employee uncertainty arising from any such transition. These risks also apply to our material subsidiaries, most notably Napster, which has experienced a high level of turnover.

Our success is also substantially dependent upon our ability to identify, attract and retain highly skilled management, technical and sales personnel. Qualified individuals are in high demand and competition for such qualified personnel in our industry, particularly engineering talent, is extremely intense, and we may incur significant costs to attract or retain them. Changes in immigration or other policies in the U.S. or other jurisdictions that make it more difficult to hire and retain key talent, or to assign individuals to any of our locations as needed to meet business needs, could adversely affect our ability to attract key talent or deploy individuals as needed, and thereby adversely affect our business and financial results. There can be no assurance that we will be able to attract and retain the key personnel necessary to sustain our business or support future growth.

Acquisitions and divestitures involve costs and risks that could harm our business and impair our ability to realize potential benefits from these transactions.

As part of our business strategy, we have acquired and sold technologies and businesses in the past and expect that we will continue to do so in the future. Most recently, our January 18, 2019 acquisition of a controlling interest in Napster represents a significant acquisition for RealNetworks. Although Napster will continue to operate independently and its business will not be integrated into our businesses, we still face transaction-related costs and risks related to the acquisition such as the consolidation of Napster's financial results into our financial statements.

The failure to adequately manage transaction costs and address the financial, legal and operational risks raised by acquisitions and divestitures of technology and businesses could harm our business and prevent us from realizing the benefits of these transactions. In addition, we may identify and acquire target companies, but those companies may not be complementary to our current operations and may not leverage our existing infrastructure or operational experience, which may increase the risks associated with completing acquisitions.

Transaction-related costs and financial risks related to completed and potential future purchase or sale transactions may harm our financial position, reported operating results, or stock price. Previous acquisitions have resulted in significant expenses, including amortization of purchased technology, amortization of acquired identifiable intangible assets and the incurrence of charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a material negative impact on our future operating results. In compliance with GAAP, we evaluate these assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that our goodwill or definite-lived assets may not be recoverable, include reduced future revenue and cash flow estimates due to changes in our forecasts, and unfavorable changes to valuation multiples and discount rates due to changes in the market. If we were to conclude that any of these assets were impaired, we would have to recognize an impairment charge that could materially impact our financial results.

Purchase and sale transactions also involve operational risks that could harm our existing operations or prevent realization of anticipated benefits from a transaction. These operational risks include:

• difficulties and expenses in assimilating the operations, products, technology, information systems, and/or personnel of the acquired company;

• retaining key management or employees of the acquired company;

• entrance into unfamiliar markets, industry segments, or types of businesses;

• operating, managing and integrating acquired businesses in remote locations or in countries in which we have little or no prior experience;

• diversion of management time and other resources from existing operations;

• impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired business;

44

• assumption of known and unknown liabilities of the acquired company, including intellectual property claims; and

• potential impacts to our system of internal controls and disclosure controls and procedures.

We may be unable to adequately protect our proprietary rights or leverage our technology assets, and may face risks associated with third-party claims relating to intellectual property rights associated with our products and services.

Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of our technology, including both internally developed technology and technology licensed from third parties. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Our efforts to protect our intellectual property rights may not assure our ownership rights in our intellectual property, protect or enhance the competitive position of our products, services and technology, or effectively prevent misappropriation of our technology.

From time to time we receive claims and inquiries from third parties alleging that our technology used in our business may infringe the third parties’ proprietary rights. These claims, even if not meritorious, could force us to make significant investments of time, attention and money in defense, and give rise to monetary damages, penalties or injunctive relief against us. We may be forced to litigate, to enforce or defend our patents, trademarks or other intellectual property rights, or to determine the validity and scope of other parties' proprietary rights in intellectual property. To resolve or avoid such disputes, we may also be forced to enter into royalty or licensing agreements on unfavorable terms or redesign our product features, services and technology to avoid actual or claimed infringement of misappropriation or technology. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute (such as additional licensing arrangements or redesign efforts) could fail to improve our business prospects or otherwise harm our business or financial results.

Nearly all of our contracts by which we provide to another party services or rights to use our technology include some form of obligation by us to indemnify the other party for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. Also, in 2012 we sold most of our patents, including patents that covered streaming media, to Intel Corporation, in a contract by which we agreed to indemnify Intel Corporation for certain third-party infringement claims against these patents up to the purchase price we received in the sale. Claims against which we may be obligated to defend others pursuant to our contracts expose us to the same risks and adverse consequences described above regarding claims we may receive directly alleging that our trademarks or technology used in our business may infringe a third party's proprietary rights.

Disputes regarding the validity and scope of patents or the ownership of technologies and rights associated with streaming media, digital distribution, and online businesses are common and likely to arise in the future. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities. We are likely to continue to receive claims of third parties against us, alleging contract breaches, infringement of copyrights or patents, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights.

Our business and operating results will suffer and we may be subject to market risk and legal liability if our systems or networks fail, become unavailable, unsecured or perform poorly so that current or potential users do not have adequate access to our products, services and websites.

Our ability to provide our products and services to our customers and operate our business depends on the continued operation and security of our information systems and networks and those of our service providers. A significant or repeated reduction in the performance, security or availability of our information systems and network infrastructure or that of our service providers could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate.

We sell many of our products and services through online sales transactions directly with consumers, and their credit card information is collected and stored by our payment processors. The systems of our third party service providers may not prevent future improper access or disclosure of credit card information or personally identifiable information. We have an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client, third party payment providers, and server products. A security breach that leads to disclosure of consumer account information, or any failure by us to comply with our posted privacy policy or existing or new privacy legislation, could harm our reputation, impact the market for our products and services, or subject us to litigation. We have on occasion experienced system errors and failures that caused interruption in availability of products or content or an increase in response time. Problems with our systems and networks, or the third party systems and networks that we utilize, could result from a failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, intentional actions to disrupt systems and networks and many other causes. Many of our services do not currently have fully redundant systems or a formal disaster recovery plan, and we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage.

45

Changes in regulations applicable to the Internet and e-commerce that increase the taxes on the services we provide could materially harm our business and operating results.

As Internet commerce continues to evolve, increasing taxation by state, local or foreign tax authorities becomes more likely. For example, taxation of electronically delivered products and services or other charges imposed by government agencies may also be imposed. We collect transactional taxes and we believe we are compliant and current in all jurisdictions where we have a collection obligation for transaction taxes. Any regulation imposing greater taxes or other fees for products and services could result in a decline in the sale of products and services and the viability of those products and services, harming our business and operating results. A successful assertion by one or more states or foreign tax authorities that we should collect and remit sales or other taxes on the sale of our products or services could result in substantial liability for past sales.

In those countries where we have a tax obligation, we collect and remit value added tax, or VAT, on sales of “electronically supplied services” provided to European Union residents. The collection and remittance of VAT subjects us to additional currency fluctuation risks.

Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.

We prepare our financial statements in conformity with GAAP. These accounting principles are subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, and the SEC, and new accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. Moreover, our financial statements require the application of judgments and estimates regarding a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, the acquisition method of accounting and its related estimated fair value amounts, stock-based compensation, music publisher and royalty accruals, and intangible asset valuations. Changes in accounting standards or practices, or in our judgments and estimates underlying accounting standards and practices, could harm our operating results and/or financial condition. An example of a new accounting pronouncement is the new lease accounting guidance. As discussed in Note 14 to the accompanying notes to the condensed consolidated financial statements, this new guidance requires us to record lease assets and lease liabilities on the balance sheet, which previously were off-balance sheet obligations subject to disclosure but not recognition. Changes to existing accounting rules or to our judgments and estimates underlying those rules could materially impact our reported operating results and financial condition.

We may be subject to additional income tax assessments and changes in applicable tax regulations could adversely affect our financial results.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, income taxes payable, and net deferred tax assets. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our historical financial statements. An audit or litigation can result in significant additional income taxes payable in the U.S. or foreign jurisdictions which could have a material adverse effect on our financial condition and results of operations.

Our Chairman of the Board and Chief Executive Officer beneficially owns approximately 37% of our stock, which gives him significant control over certain major decisions on which our shareholders may vote or which may discourage an acquisition of us.

Robert Glaser, our Chairman of the Board and Chief Executive Officer, beneficially owns approximately 37% of our common stock. As a result, Mr. Glaser and his affiliates will have significant influence to:

• elect or defeat the election of our directors;

• amend or prevent amendment of our articles of incorporation or bylaws;

• effect or prevent a merger, sale of assets or other corporate transaction; and

• control the outcome of any other matter submitted to the shareholders for vote.

The stock ownership of Mr. Glaser may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of RealNetworks, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.

Provisions of our charter documents, shareholder rights plan, and Washington law could discourage our acquisition by a third party.

Our articles of incorporation provide for a strategic transactions committee of the board of directors. Without the prior approval of this committee, and subject to certain limited exceptions, the board of directors does not have the authority to:

46

• adopt a plan of merger;

• authorize the sale, lease, exchange or mortgage of assets representing more than 50% of the book value of our assets prior to the transaction or on which our long-term business strategy is substantially dependent;

• authorize our voluntary dissolution; or

• take any action that has the effect of any of the above.

Mr. Glaser has special rights under our articles of incorporation to appoint or remove members of the strategic transactions committee at his discretion that could make it more difficult for RealNetworks to be sold or to complete another change of control transaction without Mr. Glaser’s consent. RealNetworks has also entered into an agreement providing Mr. Glaser with certain contractual rights relating to the enforcement of our charter documents and Mr. Glaser’s roles and authority within RealNetworks. These rights and his role as Chairman of the Board of Directors, together with Mr. Glaser’s significant beneficial ownership, create unique potential for concentrated influence of Mr. Glaser over potentially material transactions involving RealNetworks and decisions regarding the future strategy and leadership of RealNetworks.

We have adopted a shareholder rights plan, which was amended and restated in December 2008, amended in April 2016 and February 2018, and again amended and restated in December 2018. The plan provides that shares of our common stock have associated preferred stock purchase rights, the exercise of which would make the acquisition of RealNetworks by a third party more expensive to that party, having the effect of discouraging third parties from acquiring RealNetworks without the approval of our board of directors, which has the power to redeem these rights and prevent their exercise.

Washington law imposes restrictions on some transactions between a corporation and certain significant shareholders. The foregoing provisions of our charter documents, shareholder rights plan, our agreement with Mr. Glaser, and Washington law, as well as our charter provisions that provide for a classified board of directors and the availability of “blank check” preferred stock, could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.

Our January 2019 acquisition of a majority stake in Napster subjects our consolidated financial condition to new risks and uncertainties, including the following:

Napster’s financial results and growth are subject to risks involving revenue concentration, strategic focus, and market competition.

In recent years, Napster’s business has shifted from a predominant reliance on a direct to consumer subscription model to delivering its music streaming content to users through business partners. With this shift in strategy, Napster’s revenue has become concentrated among fewer partners, its sales cycle has become longer and more complex, and its competitive landscape has shifted. All of these factors contribute to risks and uncertainties that could impair the implementation of Napster’s growth strategy thus causing declines in Napster’s revenue and gross margin. Any such declines would negatively impact our consolidated financial results.

As Napster’s direct to consumer subscription base declines due to intense competition in the music streaming market, its growth has become dependent on successful implementation of its platform-as-a-service strategy. Reliance on fewer key partnerships brings risk to Napster’s revenue base, and developing relationships with distribution partners requires a significant investment of time and resources, with partnerships taking longer to execute than anticipated and terms becoming increasingly complex as negotiations continue. The result is a higher degree of risk in Napster’s revenue base, compressed margins, and more uncertainty in its strategy.

Napster’s access to content and dependence on third-party licenses cause substantial risk and uncertainty to its business and could, therefore, harm our financial results.

Napster’s business relies on its ability to access content in a cost-efficient and dependable manner. To secure the rights necessary to stream music to its users, Napster must obtain licenses from record labels, aggregators, artists, publishers, performing rights organizations, collecting societies, and other copyrights owners and their agents. These rights holders, to the extent that Napster is able to identify them, possess different levels of bargaining power, require payment by Napster of varying royalty rates, and may or may not continue to make licenses available to Napster. Uncertainty with regard to, and any significant changes in, royalty rates, content availability, or Napster’s ability to identify and negotiate with these rights holders could have a material adverse effect on Napster’s revenue, profitability, and ability to provide its services. This, in turn, could harm our financial condition and stock price.

Related to Napster’s ability to access the content necessary to provide its streaming services is its dependence on third-party licenses, including the major record labels that hold the rights to stream a significant number of sound recordings. Specifically, three major labels dominate the market, and the loss of access to content controlled by any one of these labels would materially limit Napster’s offering, which would likely result in the loss of users, through both consumer subscriptions

47

and business partnerships. Any such loss could materially impact Napster’s revenue and cause negative implications to our consolidated financial results.

The various complexities involved in Napster’s music royalty accrual could negatively impact our financial results.

As is common in the music streaming industry, Napster’s ability to determine and appropriately accrue music royalty liabilities involves a significant degree of risk and uncertainty. This accrual requires, among other things, identification of rights holders, application of statutory and contractual royalty rates, contractual terms such as advances and minimum guarantees, estimation of market share, user information and geographies, and a significant degree of judgment. Also, in certain jurisdictions, rights holders may have several years to claim royalties for musical compositions, in respect of which ownership has not already been claimed. While Napster bases its estimates on contractual rates, historical experience and on various other assumptions that management believes to be reasonable, actual results may differ materially from these estimates under different assumptions or conditions. The complexity, subjectivity, and variability around Napster’s royalty accrual could result in actual royalty costs exceeding amounts accrued, negatively impacting Napster’s profitability and our financial results.

Also common in the industry are royalty audits, lawsuits filed by rights holders, and other third-party assertions related to use of content on our platform. Napster has been the target of these types of actions in the past and expects to continue to be in the future. These matters create uncertainty, are costly, and can require a significant amount of management’s attention. Moreover, negotiations and disclosures related to these types of matters and disputes can cause damage to key business relationships, which could materially harm Napster’s business and prospects, thus impairing our consolidated financial results.

Underlying the complexity and risk involved in Napster’s ability to determine its music royalty liabilities, is the reliability of its systemsof internal control and disclosure controls and procedures. We cannot provide assurance that these systems are or will continue to be effective. Although a subsidiary of ours, Napster is a privately held company that has not historically been subject to public reporting requirements or the related scrutiny. In the event that Napster’s system of internal controls, particularly relating to its music royalty accrual, is found to be ineffective, it would likely have significant negative implications to Napster’s financial results and, therefore, to our consolidated financial results, and could be implicated in our required testing of internal controls pursuant to the Sarbanes-Oxley Act of 2002.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

(c) Not applicable

Item 3. Default Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

See Index to Exhibits below.

48

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q Report to be signed on its behalf by the undersigned, thereunto duly authorized.

REALNETWORKS, INC.
By:	/s/    Cary Baker
	Cary Baker
Title:	Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

Dated: October 31, 2019

49

INDEX TO EXHIBITS

Exhibit Number	Description
31.1	Certification of Robert Glaser, Chairman and Chief Executive Officer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Cary Baker, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Robert Glaser, Chairman and Chief Executive Officer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Cary Baker, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* Portions of the exhibit have been omitted.

50

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert Glaser, certify that:

1. I have reviewed this report on Form 10-Q of RealNetworks, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	October 31, 2019
/s/ Robert Glaser
Robert Glaser
Title:	Chairman and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Cary Baker, certify that:

1. I have reviewed this report on Form 10-Q of RealNetworks, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	October 31, 2019
/s/ Cary Baker
Cary Baker
Title:	Senior Vice President, Chief Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Robert Glaser, Chairman of the Board of Directors and Chief Executive Officer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.

Date:	October 31, 2019
By:	/s/ Robert Glaser
	Name:	Robert Glaser
	Title:	Chairman and Chief Executive Officer
		(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Cary Baker, Senior Vice President, Chief Financial Officer and Treasurer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.

Date:	October 31, 2019
By:	/s/ Cary Baker
	Name:	Cary Baker
	Title:	Senior Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Restructuring Charges

9 Months Ended

Sep. 30, 2019

Restructuring and Related Activities [Abstract]

Restructuring Charges

Note 11 Restructuring Charges

Restructuring and other charges in 2019 and 2018 consist of costs associated with the ongoing reorganization of our business operations and expense re-alignment efforts, which primarily relate to severance costs due to workforce reductions. Asset related and other costs primarily relate to the termination of certain contracts in the second quarter of 2019 as we continue to shift focus onto free-to-play games that offer in-game purchases of virtual goods and away from the premium mobile games that require a one-time purchase.

Restructuring charges are as follows (in thousands):

	Employee Separation Costs		Asset Related and Other Costs		Total
Costs incurred and charged to expense for the nine months ended September 30, 2019	$	1,050	$	537	$	1,587
Costs incurred and charged to expense for the nine months ended September 30, 2018	$	1,320	$	—	$	1,320

Changes to the accrued restructuring liability (which is included in Accrued royalties, fulfillment and other current liabilities) for 2019 are as follows (in thousands):

	Employee Separation Costs			Asset Related and Other Costs		Total
Accrued liability at December 31, 2018	$	755		$	—	$	755
Costs incurred and charged to expense for the nine months ended September 30, 2019, excluding noncash charges	1,050			174		1,224
Cash payments	(1,292		)	—		(1,292		)
Accrued liability at September 30, 2019	$	513		$	174	$	687

XML

Other Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Other Intangible Assets

Note 7 Other Intangible Assets

Other intangible assets (in thousands):

		September 30, 2019						December 31, 2018
		Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Amortizing intangible assets:
	Customer relationships	$	40,050	$	31,075	$	8,975	$	30,993	$	30,993	$	—
	Developed technology	29,446		24,591		4,855		24,446		24,446		—
	Patents, trademarks and tradenames	10,345		3,866		6,479		3,765		3,765		—
	Service contracts	5,344		5,344		—		5,538		5,512		26
	Total	$	85,185	$	64,876	$	20,309	$	64,742	$	64,716	$	26

Amortization expense related to other intangible assets during the quarters ended September 30, 2019, and September 30, 2018, was $1.1 million and insignificant. Amortization expense related to other intangible assets during the nine months ended September 30, 2019, and September 30, 2018, was $3.2 million and $0.3 million, respectively.

Estimated future amortization of other intangible assets (in thousands):

	Future Amortization
2019 (Excluding the nine months ended September 30, 2019)	$	1,125
2020	4,501
2021	4,501
2022	2,617
2023	1,121
Thereafter	6,444
	$	20,309

See Note 5Acquisitions for details on our acquisitions. No impairments of other intangible assets were recognized in either of the nine months ended September 30, 2019 or 2018.

XML

Revenue Recognition (Additional Information) (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018	Jan. 01, 2018
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Retained deficit	$ (537,646)	$ (524,009)
Accounting Standards Update 2014-09
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Retained deficit			$ 1,000

XML

Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Other Intangible Assets

Other intangible assets (in thousands):

		September 30, 2019						December 31, 2018
		Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Amortizing intangible assets:
	Customer relationships	$	40,050	$	31,075	$	8,975	$	30,993	$	30,993	$	—
	Developed technology	29,446		24,591		4,855		24,446		24,446		—
	Patents, trademarks and tradenames	10,345		3,866		6,479		3,765		3,765		—
	Service contracts	5,344		5,344		—		5,538		5,512		26
	Total	$	85,185	$	64,876	$	20,309	$	64,742	$	64,716	$	26

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Estimated future amortization of other intangible assets (in thousands):

	Future Amortization
2019 (Excluding the nine months ended September 30, 2019)	$	1,125
2020	4,501
2021	4,501
2022	2,617
2023	1,121
Thereafter	6,444
	$	20,309

XML

Earnings (Loss) Per Share (Tables)

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Calculation of Basic and Diluted Earnings Per Share

Basic and diluted EPS (in thousands, except per share amounts):

	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss) attributable to RealNetworks	$	(5,968	)	$	(5,977	)	$	(13,637	)	$	(18,085	)
Weighted average common shares outstanding used to compute basic EPS	38,062			37,618			37,944			37,549
Dilutive effect of stock based awards	—			—			—			—
Weighted average common shares outstanding used to compute diluted EPS	38,062			37,618			37,944			37,549
Basic EPS attributable to RealNetworks	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)
Diluted EPS attributable to RealNetworks	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)

XML

Accrued and Other Current Liabilities (Detail) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Product Warranty Liability [Line Items]
Royalties and other fulfillment costs	$ 70,371	$ 1,989
Employee compensation, commissions and benefits	6,750	4,444
Sales, VAT and other taxes payable	3,423	785
Operating Lease, Liability, Current	4,804	0
Other	7,181	4,094
Total accrued and other liabilities	92,529	$ 11,312
Napster
Product Warranty Liability [Line Items]
Royalties and other fulfillment costs	68,700
Prepaid Royalties	$ 13,500

XML

Other Intangible Assets - Estimated Amortization Expense (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Finite-Lived Intangible Assets [Line Items]
2019 (Excluding the nine months ended September 30, 2019)	$ 1,125
2020	4,501
2021	4,501
2022	2,617
2023	1,121
Thereafter	6,444
Finite-Lived Intangible Assets, Net	$ 20,309	$ 26

XML

Earnings (Loss) Per Share (Calculation of Basic and Diluted Earnings Per Share) (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings Per Share [Abstract]
Net income (loss) attributable to RealNetworks	$ (5,968)		$ (5,968)	$ (5,977)			$ (13,637)	$ (18,085)
Income (Loss) from Continuing Operations before Income Taxes, Noncontrolling Interest	(5,944)			(5,705)			(13,683)	(17,377)
Net income (loss) attributable to RealNetworks								(18,085)
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(6,254)	$ (9,455)	$ 1,214	(5,977)	$ (6,930)	$ (5,178)	(14,495)	(18,085)
Comprehensive Income (Loss), Net of Tax, Attributable to Parent	$ (6,200)			$ (6,302)			$ (14,448)	$ (19,615)
Weighted average common shares outstanding used to compute basic EPS	38,062			37,618			37,944	37,549
Dilutive effect of stock based awards	0			0			0	0
Weighted average common shares outstanding used to compute diluted EPS	38,062			37,618			37,944	37,549
Earnings Per Share, Basic	$ (0.16)			$ (0.16)			$ (0.36)	$ (0.48)
Basic EPS from continuing operations (in dollars per share)							(0.36)	(0.48)
Earnings Per Share, Diluted	$ (0.16)			$ (0.16)			(0.36)	(0.48)
Diluted EPS from continuing operations (in dollars per share)							$ (0.36)	$ (0.48)

XML

Fair Value Measurements (Financial Assets Measured at Fair Value on a Recurring Basis) (Detail) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	$ 23,475	$ 38,080
Amortized Cost	23,475	37,215
Cash and Cash Equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	18,101	35,561
Amortized Cost	18,101	35,561
Cash and Cash Equivalents | Cash
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	16,980	22,853
Amortized Cost	16,980	22,853
Cash and Cash Equivalents | Money market funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	1,121	12,708
Amortized Cost	1,121	12,708
Short-term Investments
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		24
Amortized Cost		24
Short-term Investments | Corporate notes and bonds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		24
Amortized Cost		24
Restricted cash equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	5,374	1,630
Amortized Cost	5,374	1,630
Related Party Transaction | Warrants issued by Rhapsody
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		865
Amortized Cost		0
Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	18,101	35,561
Level 1 | Cash and Cash Equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	18,101	35,561
Level 1 | Cash and Cash Equivalents | Cash
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	16,980	22,853
Level 1 | Cash and Cash Equivalents | Money market funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	1,121	12,708
Level 1 | Short-term Investments
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		0
Level 1 | Short-term Investments | Corporate notes and bonds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		0
Level 1 | Restricted cash equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 1 | Related Party Transaction | Warrants issued by Rhapsody
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		0
Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	5,374	1,654
Level 2 | Cash and Cash Equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 2 | Cash and Cash Equivalents | Cash
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 2 | Cash and Cash Equivalents | Money market funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 2 | Short-term Investments
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		24
Level 2 | Short-term Investments | Corporate notes and bonds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		24
Level 2 | Restricted cash equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	5,374	1,630
Level 2 | Related Party Transaction | Warrants issued by Rhapsody
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		0
Level 3
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	865
Level 3 | Cash and Cash Equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 3 | Cash and Cash Equivalents | Cash
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 3 | Cash and Cash Equivalents | Money market funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 3 | Short-term Investments
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		0
Level 3 | Short-term Investments | Corporate notes and bonds
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		0
Level 3 | Restricted cash equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	0	0
Level 3 | Related Party Transaction | Warrants issued by Rhapsody
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value		$ 865
Napster
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Business Combination, Contingent Consideration, Liability, Current	2,746
Business Combination, Contingent Consideration, Liability, Noncurrent	9,554
Business Combination, Contingent Consideration, Liability	12,300
Napster | Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Business Combination, Contingent Consideration, Liability, Current	0
Business Combination, Contingent Consideration, Liability, Noncurrent	0
Business Combination, Contingent Consideration, Liability	0
Napster | Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Business Combination, Contingent Consideration, Liability, Current	0
Business Combination, Contingent Consideration, Liability, Noncurrent	0
Business Combination, Contingent Consideration, Liability	0
Napster | Level 3
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Business Combination, Contingent Consideration, Liability, Current	2,746
Business Combination, Contingent Consideration, Liability, Noncurrent	9,554
Business Combination, Contingent Consideration, Liability	$ 12,300

XML

Revenue Recognition Contract Balances (Details) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Contract Balances [Abstract]
Long-term accounts receivable	$ 0.3	$ 0.7
Deferred revenue	6.3
Increase in deferred revenue	$ 3.9

XML

Acquisitions - Narrative (Details) - USD ($)			3 Months Ended						9 Months Ended
	Jan. 18, 2019	Apr. 16, 2018	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018	Nov. 30, 2017
Business Acquisition [Line Items]
Business Acquisition, Transaction Costs			$ 100,000						$ 1,300,000
Business Combination, Step Acquisition, Equity Interest in Acquiree, Remeasurement Gain									2,700,000
Business Combination, Step Acquisition, Remeasurement Gain and Gains (Losses) From Other Preexisting Relationships			0			$ 0			12,338,000	$ 0
Goodwill			65,154,000						65,154,000		$ 16,955,000
Revenue			44,993,000			17,579,000			128,713,000	52,953,000
Net Income (Loss) Attributable to Noncontrolling Interest						0				0
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest			$ (6,254,000)	$ (9,455,000)	$ 1,214,000	(5,977,000)	$ (6,930,000)	$ (5,178,000)	$ (14,495,000)	(18,085,000)
Netherlands-Based Game Development Studio
Business Acquisition [Line Items]
Percentage of shares acquired		100.00%
Net purchase price		$ 4,200,000
Rhapsody America LLC
Business Acquisition [Line Items]
Percentage of shares acquired	42.00%
Business Combination, Step Acquisition, Equity Interest in Acquiree, Including Subsequent Acquisition, Percentage	84.00%
Noncontrolling Interest, Ownership Percentage by Noncontrolling Owners			16.00%						16.00%
Business Combination, Step Acquisition, Equity Interest in Acquiree, Remeasurement Gain	$ 2,700,000
Business Combination, Step Acquisition, Initial Cash Consideration	1,000,000
Business Combination, Step Acquisition, Initial Cash Consideration, Amount Paid At Closing	200,000
Business Combination, Step Acquisition, Additional Cash Payment	14,000,000
Business Combination, Step Acquisition, Additional Cash Payment, Maximum Amount	40,000,000
Business Combination, Contingent Consideration Paid	11,600,000
Business Combination, Consideration Transferred, Settlement of Debt and Warrants	6,408,000
Business Combination, Acquisition of Less than 100 Percent, Noncontrolling Interest, Fair Value	570,000
Goodwill	48,474,000
Net purchase price	21,708,000
Rhapsody America LLC | Other Operating Income (Expense)
Business Acquisition [Line Items]
Business Combination, Consideration Transferred, Gain (Loss) on Settlement of Debt and Warrants	5,541,000
Business Acquisition, Release of Preexisting Foreign Currency, Adjustments	1,347,000
Rhapsody America LLC
Business Acquisition [Line Items]
Proceeds from Divestiture of Interest in Consolidated Subsidiaries	15,000,000
Maximum | Rhapsody America LLC
Business Acquisition [Line Items]
Business Combination, Step Acquisition, Additional Cash Payment	25,000,000
Minimum | Rhapsody America LLC
Business Acquisition [Line Items]
Business Combination, Step Acquisition, Additional Cash Payment	15,000,000
Minimum | Rhapsody America LLC
Business Acquisition [Line Items]
Proceeds from Divestiture of Interest in Consolidated Subsidiaries	60,000,000
Accrued Royalties, Fulfillment and Other Liabilities, Current | Rhapsody America LLC
Business Acquisition [Line Items]
Business Combination, Contingent Consideration Paid	2,600,000
Other Noncurrent Liabilities | Rhapsody America LLC
Business Acquisition [Line Items]
Business Combination, Contingent Consideration Paid	$ 9,000,000
Line of Credit
Business Acquisition [Line Items]
Guarantor Obligations, Maximum Exposure, Undiscounted, Gain (loss) on Elimination												$ 2,800,000
Napster
Business Acquisition [Line Items]
Goodwill			$ 48,474,000						$ 48,474,000
Revenue			27,302,000			0			80,222,000	0
Napster | Operating Segments
Business Acquisition [Line Items]
Revenue			27,302,000			$ 0			80,222,000	$ 0
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest			$ (973,000)						$ (4,271,000)

XML

Description of Business and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

Note 1 Description of Business and Summary of Significant Accounting Policies

Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play, and share digital media. The Company also develops and markets software products and services that enable the creation, distribution, and consumption of digital media, including audio and video. Our Napster music business, which we acquired on January 18, 2019, offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. For more information on Napster, see Note 5Acquisitions.

Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services, and the ability to generate related revenue and cash flow.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.

Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company’s financial statements. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2019. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 10-K).

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

XML

Segment Information (Revenue by Geographic Region) (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 44,993	$ 17,579	$ 128,713	$ 52,953
United States
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	22,015	9,026	62,307	28,106
Europe
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	16,425	3,005	48,906	9,040
Rest of the World
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 6,553	$ 5,548	$ 17,500	$ 15,807

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts Receivable, Allowance for Credit Loss, Current	$ 616	$ 560
Preferred stock, par value (USD per share)	$ 0.001	$ 0.001
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (USD per share)	$ 0.001	$ 0.001
Common stock, authorized	250,000,000	250,000,000
Common stock, issued	38,067,000	37,728,000
Common stock, outstanding	38,067,000	37,728,000
Preferred stock, Series A
Preferred stock, authorized	200,000	200,000
Preferred stock, Undesignated series
Preferred stock, authorized	59,800,000	59,800,000

XML

Leases - Narrative (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Lessee, Lease, Description [Line Items]
Future minimum lease payments		$ 15.9
2019		3.7
2020		3.0
2021		2.7
2022		2.4
2023		2.3
Thereafter		$ 1.6
Minimum
Lessee, Lease, Description [Line Items]
Lessee, Operating Lease, Term of Contract	1 year
Maximum
Lessee, Lease, Description [Line Items]
Lessee, Operating Lease, Term of Contract	5 years

XML

Description of Business and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Description of Business

Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play, and share digital media. The Company also develops and markets software products and services that enable the creation, distribution, and consumption of digital media, including audio and video. Our Napster music business, which we acquired on January 18, 2019, offers a comprehensive set of digital music products and services designed to provide consumers with broad access to digital music. For more information on Napster, see Note 5Acquisitions.

Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services, and the ability to generate related revenue and cash flow.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as “RealNetworks”, the “Company”, “we”, “us”, or “our”.

Basis of Presentation

Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a more than 50% voting interest. Noncontrolling interests primarily represent third-party ownership in the equity of Napster and are reflected separately in the Company’s financial statements. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2019. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 10-K).

Use of Estimates

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue

We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less.

Napster revenue arrangements include subscription services to the Napster music streaming service sold either directly to end users (direct to consumer) or through partners (business to business), who are generally telecommunications companies, that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Napster also sells subscriptions to third parties to provide access to the Napster platform that is typically embedded in the third party's branded or co-branded service. Such subscriptions are included in the business to business sales channel.

For services sold through third parties to end customers, we evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”). In our Napster business to business revenue stream, we generally operate as a principal in arrangements with end customers as we maintain control over the service prior to being transferred to the end customer.

Certain business to business customer arrangements include variable consideration based on usage. We estimate variable consideration as part of the total transaction price that is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative standalone selling price basis.

Revenues related to Napster subscription services are recognized ratably over the contract period, typically 30 days. Direct to consumer subscriptions are paid in advance, typically on a monthly basis. Subscription services offered to businesses are invoiced on a monthly basis and the timing of payment generally does not vary significantly from the timing of invoice.

Segments

We manage our business and report revenue and operating income (loss) in four segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products; (2) Mobile Services, which includes our SaaS services and our integrated RealTimes® platform which is sold to mobile carriers; (3) Games, which includes all our games-related businesses, including sales of mobile games, games licenses, in-game virtual goods, subscription services, and advertising on games and social network sites; and (4) Napster, which includes our on-demand music streaming and music services.

RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also include restructuring charges and stock compensation charges. As stated in Note 5Acquisitions, Napster is operating as an independent company and includes all their corporate expenses in their segment results, and RealNetworks does not allocate any expenses to the Napster segment.

RealNetworks reports four reportable segments based on factors such as how we manage our operations and how the Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 15 Commitments and Contingencies

We have been in the past and could become in the future subject to legal proceedings, governmental investigations, and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks, and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements.  

In 2017, we entered into an arrangement whereby we may be required to guarantee up to $2.8 million of Napster's outstanding indebtedness on their revolving credit facility. At that time and as a result of the guaranty, RealNetworks recognized previously suspended Napster losses up to the full $2.8 million guaranty in our consolidated statement of operations and as a Commitment to Napster in our consolidated balance sheets. Given the controlling interest RealNetworks acquired in Napster in the first quarter of 2019, we have eliminated the previously recorded guaranty from RealNetworks' balance sheet in consolidation. RealNetworks has not been required to pay any portion of this commitment, and, as discussed in Note 10Notes Payable and Long-term debt, Napster fully repaid this loan balance on April 30, 2019, thus releasing RealNetworks' previously made guaranty.    

In March 2016, Napster was notified of a putative consumer class action lawsuit relating to an alleged failure to pay so-called “mechanical royalties” on behalf of the plaintiffs and “other similarly-situated holders of mechanical rights in copyrighted musical works.” On April 7, 2017, the plaintiffs and Napster agreed to settlement terms during a mediation session. The long form Settlement Agreement was executed effective on January 16, 2019. The damages payable under the Settlement Agreement will be calculated on a claims made basis, subject to an overall maximum of $10.0 million. We have not recorded an accrual related to this settlement as of September 30, 2019 as the amount payable is not reasonably estimable. In May 2019, public notice was posted about the settlement informing purported class members that they can make claims or object to the settlement. The claims period ends on December 31, 2019, on which date (or shortly thereafter), Napster expects to know the total amount of damages payable in respect to validly made claims. Damages for valid claims are expected to be paid in the second quarter of 2020.

XML

Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Financial Assets Measured at Fair Value on a Recurring Basis

The following tables present information about our financial assets that have been measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):

	Fair Value Measurements as of								Amortized Cost as of
	September 30, 2019								September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	16,980	$	—	$	—	$	16,980	$	16,980
Money market funds	1,121		—		—		1,121		1,121
Total cash and cash equivalents	18,101		—		—		18,101		18,101
Restricted cash equivalents	—		5,374		—		5,374		5,374
Total assets	$	18,101	$	5,374	$	—	$	23,475	$	23,475
Liabilities:
Accrued royalties, fulfillment and other current liabilities
Napster acquisition contingent consideration	$	—	$	—	$	2,746	$	2,746	N/A
Other long-term liabilities
Napster acquisition contingent consideration	—		—		9,554		9,554		N/A
Total liabilities	$	—	$	—	$	12,300	$	12,300	N/A

	Fair Value Measurements as of								Amortized Cost as of
	December 31, 2018								December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	22,853	$	—	$	—	$	22,853	$	22,853
Money market funds	12,708		—		—		12,708		12,708
Total cash and cash equivalents	35,561		—		—		35,561		35,561
Short-term investments:
Corporate notes and bonds	—		24		—		24		24
Total short-term investments	—		24		—		24		24
Restricted cash equivalents	—		1,630		—		1,630		1,630
Warrants issued by Napster (included in Other assets)	—		—		865		865		—
Total assets	$	35,561	$	1,654	$	865	$	38,080	$	37,215

XML

Stock-Based Compensation (Recognized Stock-Based Compensation Expense) (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share-based Payment Arrangement [Abstract]
Total stock-based compensation expense	$ 503	$ 499	$ 2,420	$ 2,113

XML

Acquisitions - Net Assets Acquired (Details) - USD ($) $ in Thousands		9 Months Ended
	Jan. 18, 2019	Sep. 30, 2019	Dec. 31, 2018
Business Acquisition [Line Items]
Business Combination, Step Acquisition, Equity Interest in Acquiree, Remeasurement Gain		$ 2,700
Goodwill		$ 65,154	$ 16,955
Rhapsody America LLC
Business Acquisition [Line Items]
Business Combination, Step Acquisition, Initial Cash Consideration	$ 1,000
Business Combination, Contingent Consideration Paid	11,600
Business Combination, Step Acquisition, Equity Interest in Acquiree, Remeasurement Gain	2,700
Business Combination, Consideration Transferred, Settlement of Debt and Warrants	6,408
Net purchase price	21,708
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Cash and Equivalents	10,138
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Assets, Receivables	20,838
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Assets, Prepaid Expense and Other Assets	12,879
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Restricted Cash	2,322
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Property, Plant, and Equipment	474
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Operating Lease Assets	2,314
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Assets, Other	77
Business Combination Recognized Identifiable Assets Acquired and Liabilities Assumed, Deferred Tax Assets	5,942
Intangible assets acquired	23,700
Goodwill	48,474
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Assets	127,158
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Liabilities, Accounts Payable	937
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Accrued Royalties and Fulfillment	71,980
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Accrued and Other Liabilities, Current	7,475
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Contract with Customer, Liability, Current	3,600
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Notes Payable	12,115
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Deferred Tax Liabilities	6,061
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Operating Lease, Liabilities, Noncurrent	1,197
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Liabilities, Other	1,515
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Liabilities	104,880
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Net	22,278
Business Combination, Acquisition of Less than 100 Percent, Noncontrolling Interest, Fair Value	570
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Less Noncontrolling Interest	$ 21,708

XML

Fair Value Measurements - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Unrestricted Cash and Cash Equivalents, Minimum Amount Required	$ 3,500		$ 3,500
Business Combination, Contingent Consideration Arrangements, Change in Amount of Contingent Consideration, Liability	400		700	$ 0
Financial assets fair value	$ 23,475		$ 23,475		$ 38,080
Expected life	3 years 9 months	3 years 9 months	4 years 1 month	3 years 11 months
Volatility	41.00%	35.00%	41.00%	35.00%
Restricted cash equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Financial assets fair value	$ 5,374		$ 5,374		$ 1,630
Restricted Cash and Investments, Minimum Amount	3,500		3,500
Napster | Restricted cash equivalents
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Restricted Cash and Investments, Minimum Amount	$ 1,500		$ 1,500

XML

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Additional Paid-in Capital	AOCI Attributable to Parent	Retained Earnings	Parent	Noncontrolling Interest
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	$ 79,173	$ 37	$ 638,727	$ (59,547)	$ (500,044)	$ 79,173	$ 0
Shares, Outstanding at Dec. 31, 2017		37,341
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		223
Stock Issued During Period, Value, Stock Options Exercised	(232)		(232)			(232)
Unrealized investment holding gains (losses), net of reclassification adjustments	1			1		1
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	1,157		1,157			1,157
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	396			396		396
Net income (loss) attributable to RealNetworks					(5,178)	(5,178)
Shares, Outstanding at Mar. 31, 2018		37,564
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(5,178)
Shares, Outstanding at Dec. 31, 2017		37,341
Equity in net loss of Napster investment	737
Unrealized investment holding gains (losses), net of reclassification adjustments	0
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(1,530)
Net income (loss) attributable to RealNetworks	(18,085)
Net Income (Loss) Attributable to Noncontrolling Interest	0
Shares, Outstanding at Sep. 30, 2018		37,652
Accumulated other comprehensive loss balance, end of period at Sep. 30, 2018		$ 37	641,449	(61,077)	(517,104)	63,305
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(18,085)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	76,342	$ 37	639,652	(59,150)	(504,197)	76,342	0
Shares, Outstanding at Mar. 31, 2018		37,564
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		48
Stock Issued During Period, Value, Stock Options Exercised	103		103			103
Unrealized investment holding gains (losses), net of reclassification adjustments	2			2		2
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	457		457			457
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(1,604)			(1,604)		(1,604)
Net income (loss) attributable to RealNetworks					(6,930)	(6,930)
Shares, Outstanding at Jun. 30, 2018		37,612
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(6,930)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	68,370	$ 37	640,212	(60,752)	(511,127)	68,370	0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		40
Stock Issued During Period, Value, Stock Options Exercised	1		1			1
Equity in net loss of Napster investment	737		737			737
Unrealized investment holding gains (losses), net of reclassification adjustments	(3)			(3)		(3)
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	499		499			499
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(322)			(322)		(322)
Net income (loss) attributable to RealNetworks	(5,977)				(5,977)	(5,977)
Net Income (Loss) Attributable to Noncontrolling Interest	0
Shares, Outstanding at Sep. 30, 2018		37,652
Accumulated other comprehensive loss balance, end of period at Sep. 30, 2018		$ 37	641,449	(61,077)	(517,104)	63,305
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(5,977)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	63,305						0
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	56,840	$ 37	641,930	(61,118)	(524,009)	56,840	0
Shares, Outstanding at Dec. 31, 2018		37,728
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		190
Stock Issued During Period, Value, Stock Options Exercised	(271)		(271)			(271)
Adjustments to Additional Paid in Capital, Other	(776)		(1,346)			(1,346)	570
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	1,384		1,384			1,384
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(87)			(87)		(87)
Net income (loss) attributable to RealNetworks	(5,968)				1,533	1,533
Net Income (Loss) Attributable to Noncontrolling Interest							(319)
Stockholders' Equity, Other	450		362			362	88
Shares, Outstanding at Mar. 31, 2019		37,918
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	1,214
Shares, Outstanding at Dec. 31, 2018		37,728
Equity in net loss of Napster investment	0
Unrealized investment holding gains (losses), net of reclassification adjustments	0
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(811)
Net income (loss) attributable to RealNetworks	(13,637)
Shares, Outstanding at Sep. 30, 2019		38,067
Accumulated other comprehensive loss balance, end of period at Sep. 30, 2019	44,036
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(14,495)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	58,754	$ 37	642,059	(61,205)	(522,476)	58,415	339
Shares, Outstanding at Mar. 31, 2019		37,918
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		131
Stock Issued During Period, Value, Stock Options Exercised	128		128			128
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	533		533			533
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(492)			(492)		(492)
Net income (loss) attributable to RealNetworks					(9,202)	(9,202)
Net Income (Loss) Attributable to Noncontrolling Interest							(253)
Shares, Outstanding at Jun. 30, 2019		38,049
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(9,455)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	49,468	$ 37	642,720	(61,697)	(531,678)	49,382	86
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		18
Restricted Stock, Value, Shares Issued Net of Tax Withholdings		$ 1
Stock Issued During Period, Value, Stock Options Exercised	(2)		(3)			(2)
Equity in net loss of Napster investment	0
Unrealized investment holding gains (losses), net of reclassification adjustments	0
APIC, Share-based Payment Arrangement, Increase for Cost Recognition	503		503			503
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(232)			(232)		(232)
Net income (loss) attributable to RealNetworks	(5,968)				(5,968)	(5,968)
Net Income (Loss) Attributable to Noncontrolling Interest							(286)
Stockholders' Equity, Other	450		353			353	97
Shares, Outstanding at Sep. 30, 2019		38,067
Accumulated other comprehensive loss balance, end of period at Sep. 30, 2019	44,036
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(6,254)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	$ 43,933	$ 38	$ 643,573	$ (61,929)	$ (537,646)	$ 44,036	$ (103)

XML

Segment Information (Segment Results) (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Segment Reporting Information [Line Items]
Revenue	$ 44,993	$ 17,579	$ 128,713	$ 52,953
Cost of revenue	26,278	4,239	78,430	14,000
Gross profit	18,715	13,340	50,283	38,953
Operating expenses	24,980	18,268	76,843	55,668
Operating loss	(6,265)	(4,928)	(26,560)	(16,715)
Consumer Media
Segment Reporting Information [Line Items]
Revenue	3,632	4,733	8,738	14,100
Mobile Services
Segment Reporting Information [Line Items]
Revenue	6,895	7,348	20,831	22,771
Games
Segment Reporting Information [Line Items]
Revenue	7,164	5,498	18,922	16,082
Napster
Segment Reporting Information [Line Items]
Revenue	27,302	0	80,222	0
Operating Segments | Consumer Media
Segment Reporting Information [Line Items]
Revenue	3,632	4,733	8,738	14,100
Cost of revenue	705	955	2,341	2,976
Gross profit	2,927	3,778	6,397	11,124
Operating expenses	2,692	3,448	8,688	10,805
Operating loss	235	330	(2,291)	319
Operating Segments | Mobile Services
Segment Reporting Information [Line Items]
Revenue	6,895	7,348	20,831	22,771
Cost of revenue	1,721	2,052	5,634	6,502
Gross profit	5,174	5,296	15,197	16,269
Operating expenses	7,143	6,825	22,142	21,160
Operating loss	(1,969)	(1,529)	(6,945)	(4,891)
Operating Segments | Games
Segment Reporting Information [Line Items]
Revenue	7,164	5,498	18,922	16,082
Cost of revenue	1,934	1,228	5,259	4,501
Gross profit	5,230	4,270	13,663	11,581
Operating expenses	5,151	5,447	15,476	15,459
Operating loss	79	(1,177)	(1,813)	(3,878)
Operating Segments | Napster
Segment Reporting Information [Line Items]
Revenue	27,302	0	80,222	0
Cost of revenue	21,986	0	65,408	0
Gross profit	5,316	0	14,814	0
Operating expenses	6,472	0	18,642	0
Operating loss	(1,156)	0	(3,828)	0
Corporate
Segment Reporting Information [Line Items]
Cost of revenue	(68)	4	(212)	21
Operating expenses	3,522	2,548	11,895	8,244
Operating loss	$ (3,454)	$ (2,552)	$ (11,683)	$ (8,265)

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 18,101	$ 35,561
Short-term investments	0	24
Trade accounts receivable, net of allowances of $616 and $560	27,947	11,751
Deferred costs, current portion	950	331
Prepaid expenses and other current assets	18,931	5,911
Total current assets	65,929	53,578
Equipment, software, and leasehold improvements, at cost:
Equipment and software	31,853	37,458
Leasehold improvements	3,255	3,292
Total equipment, software, and leasehold improvements, at cost	35,108	40,750
Less accumulated depreciation and amortization	32,171	37,996
Net equipment, software, and leasehold improvements	2,937	2,754
Operating lease assets	12,499	0
Restricted cash equivalents	5,374	1,630
Other assets	2,842	3,997
Deferred costs, non-current portion	957	528
Deferred tax assets, net	831	851
Other intangible assets, net	20,309	26
Goodwill	65,154	16,955
Total assets	176,832	80,319
Current liabilities:
Accounts payable	4,692	3,910
Accrued royalties, fulfillment and other current liabilities	92,529	11,312
Commitment to Napster	0	2,750
Deferred revenue, current portion	6,134	2,125
Notes payable	3,599	0
Total current liabilities	106,954	20,097
Deferred revenue, non-current portion	139	268
Deferred rent	0	986
Deferred tax liabilities, net	1,225	1,168
Operating Lease, Liability, Noncurrent	9,486	0
Long-term Debt	3,900	0
Other long-term liabilities	11,195	960
Total liabilities	132,899	23,479
Commitments and contingencies
Preferred stock, $0.001 par value, no shares issued and outstanding:
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 38,067 shares in 2019 and 37,728 shares in 2018	38	37
Additional paid-in capital	643,573	641,930
Accumulated other comprehensive loss	(61,929)	(61,118)
Retained deficit	(537,646)	(524,009)
Total shareholders’ equity	44,036	56,840
Stockholders' Equity Attributable to Noncontrolling Interest	(103)	0
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest	43,933	56,840
Total liabilities and equity	176,832	80,319
Preferred stock, Series A
Preferred stock, $0.001 par value, no shares issued and outstanding:
Preferred stock	0	0
Preferred stock, Undesignated series
Preferred stock, $0.001 par value, no shares issued and outstanding:
Preferred stock	$ 0	$ 0

XML

Leases - Schedule of Future Minimum Lease Payments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Leases [Abstract]
2019 (Excluding the nine months ended September 30, 2019)	$ 1,481
2020	4,922
2021	3,266
2022	2,422
2023	2,347
Thereafter	1,634
Total minimum payments(a)	16,072
Less: Imputed interest	1,782
Present value of total minimum payments(b)	14,290	$ 14,601
Executory costs	6,500
Sublease rentals	5,800
Operating lease, liability, noncurrent	9,486		$ 0
Operating lease, liability, current	$ 4,804		$ 0

XML

Acquisitions (Tables)

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of the assets acquired and liabilities assumed as of January 18, 2019 (in thousands):

Consideration, at estimated fair value:
Cash	$	1,000
Contingent consideration	11,600
RealNetworks' preexisting 42% equity interest in Napster	2,700
Effective settlement of Napster debt and warrants, held by RealNetworks	6,408
Total consideration	$	21,708
Assets acquired and liabilities assumed, at estimated fair value:
Cash and cash equivalents	$	10,138
Accounts receivable	20,838
Prepaid expenses and other current assets	12,879
Restricted cash	2,322
Equipment, software and leasehold improvements	474
Operating lease assets	2,314
Other long-term assets	77
Deferred tax assets, net	5,942
Intangible assets	23,700
Goodwill	48,474
Total assets acquired	127,158
Accounts payable	937
Accrued royalties and fulfillment	71,980
Accrued and other current liabilities	7,475
Deferred revenue, current portion	3,600
Notes payable	12,115
Deferred tax liabilities, net	6,061
Long-term lease liabilities	1,197
Other long-term liabilities	1,515
Total liabilities assumed	104,880
Total net assets acquired	22,278
Noncontrolling interests	570
Net assets acquired	$	21,708

Schedule of Finite-Lived Intangible Assets Acquired as Part of Business Combination

Acquired intangible assets have a total weighted average useful life of approximately 8 years, are being amortized using the straight line method, and are comprised of the following (in thousands):

Intangible category	Estimated fair value		Method used to calculate fair value	Estimated remaining useful life
Trade name and trademarks	$	6,800	Relief-from-royalty	15 years
Developed technology	5,900		Excess earnings	4 years
Customer relationships	5,900		Cost-to-replace	3 years
Partner relationships	5,100		Distributor method	8 years
Total	$	23,700

Business Acquisition, Pro Forma Information

The following table provides the supplemental pro forma revenue and net results of the combined entity had the acquisition date of Napster been the first day of our first quarter of 2018 rather than during our first quarter of 2019 (in thousands):

	Quarter Ended - Pro Forma (Unaudited) September 30,						Nine Months Ended - Pro Forma (Unaudited) September 30,
	2019			2018			2019			2018
Net revenue	$	45,074		$	52,888		$	135,267		$	165,033
Net income (loss) attributable to RealNetworks (1)	(5,386		)	(3,748		)	(23,358		)	(1,453		)

⁽¹⁾ The pro forma net earnings attributable to RealNetworks for the quarter ended September 30, 2018 include $0.1 million of transaction costs, and for the nine months ended September 30, 2018, pro forma net earnings attributable to RealNetworks include the acquisition related gain of $12.3 million and $1.3 million of transaction costs.

XML

Related Party Transactions

9 Months Ended

Sep. 30, 2019

Related Party Transactions [Abstract]

Related Party Transactions

Note 18 Related Party Transactions

 As described in Note 5Acquisitions, on January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc., (doing business as Napster), bringing our aggregate ownership interest to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest in Napster. Following this acquisition of a controlling interest, we consolidate Napster's financial results into our financial statements for fiscal periods beginning with our first quarter of 2019. Rhapsody America LLC was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc., to own and operate a business-to-consumer digital audio music service originally branded as Rhapsody. The service has been significantly expanded and was re-branded in 2016 as Napster.

Following certain restructuring transactions effective March 31, 2010, we began accounting for the investment using the equity method of accounting. As part of the 2010 restructuring transactions, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events. Although we now consolidate Napster for reporting purposes, our convertible preferred stock and the related rights remain contractually binding instruments between RealNetworks and Napster.

In December 2016, RealNetworks and the other then-owner of 42% of Napster each entered into an agreement to loan up to $5.0 million to Napster for general operating purposes, which loans were fully funded as of the end of January 2017 for an aggregate of $10.0 million. Included in RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the seller's $5.0 million note, resulting in RealNetworks holding $10.0 million of notes receivable from Napster. The terms of the notes were modified subsequent to the original December 2016 execution, including a provision, effective July 2018, that requires repayment at the greater of (a) principal plus accrued interest at an annual rate of 15% or (b) a preference of three times the principal amount.

In May 2019, RealNetworks extended a short-term loan to Napster in the principal amount of $1.1 million. In August 2019, RealNetworks established a two-year term on this short-term loan and, as discussed in Note 10Notes Payable and Long-term debt, loaned Napster an additional $3.9 million and charged Napster for associated fees. As a result, the principal amount on this two-year note is $5.4 million. Both the two-year note and the $10.0 million loan are subordinate to RealNetworks' and Napster's third party debt.

In each of February 2015 and February 2017, Napster issued warrants to purchase shares of its common stock to each of RealNetworks and the other then-owner of 42% of Napster. The warrants have a 10-year contractual term and were issued as compensation for past services provided by these two significant stockholders of Napster. As part of RealNetworks' January 2019 acquisition of the additional 42% interest in Napster, RealNetworks assumed the warrants held by the seller.

Upon our acquisition of a controlling interest in Napster, the notes and warrants were effectively settled and eliminated in our consolidated financial statements as they represent preexisting relationships between RealNetworks and Napster. However, the notes and warrants remain contractually binding instruments between RealNetworks and Napster.

XML

Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Note 14 Leases

We have commitments for future payments related to office facilities leases. We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease assets, Other current liabilities, and Long-term lease liabilities on our consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Operating lease assets also exclude lease incentives and initial direct costs incurred. Some of our leases include options to extend or terminate the lease. Our leases generally include one or more options to renew; however, the exercise of lease renewal options is at our sole discretion. For nearly all of our operating leases, upon adoption of the new guidance, we have not assumed any options to extend will be exercised as part of our calculation of the lease liability. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have operating leases for office space and data centers with remaining lease terms of 1 year to 5 years.

Details related to lease expense and supplemental cash flow were as follows (in thousands):

	Quarter Ended September 30,			Nine Months Ended September 30,
	2019			2019
Operating lease expense	$	1,396		$	4,199
Variable lease expense	165			676
Sublease income	(511		)	(1,497		)
Net lease expense	$	1,050		$	3,378
Operating cash outflows for lease liabilities	$	1,274		$	4,147

Details related to lease term and discount rate were as follows:

	September 30, 2019
Weighted-average remaining lease term (in years)	4 years
Weighted-average discount rate	5.14	%

Future minimum lease payments as of September 30, 2019 were as follows (in thousands):

	Operating Leases
2019 (Excluding the nine months ended September 30, 2019)	$	1,481
2020	4,922
2021	3,266
2022	2,422
2023	2,347
Thereafter	1,634
Total minimum payments(a)	16,072
Less: Imputed interest	1,782
Present value of total minimum payments(b)	$	14,290

^(a)Total minimum payments exclude executory costs, inclusive of insurance, maintenance, and taxes, of $6.5 million; minimum payments also have not been reduced by sublease rentals of $5.8 million due in the future under noncancelable subleases.

^(b)$9.5 million is included in Long-term lease liabilities and $4.8 million is included in Accrued royalties, fulfillment, and other current liabilities on the condensed consolidated balance sheets.

As of December 31, 2018, future minimum lease payments were $15.9 million in the aggregate, which consisted of the following: $3.7 million in 2019; $3.0 million in 2020; $2.7 million in 2021; $2.4 million in 2022; $2.3 million in 2023; and $1.6 million thereafter.

XML

Notes Payable and long-term debt

9 Months Ended

Sep. 30, 2019

Related Party Transactions [Abstract]

Debt

Note 10 Notes Payable and Long-term debt

In August 2019, RealNetworks and Napster entered into a Loan and Security Agreement (Loan Agreement) with a third-party financial institution. Under the terms of the Loan Agreement, the bank extended a revolving line of credit not to exceed $10 million in the aggregate. Available advances on the revolving line of credit, which will be used for working capital and general corporate purposes, are based on a borrowing base that comprises accounts receivable and direct to consumer deposits. Borrowings under the Loan Agreement are secured by a first priority security interest in the assets of RealNetworks and Napster. Advances bear interest at a rate equal to one-half of one percent point (0.5%) above the greater of the prime rate or 5.5%, with monthly payments of interest only and principal due at the end of the two-year term. The Loan Agreement contains customary covenants, including financial covenants, minimum EBITDA levels, and maintaining a minimum balance of $3.5 million unrestricted cash at the bank. 

As of September 30, 2019, RealNetworks drew down $3.9 million from the revolving line of credit, which was loaned to Napster bearing interest and fees commensurate with our costs. See Note 18Related Party Transactions for additional details.

We paid and capitalized $0.6 million of financing fees to enter into the revolving line of credit, and the financing fees will be amortized over the term of the debt. The current and non-current unamortized fees were $0.3 million and $0.2 million at September 30, 2019, respectively, and are included in Deferred costs, current and non-current on our condensed consolidated balance sheets.

In 2017, Napster entered into a Non-Recourse Purchase of Eligible Receivables Agreement (NRP Agreement) with an international bank (Purchaser) in which Napster will sell and assign on a continuing basis its eligible receivables to the Purchaser in return for 90% of the receivables upfront, up to a maximum amount of $15.0 million in advances. The interest rate is 2.25% above the 1-month-EURIBOR with a minimum 0.0% rate applying to the 1-month-EURIBOR rate. As of September 30, 2019, Napster had $3.6 million borrowings outstanding with an interest rate of 2.25%.

In 2015, Napster entered into a Loan and Security Agreement (Revolver LSA) with a bank. The available borrowing on the Revolver LSA was based upon Napster's accounts receivable and direct to consumer subscription deposits. The Revolver LSA had a maximum available balance of $7.0 million. The Revolver LSA matured and the loan balance was paid in full on April 30, 2019. The Revolver LSA required Napster to maintain a balance of unrestricted cash at the bank of not less than $1.5 million plus 5% of the total amount outstanding under the NRP Agreement. As the loan was paid off on April 30, 2019, this amount is no longer restricted.

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 6 Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following tables present information about our financial assets that have been measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation inputs utilized to determine fair value (in thousands):

	Fair Value Measurements as of								Amortized Cost as of
	September 30, 2019								September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	16,980	$	—	$	—	$	16,980	$	16,980
Money market funds	1,121		—		—		1,121		1,121
Total cash and cash equivalents	18,101		—		—		18,101		18,101
Restricted cash equivalents	—		5,374		—		5,374		5,374
Total assets	$	18,101	$	5,374	$	—	$	23,475	$	23,475
Liabilities:
Accrued royalties, fulfillment and other current liabilities
Napster acquisition contingent consideration	$	—	$	—	$	2,746	$	2,746	N/A
Other long-term liabilities
Napster acquisition contingent consideration	—		—		9,554		9,554		N/A
Total liabilities	$	—	$	—	$	12,300	$	12,300	N/A

	Fair Value Measurements as of								Amortized Cost as of
	December 31, 2018								December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents:
Cash	$	22,853	$	—	$	—	$	22,853	$	22,853
Money market funds	12,708		—		—		12,708		12,708
Total cash and cash equivalents	35,561		—		—		35,561		35,561
Short-term investments:
Corporate notes and bonds	—		24		—		24		24
Total short-term investments	—		24		—		24		24
Restricted cash equivalents	—		1,630		—		1,630		1,630
Warrants issued by Napster (included in Other assets)	—		—		865		865		—
Total assets	$	35,561	$	1,654	$	865	$	38,080	$	37,215

Restricted cash equivalents as of September 30, 2019 and December 31, 2018 relate to cash pledged as collateral against letters of credit in connection with certain lease agreements and, as of September 30, 2019, our recently entered into Loan and Security Agreement ("Loan Agreement") requires us to maintain a minimum balance of $3.5 million unrestricted cash at the bank. See Note 10Notes Payable and Long-term debt for additional details.

Accrued royalties, fulfillment and other current liabilities and Other long-term liabilities as of September 30, 2019 include the estimated fair value of the contingent consideration for the Napster acquisition, which was determined using a fair value measurement categorized within Level 3 of the fair value hierarchy. As discussed in Note 5Acquisitions, after completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, this liability is adjusted quarterly to fair value through earnings. During the quarter and nine months ended September 30, 2019, we recorded the change in fair value of the contingent consideration of $0.4 million and $0.7 million, respectively, as an increase to the total liability on the consolidated balance sheet and as general and administrative expense on the consolidated statement of operations.

Items Measured at Fair Value on a Non-recurring Basis

Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the nine months ended September 30, 2019 and 2018, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.

XML

Goodwill (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Changes in Goodwill

The following table presents changes in goodwill (in thousands):

Balance, December 31, 2018	$	16,955
Increases due to current year acquisitions	48,474
Effects of foreign currency translation	(275		)
Balance, September 30, 2019	$	65,154

Goodwill Assigned by Segments

The following table presents goodwill by segments (in thousands):

	September 30, 2019
Consumer Media	$	580
Mobile Services	1,959
Games	14,141
Napster	48,474
Total goodwill	$	65,154

XML

Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Lease, Cost

Details related to lease expense and supplemental cash flow were as follows (in thousands):

	Quarter Ended September 30,			Nine Months Ended September 30,
	2019			2019
Operating lease expense	$	1,396		$	4,199
Variable lease expense	165			676
Sublease income	(511		)	(1,497		)
Net lease expense	$	1,050		$	3,378
Operating cash outflows for lease liabilities	$	1,274		$	4,147

Lessee, Operating Lease, Disclosure

Details related to lease term and discount rate were as follows:

	September 30, 2019
Weighted-average remaining lease term (in years)	4 years
Weighted-average discount rate	5.14	%

Lessee, Operating Lease, Liability, Maturity

Future minimum lease payments as of September 30, 2019 were as follows (in thousands):

	Operating Leases
2019 (Excluding the nine months ended September 30, 2019)	$	1,481
2020	4,922
2021	3,266
2022	2,422
2023	2,347
Thereafter	1,634
Total minimum payments(a)	16,072
Less: Imputed interest	1,782
Present value of total minimum payments(b)	$	14,290

XML

Revenue Recognition (Disaggregation of Revenue) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Disaggregation of Revenue [Line Items]
Revenue	$ 44,993	$ 17,579	$ 128,713	$ 52,953
Consumer Media
Disaggregation of Revenue [Line Items]
Revenue	3,632	4,733	8,738	14,100
Consumer Media | Business to Business
Disaggregation of Revenue [Line Items]
Revenue	2,398	3,220	4,951	9,438
Consumer Media | Direct to Consumer
Disaggregation of Revenue [Line Items]
Revenue	1,234	1,513	3,787	4,662
Consumer Media | Software License
Disaggregation of Revenue [Line Items]
Revenue	1,987	2,746	3,666	7,891
Consumer Media | Subscription Services
Disaggregation of Revenue [Line Items]
Revenue	1,028	1,232	3,156	3,742
Consumer Media | Product Sales
Disaggregation of Revenue [Line Items]
Revenue	207	281	632	920
Consumer Media | Advertising and Other
Disaggregation of Revenue [Line Items]
Revenue	410	474	1,284	1,547
Mobile Services
Disaggregation of Revenue [Line Items]
Revenue	6,895	7,348	20,831	22,771
Mobile Services | Business to Business
Disaggregation of Revenue [Line Items]
Revenue	6,784	7,209	20,482	22,312
Mobile Services | Direct to Consumer
Disaggregation of Revenue [Line Items]
Revenue	111	139	349	459
Mobile Services | Software License
Disaggregation of Revenue [Line Items]
Revenue	888	520	2,444	2,324
Mobile Services | Subscription Services
Disaggregation of Revenue [Line Items]
Revenue	6,007	6,828	18,387	20,447
Mobile Services | Product Sales
Disaggregation of Revenue [Line Items]
Revenue	0	0	0	0
Mobile Services | Advertising and Other
Disaggregation of Revenue [Line Items]
Revenue	0	0	0	0
Games
Disaggregation of Revenue [Line Items]
Revenue	7,164	5,498	18,922	16,082
Games | Business to Business
Disaggregation of Revenue [Line Items]
Revenue	1,362	806	3,513	2,393
Games | Direct to Consumer
Disaggregation of Revenue [Line Items]
Revenue	5,802	4,692	15,409	13,689
Games | Software License
Disaggregation of Revenue [Line Items]
Revenue	0	0	0	0
Games | Subscription Services
Disaggregation of Revenue [Line Items]
Revenue	3,056	2,744	9,114	8,126
Games | Product Sales
Disaggregation of Revenue [Line Items]
Revenue	3,078	2,280	7,243	6,635
Games | Advertising and Other
Disaggregation of Revenue [Line Items]
Revenue	1,030	474	2,565	1,321
Napster
Disaggregation of Revenue [Line Items]
Revenue	27,302	0	80,222	0
Napster | Business to Business
Disaggregation of Revenue [Line Items]
Revenue	13,084	0	38,983	0
Napster | Direct to Consumer
Disaggregation of Revenue [Line Items]
Revenue	14,218	0	41,239	0
Napster | Software License
Disaggregation of Revenue [Line Items]
Revenue	0	0	0	0
Napster | Subscription Services
Disaggregation of Revenue [Line Items]
Revenue	27,302	0	80,222	0
Napster | Product Sales
Disaggregation of Revenue [Line Items]
Revenue	0	0	0	0
Napster | Advertising and Other
Disaggregation of Revenue [Line Items]
Revenue	$ 0	$ 0	$ 0	$ 0

XML

Income Taxes Income Taxes (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Income Tax Contingency [Line Items]
Unrecognized Tax Benefits	$ 4,500
Napster
Income Tax Contingency [Line Items]
Unrecognized Tax Benefits	$ 4,100

XML

Goodwill (Goodwill by Segments) (Detail) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Goodwill [Line Items]
Goodwill	$ 65,154	$ 16,955
Consumer Media
Goodwill [Line Items]
Goodwill	580
Mobile Services
Goodwill [Line Items]
Goodwill	1,959
Games
Goodwill [Line Items]
Goodwill	14,141
Napster
Goodwill [Line Items]
Goodwill	$ 48,474

XML

Other Intangible Assets (Detail) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Finite-Lived Intangible Assets [Line Items]
Amortization of Intangible Assets	$ 1,100	$ 3,200	$ 300
Finite-Lived Intangible Assets, Net [Abstract]
Gross Amount	85,185	85,185		$ 64,742
Accumulated Amortization	64,876	64,876		64,716
Net	20,309	20,309		26
Customer relationships
Finite-Lived Intangible Assets, Net [Abstract]
Gross Amount	40,050	40,050		30,993
Accumulated Amortization	31,075	31,075		30,993
Net	8,975	8,975		0
Developed technology
Finite-Lived Intangible Assets, Net [Abstract]
Gross Amount	29,446	29,446		24,446
Accumulated Amortization	24,591	24,591		24,446
Net	4,855	4,855		0
Patents, trademarks and tradenames
Finite-Lived Intangible Assets, Net [Abstract]
Gross Amount	10,345	10,345		3,765
Accumulated Amortization	3,866	3,866		3,765
Net	6,479	6,479		0
Service contracts
Finite-Lived Intangible Assets, Net [Abstract]
Gross Amount	5,344	5,344		5,538
Accumulated Amortization	5,344	5,344		5,512
Net	$ 0	$ 0		$ 26

XML

Commitments and Contingencies Commitments and Contingencies (Details) - USD ($) $ in Millions	Sep. 30, 2019	Nov. 30, 2017
Line of Credit
Loss Contingencies [Line Items]
Guarantor Obligations, Maximum Exposure, Undiscounted, Gain (loss) on Elimination		$ 2.8
Guarantor Obligations, Maximum Exposure, Undiscounted		$ 2.8
Napster
Loss Contingencies [Line Items]
Loss Contingency, Estimate of Possible Loss	$ 10.0

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income Statement [Abstract]
Revenue	$ 44,993	$ 17,579	$ 128,713	$ 52,953
Cost of revenue	26,278	4,239	78,430	14,000
Gross profit	18,715	13,340	50,283	38,953
Operating expenses:
Research and development	8,687	8,052	26,396	23,398
Sales and marketing	8,470	4,998	24,972	15,878
General and administrative	7,132	4,586	23,888	15,526
Restructuring and other charges	691	632	1,587	1,320
Lease exit and related benefit	0	0	0	(454)
Total operating expenses	24,980	18,268	76,843	55,668
Operating loss	(6,265)	(4,928)	(26,560)	(16,715)
Other income (expenses):
Interest Expense	(220)	0	(429)	0
Interest income	0	72	117	270
Business Combination, Step Acquisition, Remeasurement Gain and Gains (Losses) From Other Preexisting Relationships	0	0	12,338	0
Equity in net loss of Napster investment	0	(737)	0	(737)
Other income (expenses), net	541	(112)	851	(195)
Total other income (expenses), net	321	(777)	12,877	(662)
Income (loss) before income taxes	(5,944)	(5,705)	(13,683)	(17,377)
Income tax expense	310	272	812	708
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(6,254)	(5,977)	(14,495)	(18,085)
Net Income (Loss) Attributable to Noncontrolling Interest		0		0
Net income (loss) attributable to RealNetworks	$ (5,968)	$ (5,977)	$ (13,637)	$ (18,085)
Basic net income (loss) per share (USD per share)	$ (0.16)	$ (0.16)	$ (0.36)	$ (0.48)
Diluted net income (loss) per share (USD per share)	$ (0.16)	$ (0.16)	$ (0.36)	$ (0.48)
Shares used to compute basic net income (loss) per share	38,062	37,618	37,944	37,549
Shares used to compute diluted net income (loss) per share	38,062	37,618	37,944	37,549
Comprehensive income (loss):
Unrealized investment holding gains (losses), net of reclassification adjustments	$ 0	$ (3)	$ 0	$ 0
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	(232)	(322)	(811)	(1,530)
Total other comprehensive income (loss)	(232)	(325)	(811)	(1,530)
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	(6,254)	(5,977)	(14,495)	(18,085)
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest	(6,486)	(6,302)	(15,306)	(19,615)
Comprehensive Income (Loss), Net of Tax, Attributable to Noncontrolling Interest	(286)	0	(858)	0
Comprehensive income (loss) including noncontrolling interests	$ (6,200)	$ (6,302)	$ (14,448)	$ (19,615)

XML

Earnings (Loss) Per Share (Additional Information) (Detail) - shares shares in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings Per Share [Abstract]
Shares of common stock excluded from the calculation of diluted net income per share because of antidilutive effect	8.0	6.7	7.6	6.3

XML

Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2019

Accounting Changes and Error Corrections [Abstract]

Recent Accounting Pronouncements

Note 2 Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance related to the accounting for leases. A major change in the new guidance is that lessees are now required to present right-of-use assets and lease liabilities on the balance sheet. Enhanced disclosures are also required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. We adopted the new guidance effective January 1, 2019 and elected to apply the new guidance at the beginning of the year of adoption, rather than applying the new guidance retrospectively to each prior reporting period presented. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. We have finalized our assessment of the impacts resulting from the new standard, including the impact on our internal controls. As a result of our evaluation, we have modified certain accounting policies and practices and existing controls. Adoption of the standard resulted in the recognition of $12.5 million of operating lease assets and $14.6 million of current and long-term operating lease liabilities as of January 1, 2019. The difference between the operating lease assets and lease liabilities recorded upon adoption relates to previously accrued deferred rent and lease exit and related charges included on our balance sheet as of December 31, 2018. Lease exit and related charges previously recorded pertain to the reduction in use of RealNetworks' office space and included estimates of sublease income expected to be received. The new guidance did not materially impact our consolidated statement of operations in the quarter of adoption or in the third quarter of 2019 and did not cause revision to previously recorded estimates for lease exit charges. See Note 14Leases for additional information about the new accounting standard.

In June 2018, the FASB issued new guidance related to the measurement and classification for share-based awards to non-employees. The new guidance essentially aligns the measurement and classification for these awards with that for share-based awards to employees. We adopted the new guidance effective January 1, 2019, with no material impact on our consolidated financial statements and related disclosures.

Recently issued accounting pronouncements not yet adopted

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact of this guidance, but do not currently expect the adoption to have a material impact on our consolidated financial statements and related disclosures.

XML

Segment Information (Long-Lived Assets by Geographic Region) (Detail) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets	$ 100,899	$ 19,735
United States
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets	88,043	11,823
Europe
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets	10,359	6,761
Rest of the World
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-lived assets	$ 2,497	$ 1,151

XML

Stock-Based Compensation (Additional Information) (Detail) $ in Millions	3 Months Ended
	Sep. 30, 2019 USD ($)
Share-based Payment Arrangement [Abstract]
Total unrecognized compensation cost	$ 2.7
Total unrecognized compensation cost, expected recognition period (in years)	3 years

XML

Acquisitions - Pro Forma Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Business Acquisition [Line Items]
Gain (Loss) on Sale of Investments				$ 12,338
Business Acquisition, Pro Forma Revenue	$ 45,074	$ 52,888	$ 135,267	165,033
Business Acquisition, Pro Forma Transaction Expenses		114		1,271
Business Acquisition, Pro Forma Net Income (Loss)	$ (5,386)	$ (3,748)	$ (23,358)	$ (1,453)

XML

Revenue Recognition (Tables)

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Schedule of Segment Reporting Information, by Segment

Disaggregation of Revenue

The following table presents our disaggregated revenue by source and segment (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	1,987	$	888	$	—	$	—	$	3,666	$	2,444	$	—	$	—
Subscription Services	1,028		6,007		3,056		27,302		3,156		18,387		9,114		80,222
Product Sales	207		—		3,078		—		632		—		7,243		—
Advertising and Other	410		—		1,030		—		1,284		—		2,565		—
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	2,746	$	520	$	—	$	—	$	7,891	$	2,324	$	—	$	—
Subscription Services	1,232		6,828		2,744		—		3,742		20,447		8,126		—
Product Sales	281		—		2,280		—		920		—		6,635		—
Advertising and Other	474		—		474		—		1,547		—		1,321		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

The following table presents our disaggregated revenue by sales channel (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	2,398	$	6,784	$	1,362	$	13,084	$	4,951	$	20,482	$	3,513	$	38,983
Direct to Consumer	1,234		111		5,802		14,218		3,787		349		15,409		41,239
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	3,220	$	7,209	$	806	$	—	$	9,438	$	22,312	$	2,393	$	—
Direct to Consumer	1,513		139		4,692		—		4,662		459		13,689		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

Consumer Media	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Revenue	$	3,632	$	4,733	$	8,738		$	14,100
Cost of revenue	705		955		2,341			2,976
Gross profit	2,927		3,778		6,397			11,124
Operating expenses	2,692		3,448		8,688			10,805
Operating income (loss)	$	235	$	330	$	(2,291	)	$	319

Mobile Services	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	6,895		$	7,348		$	20,831		$	22,771
Cost of revenue	1,721			2,052			5,634			6,502
Gross profit	5,174			5,296			15,197			16,269
Operating expenses	7,143			6,825			22,142			21,160
Operating income (loss)	$	(1,969	)	$	(1,529	)	$	(6,945	)	$	(4,891	)

Games	Quarter Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Revenue	$	7,164	$	5,498		$	18,922		$	16,082
Cost of revenue	1,934		1,228			5,259			4,501
Gross profit	5,230		4,270			13,663			11,581
Operating expenses	5,151		5,447			15,476			15,459
Operating income (loss)	$	79	$	(1,177	)	$	(1,813	)	$	(3,878	)

Napster	Quarter Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Revenue	$	27,302		$	—	$	80,222		$	—
Cost of revenue	21,986			—		65,408			—
Gross profit	5,316			—		14,814			—
Operating expenses	6,472			—		18,642			—
Operating income (loss)	$	(1,156	)	$	—	$	(3,828	)	$	—

Corporate	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Cost of revenue	$	(68	)	$	4		$	(212	)	$	21
Operating expenses	3,522			2,548			11,895			8,244
Operating income (loss)	$	(3,454	)	$	(2,552	)	$	(11,683	)	$	(8,265	)

XML

Guarantees

9 Months Ended

Sep. 30, 2019

Guarantees [Abstract]

Guarantees

Note 16 Guarantees

In the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have received in the past, and may receive in the future, claims for indemnification from some of our carrier customers.

In the ordinary course of business, Napster enters into agreements with various content providers that guarantee a minimum amount of royalty payments in a given period. These minimum payments are generally based on targets and, based on our historical experience and expectations under relevant contracts, we anticipate that actual royalty accruals and payments will exceed minimum guarantees and, accordingly, we do not maintain accruals for these minimum guarantees.

In relation to certain patents and other technology assets we sold to Intel in the second quarter of 2012, we have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to in the asset purchase agreement for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations to Intel will not be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale.

XML

Restructuring Charges (Tables)

9 Months Ended

Sep. 30, 2019

Restructuring and Related Activities [Abstract]

Schedule of Restructuring Charges by Type of Cost

Restructuring charges are as follows (in thousands):

	Employee Separation Costs		Asset Related and Other Costs		Total
Costs incurred and charged to expense for the nine months ended September 30, 2019	$	1,050	$	537	$	1,587
Costs incurred and charged to expense for the nine months ended September 30, 2018	$	1,320	$	—	$	1,320

Changes to the accrued restructuring liability (which is included in Accrued royalties, fulfillment and other current liabilities) for 2019 are as follows (in thousands):

	Employee Separation Costs			Asset Related and Other Costs		Total
Accrued liability at December 31, 2018	$	755		$	—	$	755
Costs incurred and charged to expense for the nine months ended September 30, 2019, excluding noncash charges	1,050			174		1,224
Cash payments	(1,292		)	—		(1,292		)
Accrued liability at September 30, 2019	$	513		$	174	$	687

XML

Recent Accounting Pronouncements Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Accounting Changes and Error Corrections [Abstract]
Operating lease assets	$ 12,499	$ 12,537	$ 0
Present value of total minimum payments(b)	$ 14,290	$ 14,601

XML

Goodwill

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

Note 8 Goodwill

The following table presents changes in goodwill (in thousands):

Balance, December 31, 2018	$	16,955
Increases due to current year acquisitions	48,474
Effects of foreign currency translation	(275		)
Balance, September 30, 2019	$	65,154

See Note 5Acquisitions for details on our acquisitions and the impact to goodwill.

The following table presents goodwill by segments (in thousands):

	September 30, 2019
Consumer Media	$	580
Mobile Services	1,959
Games	14,141
Napster	48,474
Total goodwill	$	65,154

No impairment of goodwill was recognized in either of the nine months ended September 30, 2019 or in 2018.

XML

Stock-Based Compensation

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation

Note 4 Stock-Based Compensation

Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total stock-based compensation expense	$	503	$	499	$	2,420	$	2,113

The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Expected dividend yield	0	%	0	%	0	%	0	%
Risk-free interest rate	1.71	%	2.78	%	2.16	%	2.69	%
Expected life (years)	3.8		3.8		4.1		3.9
Volatility	41	%	35	%	41	%	35	%

The total stock-based compensation amounts for 2019 and 2018 disclosed above are recorded in their respective line items within operating expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Included in the expense for the nine months ended September 30, 2019 and 2018 was stock compensation expense recorded in the first quarter of 2019 and 2018 related to our 2018 and 2017 incentive bonuses paid in fully vested restricted stock units, which were authorized and granted in the first quarter of 2019 and 2018, respectively.

As of September 30, 2019, $2.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3.0 years.

XML

Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 12 Income Taxes

As of September 30, 2019, RealNetworks has $4.5 million in uncertain tax positions, of which $4.1 million of unrecognized tax positions was recorded through purchase accounting on January 18, 2019 as a result of the acquisition of Napster. We do not anticipate that the total amount of unrecognized tax benefits will significantly change within the next twelve months.

We file numerous consolidated and separate income tax returns in the U.S. including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal income tax examinations for tax years before 2013 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993.

XML

Notes Payable and long-term debt (Details) - USD ($) $ in Thousands		3 Months Ended	9 Months Ended
	Aug. 01, 2019	Sep. 30, 2019	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2019	Dec. 31, 2018
Related Party Transaction [Line Items]
Notes payable		$ 3,599	$ 3,599			$ 0
Related Party Transaction, Accounts Receivable Purchasing Agreement, Percent Upfront				90.00%
Proceeds from Lines of Credit		3,900
Debt Issuance Costs, Line of Credit Arrangements, Gross		600	600
Restricted cash equivalents
Related Party Transaction [Line Items]
Restricted Cash and Investments, Minimum Amount		3,500	3,500
Restricted cash equivalents | Napster
Related Party Transaction [Line Items]
Restricted Cash and Investments, Minimum Amount		1,500	$ 1,500
Related Party Debt Obligation | Napster
Related Party Transaction [Line Items]
Debt Instrument, Covenant, Amount Outstanding Under Agreement, Percent, Minimum			5.00%
Revolving Credit Facility
Related Party Transaction [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity	$ 10,000
Debt Instrument, Description of Variable Rate Basis	0.055
Revolving Credit Facility | Napster
Related Party Transaction [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity		15,000	$ 15,000
Notes payable		$ 3,585	$ 3,585
Line of Credit Facility, Interest Rate at Period End		2.25%	2.25%
Prime Rate [Member] | Revolving Credit Facility
Related Party Transaction [Line Items]
Debt Instrument, Basis Spread on Variable Rate	0.50%
EURIBOR | Revolving Credit Facility | Napster
Related Party Transaction [Line Items]
Debt Instrument, Basis Spread on Variable Rate			2.25%
Minimum | EURIBOR | Revolving Credit Facility | Napster
Related Party Transaction [Line Items]
Debt Instrument, Basis Spread on Variable Rate			0.00%
Revolver Loan and Security Agreement | Revolving Credit Facility | Napster
Related Party Transaction [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity					$ 7,000
Other Current Assets [Member]
Related Party Transaction [Line Items]
Unamortized Debt Issuance Expense		$ 300	$ 300
Other Noncurrent Assets [Member]
Related Party Transaction [Line Items]
Unamortized Debt Issuance Expense		$ 200	$ 200

XML

Goodwill (Changes in Goodwill) (Detail) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Goodwill [Roll Forward]
Beginning Balance	$ 16,955
Goodwill, Written off Related to Sale of Business Unit	48,474
Effects of foreign currency translation	(275)
Ending Balance	$ 65,154

XML

Accrued and Other Current Liabilities (Tables)

9 Months Ended

Sep. 30, 2019

Payables and Accruals [Abstract]

Accrued and Other Liabilities

Accrued royalties, fulfillment and other current liabilities (in thousands):

	September 30, 2019		December 31, 2018
Royalties and other fulfillment costs	$	70,371	$	1,989
Employee compensation, commissions and benefits	6,750		4,444
Sales, VAT and other taxes payable	3,423		785
Operating Lease Liabilities - Current	4,804		—
Other	7,181		4,094
Total accrued royalties, fulfillment and other current liabilities	$	92,529	$	11,312

XML

Segment Information (Tables)

9 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Segment Results

Disaggregation of Revenue

The following table presents our disaggregated revenue by source and segment (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	1,987	$	888	$	—	$	—	$	3,666	$	2,444	$	—	$	—
Subscription Services	1,028		6,007		3,056		27,302		3,156		18,387		9,114		80,222
Product Sales	207		—		3,078		—		632		—		7,243		—
Advertising and Other	410		—		1,030		—		1,284		—		2,565		—
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	2,746	$	520	$	—	$	—	$	7,891	$	2,324	$	—	$	—
Subscription Services	1,232		6,828		2,744		—		3,742		20,447		8,126		—
Product Sales	281		—		2,280		—		920		—		6,635		—
Advertising and Other	474		—		474		—		1,547		—		1,321		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

The following table presents our disaggregated revenue by sales channel (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	2,398	$	6,784	$	1,362	$	13,084	$	4,951	$	20,482	$	3,513	$	38,983
Direct to Consumer	1,234		111		5,802		14,218		3,787		349		15,409		41,239
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	3,220	$	7,209	$	806	$	—	$	9,438	$	22,312	$	2,393	$	—
Direct to Consumer	1,513		139		4,692		—		4,662		459		13,689		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

Consumer Media	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Revenue	$	3,632	$	4,733	$	8,738		$	14,100
Cost of revenue	705		955		2,341			2,976
Gross profit	2,927		3,778		6,397			11,124
Operating expenses	2,692		3,448		8,688			10,805
Operating income (loss)	$	235	$	330	$	(2,291	)	$	319

Mobile Services	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	6,895		$	7,348		$	20,831		$	22,771
Cost of revenue	1,721			2,052			5,634			6,502
Gross profit	5,174			5,296			15,197			16,269
Operating expenses	7,143			6,825			22,142			21,160
Operating income (loss)	$	(1,969	)	$	(1,529	)	$	(6,945	)	$	(4,891	)

Games	Quarter Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Revenue	$	7,164	$	5,498		$	18,922		$	16,082
Cost of revenue	1,934		1,228			5,259			4,501
Gross profit	5,230		4,270			13,663			11,581
Operating expenses	5,151		5,447			15,476			15,459
Operating income (loss)	$	79	$	(1,177	)	$	(1,813	)	$	(3,878	)

Napster	Quarter Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Revenue	$	27,302		$	—	$	80,222		$	—
Cost of revenue	21,986			—		65,408			—
Gross profit	5,316			—		14,814			—
Operating expenses	6,472			—		18,642			—
Operating income (loss)	$	(1,156	)	$	—	$	(3,828	)	$	—

Corporate	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Cost of revenue	$	(68	)	$	4		$	(212	)	$	21
Operating expenses	3,522			2,548			11,895			8,244
Operating income (loss)	$	(3,454	)	$	(2,552	)	$	(11,683	)	$	(8,265	)

Revenue by Geographic Region

Our customers consist primarily of consumers and corporations located in the U.S., Europe, and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	22,015	$	9,026	$	62,307	$	28,106
Europe	16,425		3,005		48,906		9,040
Rest of the World	6,553		5,548		17,500		15,807
Total net revenue	$	44,993	$	17,579	$	128,713	$	52,953

Long-Lived Assets by Geographic Region

Long-lived assets (consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets) by geographic region (in thousands) are as follows:

	September 30, 2019		December 31, 2018
United States	$	88,043	$	11,823
Europe	10,359		6,761
Rest of the World	2,497		1,151
Total long-lived assets	$	100,899	$	19,735

XML

Label	Element	Value
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	$ 1,024,000
Parent [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	1,024,000
Retained Earnings [Member]
Cumulative Effect of New Accounting Principle in Period of Adoption	us-gaap_CumulativeEffectOfNewAccountingPrincipleInPeriodOfAdoption	$ 1,024,000

XML

Earnings (Loss) Per Share

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Earnings (Loss) Per Share

Note 13 Income (Loss) Per Share

Basic net income (loss) per share (EPS) is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) attributable to RealNetworks by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):

	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss) attributable to RealNetworks	$	(5,968	)	$	(5,977	)	$	(13,637	)	$	(18,085	)
Weighted average common shares outstanding used to compute basic EPS	38,062			37,618			37,944			37,549
Dilutive effect of stock based awards	—			—			—			—
Weighted average common shares outstanding used to compute diluted EPS	38,062			37,618			37,944			37,549
Basic EPS attributable to RealNetworks	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)
Diluted EPS attributable to RealNetworks	$	(0.16	)	$	(0.16	)	$	(0.36	)	$	(0.48	)

During the quarter and nine months ended September 30, 2019, 8.0 million and 7.6 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.

During the quarter and nine months ended September 30, 2018, 6.7 million and 6.3 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.

XML

Accrued and Other Current Liabilities

9 Months Ended

Sep. 30, 2019

Payables and Accruals [Abstract]

Accrued and Other Current Liabilities

Note 9 Accrued royalties, fulfillment and other current liabilities

Accrued royalties, fulfillment and other current liabilities (in thousands):

	September 30, 2019		December 31, 2018
Royalties and other fulfillment costs	$	70,371	$	1,989
Employee compensation, commissions and benefits	6,750		4,444
Sales, VAT and other taxes payable	3,423		785
Operating Lease Liabilities - Current	4,804		—
Other	7,181		4,094
Total accrued royalties, fulfillment and other current liabilities	$	92,529	$	11,312

Included in royalties and other fulfillment costs are Napster's accrued music royalties totaling $68.7 million at September 30, 2019. Napster’s agreements and arrangements with rights holders for the content used in its business are complex and the determination of royalty accruals involves significant judgments, assumptions, and estimates of the amounts to be paid.

The variables involved in determining royalty accruals include unmatched royalty accruals, revenue to be recognized, the type of content used and the country it is used in, outstanding royalty audits, and identification of appropriate license holders, among other variables. In addition, some rights holders have allowed the use of their content while negotiations of the terms and conditions are ongoing. In certain jurisdictions, rights holders have several years to claim royalties for musical composition.

While Napster bases its estimates on historical experience and on various assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates in the event of modified assumptions or conditions.

Related to Napster's accrued music royalties are amounts that are advanced to certain music publishers for royalty amounts that have been agreed as being owed, but for which the underlying rights holder have not yet been specifically matched. These prepaid royalty amounts totaling $13.5 million at September 30, 2019 are included in Prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets. When these amounts are ultimately matched and invoiced to Napster, the prepaid royalty amount and the related accrued royalty liability are offset on the unaudited condensed consolidated balance sheets.

XML

Acquisitions

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Business Combination Disclosure

Note 5 Acquisitions

Napster

On January 18, 2019, RealNetworks acquired an additional 42% interest in Rhapsody International, Inc. (doing business as Napster) bringing our aggregate ownership to 84% of Napster's outstanding equity, thus giving RealNetworks a majority voting interest. Napster's music streaming service provides users with broad access to digital music, offering on-demand streaming and conditional downloads through unlimited access to a catalog of millions of music tracks. Napster offers music services worldwide and generates revenue primarily through subscriptions to its music services either directly to consumers or through distribution partners.

Initially formed in 2007 and branded then as Rhapsody, Napster began as a joint venture between RealNetworks and MTV Networks, a division of Viacom International, Inc. Prior to the acquisition of the additional 42% interest in Napster, we accounted for our investment using the equity method of accounting.

Following the January 2019 acquisition, RealNetworks has the right to nominate directors constituting a majority of the Napster board of directors, however, Napster will continue to operate as an independent business with its own board of directors, strategy and leadership team. We are consolidating Napster's financial results into our financial statements for fiscal periods following the closing of the acquisition, and Napster is reported as a separate segment in RealNetworks' consolidated financial statements. Napster, however, remains a distinct legal entity and RealNetworks assumes no ownership or control over the assets or liabilities of Napster.

We have preliminarily recorded 100% of the estimated fair value of the assets acquired and liabilities assumed as of January 18, 2019 based on the results of an independent valuation. The 16% of Napster that we do not own is accounted for as a noncontrolling interest in our consolidated financial statements, and as part of this consolidation, the carrying value of our previous 42% equity method investment was remeasured to fair value on the acquisition date. The remeasurement to fair value of the historical 42% ownership interest resulted in the recognition of a $2.7 million gain in the first quarter of 2019, which is a component of the overall gain recognized as a part of this transaction. Our consolidated balance sheet reflects Napster's working capital deficit, which results in a consolidated working capital deficit. RealNetworks does not have any contractual or implied obligation to provide funding or other financial support to Napster, or to guarantee or provide other such support related to Napster's third party borrowing or Napster's other obligations on our consolidated balance sheet, except as discussed in Note 15Commitments and Contingencies.

The terms of the transaction included initial cash consideration of $1.0 million and additional contingent consideration. Initial cash consideration of $0.2 million was paid at closing and the remainder of the initial cash consideration is included in accrued royalties, fulfillment and other current liabilities and will be paid when due with existing cash balances. With regards to contingent consideration, over the five years following the acquisition, RealNetworks will pay the lesser of the following:

(a) an additional $14.0 million to seller, or

(b) if RealNetworks sells the interest to a third party for less than $15.0 million, the actual amount received by RealNetworks, minus the $1.0 million initial payment.

In the event that RealNetworks sells such equity interest for consideration in excess of $15.0 million, RealNetworks will pay seller additional consideration, dependent on the sale price, which shall in no event exceed an additional $25.0 million. In order for seller to receive the full $40.0 million, the proceeds from the sale of Napster received by RealNetworks for the 42% equity interest acquired would have to exceed $60.0 million. These contingent consideration amounts were part of the total consideration at estimated fair value, as described in more detail below.

The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of the assets acquired and liabilities assumed as of January 18, 2019 (in thousands):

Consideration, at estimated fair value:
Cash	$	1,000
Contingent consideration	11,600
RealNetworks' preexisting 42% equity interest in Napster	2,700
Effective settlement of Napster debt and warrants, held by RealNetworks	6,408
Total consideration	$	21,708
Assets acquired and liabilities assumed, at estimated fair value:
Cash and cash equivalents	$	10,138
Accounts receivable	20,838
Prepaid expenses and other current assets	12,879
Restricted cash	2,322
Equipment, software and leasehold improvements	474
Operating lease assets	2,314
Other long-term assets	77
Deferred tax assets, net	5,942
Intangible assets	23,700
Goodwill	48,474
Total assets acquired	127,158
Accounts payable	937
Accrued royalties and fulfillment	71,980
Accrued and other current liabilities	7,475
Deferred revenue, current portion	3,600
Notes payable	12,115
Deferred tax liabilities, net	6,061
Long-term lease liabilities	1,197
Other long-term liabilities	1,515
Total liabilities assumed	104,880
Total net assets acquired	22,278
Noncontrolling interests	570
Net assets acquired	$	21,708

Under the acquisition method of accounting, the purchase price is allocated to the assets acquired and the liabilities assumed based on their estimated fair values. Due to the complexity and limited time since closing the transaction, the purchase price allocation is subject to change, which may result from additional information becoming available and additional analyses being performed on these acquired assets and assumed liabilities. Such changes could impact estimated fair values of intangible assets, accrued royalties and fulfillment, deferred revenue, and assets and liabilities assumed, as well as the contingent consideration, noncontrolling interests, and gain recognized from consolidation. Purchase price allocation adjustments may be recorded during the measurement period (a period not to exceed 12 months from the acquisition date). The final purchase price allocation could result in material differences, which could have a material impact on our financial statements.

Acquired intangible assets have a total weighted average useful life of approximately 8 years, are being amortized using the straight line method, and are comprised of the following (in thousands):

Intangible category	Estimated fair value		Method used to calculate fair value	Estimated remaining useful life
Trade name and trademarks	$	6,800	Relief-from-royalty	15 years
Developed technology	5,900		Excess earnings	4 years
Customer relationships	5,900		Cost-to-replace	3 years
Partner relationships	5,100		Distributor method	8 years
Total	$	23,700

The estimated fair value amounts for each of these intangibles were determined using a fair value measurement categorized within Level 3 of the fair value hierarchy.

The fair value of the trade name and trademarks intangible asset was estimated using the income approach, utilizing the relief from royalty method, which values the assets by estimating the savings achieved by ownership of trade name and trademarks when compared with the cost of licensing them from an independent owner.

The fair value of developed technology was estimated using the income approach, utilizing the excess earnings method. Under this method, cash flows attributable to the asset are estimated by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated by the asset.

The fair value of customer relationships was estimated using a cost-to-replace approach, whereby the number of subscribers and the cost to acquire subscribers are key estimates utilized in the valuation.

The fair value of partner relationships was estimated using the income approach, which uses market-based distributor data to value underlying distributor relationships. Revenue, earnings, and cash flow estimates associated with these underlying distributor relationships are key estimates in determining the fair value of the partner relationships intangibles.

The fair value of deferred revenue was estimated using the income approach, utilizing a cost to fulfill analysis by estimating the direct and indirect costs related to supporting remaining obligations plus an assumed operating margin.

The fair value of our preexisting 42% equity method investment has been remeasured to an estimated fair value of $2.7 million, which resulted in a pretax gain of $2.7 million, as our existing carrying value was zero. This gain, as well as the settlement of preexisting relationships and other purchase accounting adjustments discussed below, comprise the total gain of $12.3 million recognized in Other income (expenses) in the Consolidated statement of operations in the first quarter of 2019.

The fair value of our preexisting equity method investment was calculated using an average of the income and market approach to arrive at estimated total enterprise value. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of Napster's business. The discount rate applied was based on Napster's weighted-average cost of capital and included a small-company risk premium. The market approach fair value measurement was based on a market comparable methodology. We used a group of comparable companies and selected an appropriate EBITDA and revenue multiple to apply to Napster's trailing twelve months and projected 2019, 2020 and 2021 EBITDA (weighted 90%) and revenues (weighted 10%). Assumptions in both the income and market approaches are significant to the overall valuation of Napster and changes to these assumptions could materially impact the preliminary fair values of assets acquired and liabilities assumed, noncontrolling interests, total consideration, and gain on consolidation.

The fair value of the contingent consideration was estimated using multiple scenarios for each tranche of contingent consideration and then probability weighting each scenario and discounting them to estimated fair value of $11.6 million. This fair value calculation is directly impacted by the estimated total enterprise value described above. After the completion of the measurement period or in conjunction with changes in fair value unrelated to our preliminary estimate of fair value, the contingent consideration will be adjusted quarterly to fair value through earnings. Of the total amount of $11.6 million, we accrued $2.6 million and $9.0 million in Accrued royalties, fulfillment and other current liabilities, and Other long-term liabilities, respectively, as of March 31, 2019. See Note 6Fair Value Measurements for details on the adjustment to this liability.

The effective settlement of Napster's debt and warrants totaling $6.4 million represents the estimated fair value of debt and warrants held between RealNetworks and Napster as of the acquisition date. The estimated fair value is derived from the estimated total enterprise value described above. The resulting net gain of $5.5 million is included in Other income (expenses) in the Consolidated statement of operations.

As discussed in Note 15Commitments and Contingencies, the preexisting $2.8 million guarantee related to Napster's outstanding indebtedness on their revolving credit facility was eliminated upon the consolidation of Napster. This resulted in RealNetworks recording a gain of $2.8 million, which is included in Other income (expenses) in the Consolidated statement of operations.

Prior to our acquisition of Napster, we accounted for our investment under the equity method of accounting and recorded Napster 's foreign currency translation adjustments in our equity. As part of the acquisition method of accounting, we released these amounts and recorded a gain of $1.3 million, which is included in Other income (expenses) in the Consolidated statement of operations.

We recorded the fair value of noncontrolling interests on the acquisition date, estimated at $0.6 million, using the estimated total enterprise value described above.

We also recorded goodwill of $48.5 million, representing the intangible assets that do not qualify for separate recognition for accounting purposes, including the expected growth in Napster's business to business model and the assembled workforce. The goodwill is reported in our Napster segment and is not deductible for income tax purposes. As discussed above, during the measurement period, purchase price allocation adjustments or changes in assumptions used in determining the total estimated enterprise value of Napster could materially impact goodwill recognized. Moreover, future performance of the Napster business will factor into our goodwill impairment analysis.

We began consolidating Napster's results of operations and cash flows into our consolidated financial statements after January 18, 2019. For the quarter ended September 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $27.3 million and $1.0 million, respectively. For the nine months ended September 30, 2019, Napster's revenue and net loss including noncontrolling interests in our consolidated statements of operations was $80.2 million and $4.3 million, respectively.

The following table provides the supplemental pro forma revenue and net results of the combined entity had the acquisition date of Napster been the first day of our first quarter of 2018 rather than during our first quarter of 2019 (in thousands):

	Quarter Ended - Pro Forma (Unaudited) September 30,						Nine Months Ended - Pro Forma (Unaudited) September 30,
	2019			2018			2019			2018
Net revenue	$	45,074		$	52,888		$	135,267		$	165,033
Net income (loss) attributable to RealNetworks (1)	(5,386		)	(3,748		)	(23,358		)	(1,453		)

⁽¹⁾ The pro forma net earnings attributable to RealNetworks for the quarter ended September 30, 2018 include $0.1 million of transaction costs, and for the nine months ended September 30, 2018, pro forma net earnings attributable to RealNetworks include the acquisition related gain of $12.3 million and $1.3 million of transaction costs. The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions and conform Napster's accounting policies to RealNetworks'. These pro forma results also reflect amortization of acquisition-related intangibles and fair value adjustments to deferred revenue and contingent consideration.

The unaudited pro forma amounts are based upon the historical financial statements of RealNetworks and Napster and were prepared using the acquisition method of accounting and are not necessarily indicative of results for any current or future period. The purchase price allocation is preliminary and is subject to change prior to finalization. The final purchase price allocation could result in material differences, which could have a material impact on the accompanying pro forma amounts.

For the quarter and nine months ended September 30, 2019, we incurred approximately $0.1 million and $1.3 million, respectively, in acquisition-related costs, including regulatory, legal, and other advisory fees, which we have recorded within general and administrative expenses.

Games

As described in more detail in our 2018 10-K, in order to acquire a full workforce, we purchased 100% of the shares of a small, privately-held Netherlands-based game development studio for net cash consideration of $4.2 million in April 2018.

XML

Restructuring Charges (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Restructuring Cost and Reserve [Line Items]
Costs incurred and charged to expense	$ 1,587	$ 1,320
Restructuring Reserve [Roll Forward]
Accrued liability beginning balance	755
Restructuring Reserve, Charged Against Earnings, Excluding Non-Cash Charges	1,224
Cash payments	(1,292)
Accrued liability ending balance	687
Employee Separation Costs
Restructuring Cost and Reserve [Line Items]
Costs incurred and charged to expense	1,050	1,320
Restructuring Reserve [Roll Forward]
Accrued liability beginning balance	755
Costs incurred and charged to expense	1,050
Cash payments	(1,292)
Accrued liability ending balance	513
Contract Termination [Member]
Restructuring Cost and Reserve [Line Items]
Costs incurred and charged to expense	537	$ 0
Restructuring Reserve [Roll Forward]
Accrued liability beginning balance	0
Costs incurred and charged to expense	174
Cash payments	0
Accrued liability ending balance	$ 174

XML

Goodwill (Additional Information) (Details) - USD ($) $ in Thousands	Apr. 16, 2018	Sep. 30, 2019	Dec. 31, 2018
Acquired Finite-Lived Intangible Assets [Line Items]
Goodwill		$ 65,154	$ 16,955
Netherlands-Based Game Development Studio
Acquired Finite-Lived Intangible Assets [Line Items]
Percentage of shares acquired	100.00%
Net purchase price	$ 4,200

XML

Revenue Recognition

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Note 3 Revenue Recognition

On January 1, 2018, we adopted the new revenue recognition standard by applying the modified retrospective approach to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard.

We recorded a net decrease to opening retained deficit of $1.0 million as of January 1, 2018 due to the cumulative impact of adopting the new revenue recognition standard. This impact primarily related to licensing of our RealPlayer product and full recognition of non-recurring engineering fees, which were previously deferred and amortized over the life of the contract.

We generate all of our revenue through contracts with customers. Revenue is either recognized over time as the service is provided, or at a point in time when the product is transferred to the customer, depending on the contract type. Our performance obligations typically have an original duration of one year or less.

Napster revenue arrangements include subscription services to the Napster music streaming service sold either directly to end users (direct to consumer) or through partners (business to business), who are generally telecommunications companies, that bundle the subscription with their own services or collect payment for the stand-alone subscriptions from their end customers. Napster also sells subscriptions to third parties to provide access to the Napster platform that is typically embedded in the third party's branded or co-branded service. Such subscriptions are included in the business to business sales channel.

For services sold through third parties to end customers, we evaluate the presentation of revenue on a gross or net basis based on whether we control the service provided to the end-user and are the principal (i.e. “gross”), or we arrange for other parties to provide the service to the end-user and are an agent (i.e. “net”). In our Napster business to business revenue stream, we generally operate as a principal in arrangements with end customers as we maintain control over the service prior to being transferred to the end customer.

Certain business to business customer arrangements include variable consideration based on usage. We estimate variable consideration as part of the total transaction price that is allocated to performance obligations, or distinct service periods within a performance obligation, on a relative standalone selling price basis.

Revenues related to Napster subscription services are recognized ratably over the contract period, typically 30 days. Direct to consumer subscriptions are paid in advance, typically on a monthly basis. Subscription services offered to businesses are invoiced on a monthly basis and the timing of payment generally does not vary significantly from the timing of invoice.

Disaggregation of Revenue

The following table presents our disaggregated revenue by source and segment (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	1,987	$	888	$	—	$	—	$	3,666	$	2,444	$	—	$	—
Subscription Services	1,028		6,007		3,056		27,302		3,156		18,387		9,114		80,222
Product Sales	207		—		3,078		—		632		—		7,243		—
Advertising and Other	410		—		1,030		—		1,284		—		2,565		—
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Business Line
Software License	$	2,746	$	520	$	—	$	—	$	7,891	$	2,324	$	—	$	—
Subscription Services	1,232		6,828		2,744		—		3,742		20,447		8,126		—
Product Sales	281		—		2,280		—		920		—		6,635		—
Advertising and Other	474		—		474		—		1,547		—		1,321		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

The following table presents our disaggregated revenue by sales channel (in thousands):

	Quarter Ended September 30, 2019								Nine Months Ended September 30, 2019
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	2,398	$	6,784	$	1,362	$	13,084	$	4,951	$	20,482	$	3,513	$	38,983
Direct to Consumer	1,234		111		5,802		14,218		3,787		349		15,409		41,239
Total	$	3,632	$	6,895	$	7,164	$	27,302	$	8,738	$	20,831	$	18,922	$	80,222
	Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018
	Consumer Media		Mobile Services		Games		Napster		Consumer Media		Mobile Services		Games		Napster
Sales Channel
Business to Business	$	3,220	$	7,209	$	806	$	—	$	9,438	$	22,312	$	2,393	$	—
Direct to Consumer	1,513		139		4,692		—		4,662		459		13,689		—
Total	$	4,733	$	7,348	$	5,498	$	—	$	14,100	$	22,771	$	16,082	$	—

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to our customers. We record accounts receivable when the right to consideration becomes unconditional, except for the passage of time. For certain contracts, payment schedules may exceed one year; for those contracts we recognize a long-term receivable. As of September 30, 2019 and December 31, 2018, our balance of long-term accounts receivable was $0.3 million and $0.7 million, respectively, and is included in other long-term assets on our condensed consolidated balance sheets. The decrease in this balance from December 31, 2018 to September 30, 2019 is primarily due to the timing of expected cash receipts. During the quarter and nine months ended September 30, 2019, we recorded no impairments to our contract assets.

We record deferred revenue when cash payments are received in advance of our completion of the underlying performance obligation. As of September 30, 2019, we had a deferred revenue balance of $6.3 million, an increase of $3.9 million from December 31, 2018, primarily due to deferred revenue associated with Napster.

Practical Expedients

For those contracts for which we recognize revenue at the amount to which we have the right to invoice for service performed, we do not disclose the value of any unsatisfied performance obligations. We also do not disclose the remaining unsatisfied performance obligations which have an original duration of one year or less. Additionally, we immediately expense sales commissions when incurred as the amortization period would have been less than one year. These costs are recorded within sales and marketing expense.

XML

Related Party Transactions Related Party Transactions (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended	9 Months Ended
	Feb. 28, 2015	Mar. 31, 2010	Sep. 30, 2019	Jan. 18, 2019	Dec. 31, 2018	Dec. 01, 2016
Related Party Transaction [Line Items]
Payments for restructuring			$ 1,292
Rhapsody America LLC
Related Party Transaction [Line Items]
Loan principal to related party			1,000
Rhapsody America LLC
Related Party Transaction [Line Items]
Percentage of shares acquired				42.00%
Business Combination, Step Acquisition, Equity Interest in Acquiree, Including Subsequent Acquisition, Percentage				84.00%
Rhapsody America LLC
Related Party Transaction [Line Items]
Payments for restructuring		$ 18,000
Liquidation preference amount			10,000
Percentage of ownership interest in Rhapsody					42.00%
Loan principal to related party						$ 5,000
Notes Payable, Related Parties, Aggregate Amount						$ 10,000
Note payable, Related Parties, Interest Rate						15.00%
Related Party Debt Obligation | Warrants issued by Rhapsody
Related Party Transaction [Line Items]
Total expected term for warrant	10 years
Related Party Debt Obligation | Rhapsody America LLC
Related Party Transaction [Line Items]
Loans and Leases Receivable, Related Parties			3,900
Debt [Member] | Rhapsody America LLC
Related Party Transaction [Line Items]
Loans and Leases Receivable, Related Parties			$ 5,400

XML

Segment Information (Additional Information) (Detail)	3 Months Ended
	Sep. 30, 2019 Segment
Segment Reporting [Abstract]
Number of reporting segments	4

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest	$ (14,495)	$ (18,085)
Adjustments to reconcile net income (loss) including noncontrolling interests to net cash used in operating activities:
Depreciation and amortization	4,397	1,738
Stock-based compensation	2,420	2,113
Equity in net loss of Napster investment	0	737
Deferred income taxes, net	0	5
Business Combination, Step Acquisition, Remeasurement Gain and Gains (Losses) From Other Preexisting Relationships	(12,338)	0
Foreign currency (gain) loss	(804)	0
Business Combination, Contingent Consideration Arrangements, Change in Amount of Contingent Consideration, Liability	700	0
Mark to market adjustment of warrants	0	78
Trade accounts receivable	4,036	16,754
Prepaid expenses, operating lease and other assets	1,379	(979)
Accounts payable	(64)	(15,235)
Accrued, lease and other liabilities	(5,528)	(2,754)
Net cash used in operating activities	(20,297)	(15,628)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements	(1,068)	(698)
Proceeds from sales and maturities of short-term investments	24	7,607
Cash Acquired from Acquisition	12,260	(4,192)
Net cash provided by investing activities	11,216	2,717
Cash flows from financing activities:
Proceeds from issuance of common stock (stock options and stock purchase plan)	144	114
Tax payments from shares withheld upon vesting of restricted stock	(289)	(243)
Proceeds from Notes Payable	31,337	0
Repayments of Notes Payable	(35,768)	0
Payments of Financing Costs	(569)	0
Proceeds from (Payments for) Other Financing Activities	900	0
Net cash provided by (used in) financing activities	(4,245)	(129)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(390)	(962)
Net increase (decrease) in cash, cash equivalents and restricted cash	(13,716)	(14,002)
Cash, cash equivalents and restricted cash, beginning of period	37,191	53,596
Cash, cash equivalents, and restricted cash end of period	$ 23,475	$ 39,594

XML

Leases - Details of Lease Assets and Liabilities (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Leases [Abstract]
Operating Lease, Expense, Including Sublease Income	$ 1,396	$ 4,199
Operating Lease, Variable Rent Expense	165	676
Operating Leases, Rent Expense, Sublease Rentals	(511)	(1,497)
Operating Lease, Expense	1,050	3,378
Operating cash outflows for lease liabilities	$ (1,274)	$ (4,147)
Weighted-average remaining lease term	4 years	4 years
Weighted-average discount rate	5.14%	5.14%

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Oct. 29, 2019
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Registrant Name	REALNETWORKS INC
Entity Central Index Key	0001046327
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Current Reporting Status	Yes
Entity Common Stock, Shares Outstanding		38,120,035

XML

Stock-Based Compensation (Weighted-Average Assumptions Used to Determine Fair Value of Options Granted) (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share-based Payment Arrangement [Abstract]
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Risk-free interest rate	1.71%	2.78%	2.16%	2.69%
Expected life	3 years 9 months	3 years 9 months	4 years 1 month	3 years 11 months
Volatility	41.00%	35.00%	41.00%	35.00%

XML

Acquisitions - Intangible Assets Acquired (Details) - Rhapsody America LLC $ in Thousands	Jan. 18, 2019 USD ($)
Business Acquisition [Line Items]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles	$ 23,700
Trademarks and Trade Names
Business Acquisition [Line Items]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles	6,800
Developed technology
Business Acquisition [Line Items]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles	5,900
Customer relationships
Business Acquisition [Line Items]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles	5,900
Partner Relationships
Business Acquisition [Line Items]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Finite-Lived Intangibles	$ 5,100

XML

Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in our unaudited condensed consolidated statements of operations and comprehensive income (loss) includes amounts related to stock options, restricted stock, and employee stock purchase plans and was as follows (in thousands):

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Total stock-based compensation expense	$	503	$	499	$	2,420	$	2,113

Weighted-Average Assumptions Used to Determine Fair Value of Options Granted

The fair value of RealNetworks options granted determined using the Black-Scholes model used the following weighted-average assumptions:

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Expected dividend yield	0	%	0	%	0	%	0	%
Risk-free interest rate	1.71	%	2.78	%	2.16	%	2.69	%
Expected life (years)	3.8		3.8		4.1		3.9
Volatility	41	%	35	%	41	%	35	%

XML

Segment Information

9 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Segment Information

Note 17 Segment Information

We manage our business and report revenue and operating income (loss) in four segments: (1) Consumer Media, which includes licensing of our codec technology and our PC-based RealPlayer products, including RealPlayer Plus and related products; (2) Mobile Services, which includes our SaaS services and our integrated RealTimes® platform which is sold to mobile carriers; (3) Games, which includes all our games-related businesses, including sales of mobile games, games licenses, in-game virtual goods, subscription services, and advertising on games and social network sites; and (4) Napster, which includes our on-demand music streaming and music services.

RealNetworks allocates to its Consumer Media, Mobile Services and Games reportable segments certain corporate expenses which are directly attributable to supporting these businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting these businesses, are reported as corporate items. These corporate items also include restructuring charges and stock compensation charges. As stated in Note 5Acquisitions, Napster is operating as an independent company and includes all their corporate expenses in their segment results, and RealNetworks does not allocate any expenses to the Napster segment.

RealNetworks reports four reportable segments based on factors such as how we manage our operations and how the Chief Operating Decision Maker (CODM) reviews results. The CODM reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note 1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.

Segment results for the quarters and nine months ended September 30, 2019 and 2018 (in thousands):

Consumer Media	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Revenue	$	3,632	$	4,733	$	8,738		$	14,100
Cost of revenue	705		955		2,341			2,976
Gross profit	2,927		3,778		6,397			11,124
Operating expenses	2,692		3,448		8,688			10,805
Operating income (loss)	$	235	$	330	$	(2,291	)	$	319

Mobile Services	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	6,895		$	7,348		$	20,831		$	22,771
Cost of revenue	1,721			2,052			5,634			6,502
Gross profit	5,174			5,296			15,197			16,269
Operating expenses	7,143			6,825			22,142			21,160
Operating income (loss)	$	(1,969	)	$	(1,529	)	$	(6,945	)	$	(4,891	)

Games	Quarter Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Revenue	$	7,164	$	5,498		$	18,922		$	16,082
Cost of revenue	1,934		1,228			5,259			4,501
Gross profit	5,230		4,270			13,663			11,581
Operating expenses	5,151		5,447			15,476			15,459
Operating income (loss)	$	79	$	(1,177	)	$	(1,813	)	$	(3,878	)

Napster	Quarter Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Revenue	$	27,302		$	—	$	80,222		$	—
Cost of revenue	21,986			—		65,408			—
Gross profit	5,316			—		14,814			—
Operating expenses	6,472			—		18,642			—
Operating income (loss)	$	(1,156	)	$	—	$	(3,828	)	$	—

Corporate	Quarter Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Cost of revenue	$	(68	)	$	4		$	(212	)	$	21
Operating expenses	3,522			2,548			11,895			8,244
Operating income (loss)	$	(3,454	)	$	(2,552	)	$	(11,683	)	$	(8,265	)

Our customers consist primarily of consumers and corporations located in the U.S., Europe, and various foreign countries (Rest of the World). Revenue by geographic region (in thousands):

	Quarter Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	22,015	$	9,026	$	62,307	$	28,106
Europe	16,425		3,005		48,906		9,040
Rest of the World	6,553		5,548		17,500		15,807
Total net revenue	$	44,993	$	17,579	$	128,713	$	52,953

Long-lived assets (consisting of goodwill, equipment, software, leasehold improvements, operating lease assets, and other intangible assets) by geographic region (in thousands) are as follows:

	September 30, 2019		December 31, 2018
United States	$	88,043	$	11,823
Europe	10,359		6,761
Rest of the World	2,497		1,151
Total long-lived assets	$	100,899	$	19,735