Real-Microsoft Accounting Should Be Interesting

So the Real-Microsoft deal is $460 million in cash for the anti-trust settlement, plus another $301 million for an 18-month "music and games partnership."  The second part is being presented as separate and apart from the anti-trust stuff, but this seems unlikely.

In the music and games partnership, Microsoft will pay Real $301 million in cash and help generate subscribers for Real's music and games services through MSN...in exchange for Real [taking] steps to support MSN Search and agreeing to co-promote Microsoft's Windows Media technologies.  Doesn't exactly sound like an arms' length deal.

So the accounting for the partnership should be interesting.  Will Real argue that the $301 million is part of the anti-trust settlement (which it appears to be)--and, therefore, book the whole $761 million as a one-time extraordinary gain?  Or will it suggest that the partnership is actually a bona-fide business deal and, god forbid, book it as revenue? 

Even in the first instance, the accounting might be hairy, as the cash and services Microsoft is providing will presumably create marketing and development value for Real for the next 18 months and should therefore be reflected in the relevant lines of the income statement over the next 6 quarters (even though the cash is coming in instead of going out).  If they aren't reflected, the company will be benefitting from Microsoft's efforts in the revenue and subscriber lines, but won't be showing corresponding expenses (thus artificially boosting profits).  This would be defensible if the companies were really exchanging goods or services of equal value, but at least according to the wording in the press release, it's hard to see how this is the case.

We shall stay tuned... 

Comments

[W. Zimmerman]

It's hard to see how Real "taking steps to support MSN search" and "agreeing to co-promote Windows Media" for 18 months could possibly be worth $301 million plus.

[Henry Blodget]

Agreed. I expect the argument will be that Microsoft is buying the right to distribute Real's music and games service to MSN users. Given that Real should probably be paying MSN for distribution, however, this seems a stretch (to say the least). Don't want to pre-judge anything, though; we'll see how they account for it in a couple of months.

[Ron Belt]

Whats your view on Real anyway Henry? Is this (triple?) strategy of them going to work? (player, music, games)...

[Network]

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