Off-Balance Sheet Arrangements

We have operating lease obligations for office facility leases with future cash commitments that are not required to be recorded on our consolidated balance sheet. Accordingly, these operating lease obligations constitute off-balance sheet arrangements. In addition, since we do not maintain accruals associated with certain guarantees, as discussed in Note 1716, Guarantees, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q, those guarantee obligations also constitute off-balance sheet arrangements.

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;

Estimating music publishing rights and music royalty accruals;

Estimating recoverability of deferred costs;

Estimating allowances for doubtful accounts and sales returns;

Estimating losses on excess office facilities;

Valuation of equity method investments;

Valuation of definite-lived assets;

Valuation of goodwill;

Stock-based compensation; and

Accounting for income taxes.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the product or services are made available, digitally, to the end user.

We recognize revenue on a gross or net basis. In most arrangements, we contract directly with end user customers, and are the primary obligor. In such arrangements, we recognize revenue on a gross basis. In some cases, we utilize third-party distributors who are the primary obligor to sell products or services directly to end user customers. In such instances, we recognize revenue on a net basis.

In our direct to consumer operations, we derive revenue primarily through (1) subscriptions sold by our Games segment and subscriptions of SuperPass within our Consumer Media segment, (2) sales of content downloads, software and licenses offered by our Consumer Media, Mobile Services, and Games segments and (3) the sale of advertising and the distribution of third-party products on our websites and in our games.

Consumer subscription products are paid in advance, typically for monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally, to the end user. Revenue generated from advertising on our websites and from advertising and the distribution of third-party products included in our products is recognized as revenue at the time of delivery.

We also generate revenue through business-to-business channels by providing services within our Mobile Services segment enabling mobile carriers to deliver audio and video content to their customers and by selling software licenses and products and related support and other services. Revenue generated from services provided to mobile carriers that enable the delivery of audio and video content to their customers is recognized as the services are provided. Setup fees to build these services are recognized ratably upon launch of the service over the remaining expected term of the service.

Non-software revenue arrangements containing multiple elements are divided into separate units of accounting, after being evaluated for specific criteria. If the criteria for separation are met, revenue is allocated to the individual units using the relative price method. If the criteria are not met, the elements are treated as one unit of accounting and revenue recognition is delayed until all elements have been delivered. In the case of revenue arrangements containing software, elements are divided into separate units of accounting only when vendor-specific objective evidence has been established. In cases where vendor-specific objective evidence has not been established, undelivered elements are combined into one unit of accounting and are not recognized in revenue until all elements have been delivered.

Estimating Music Publishing Rights and Music Royalty Accruals. We have made estimates of amounts that may be owed related to music royalties for our historical domestic and international music services. Material differences may impact the

amount and timing of our expense for any period if management made different judgments or utilized different estimates. Under copyright law, we may be required to pay licensing fees for digital sound recordings and compositions we have delivered. Copyright law generally does not specify the rate and terms of the licenses, which are determined by voluntary negotiations among the parties or, for certain compulsory licenses where voluntary negotiations are unsuccessful, by arbitration. Our estimates are based on contracted or statutory rates, when established, or management’s best estimates based on facts and circumstances regarding the specific music services and agreements in similar geographies or with similar agencies. While we have based our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates under different assumptions or conditions.

Estimating Recoverability of Deferred Costs. We defer costs on projects for service revenue and system sales. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other

third parties. We recognize such costs as a component of cost of revenue, the timing of which is dependent upon the revenue recognition policy by contract. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

Assessing the recoverability of deferred project costs is based on significant assumptions and estimates, including future revenue and cost of sales. Significant or sustained decreases in revenue or increases in cost of sales in future periods could result in impairments of deferred project costs. We cannot accurately predict the amount and timing of any such impairments. Should the value of deferred project costs become impaired, we would record the appropriate charge, which could have a material adverse effect on our financial condition or results of operations.

Estimating Allowances for Doubtful Accounts and Sales Returns. We make estimates of the uncollectible portion of our accounts receivable. We specifically analyze the age of accounts receivable and historical bad debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Similarly, we make estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant judgments and estimates are made and used in connection with establishing allowances for doubtful accounts and sales returns. Material differences may result in the amount and timing of our revenue for any period if we were to make different judgments or utilize different estimates or actual future experience was different from the judgments and estimates.

Estimating losses on excess office facilities. We make significant estimates in determining the appropriate amount of accrued loss on excess office facilities, including estimates of sublease income expected to be received. If we make different estimates, our loss on excess office facilities could be significantly different from that recorded, which could have a material impact on our operating results.

Valuation of Equity Method Investments. We use the equity method of accounting for investments in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We record our percentage interest in the investee's recorded income or loss and changes in the investee's capital under this method, which will increase or decrease the reported value of our investment. See Note 54, Rhapsody Joint Venture, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q, for additional information. We initially record our investment based on a fair value analysis of the investment.

We evaluate impairment of an investment valued under the equity method if events and circumstances warrant. An impairment charge would be recorded if a decline in value of an equity investment below its carrying amount were determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and financial prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.

Valuation of Definite-Lived Assets. Definite-lived assets consist primarily of property, plant and equipment, as well as amortizable intangible assets acquired in business combinations. 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.

The impairment analysis of definite-lived assets 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 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 undiscounted

cash flows and related fair market 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 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.~~Factors of our 2016 10-K.

Valuation of Goodwill. 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. Circumstances that may indicate a reporting unit's carrying value exceeds its fair value include, but are not limited to: poor economic performance relative to historical or projected future operating results; significant negative industry, economic or company specific trends; changes in the manner of our use of the assets or the plans for our business; and loss of key personnel.

When evaluating goodwill for impairment, based upon our annual test or due to changes in circumstances described above, 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.

Significant judgments and estimates are required in determining the reporting units and assessing the fair value of the reporting units. 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, market and interest rate risk, and risk-commensurate discount rates and cost of capital.

Stock-Based Compensation. Stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period, which is the vesting period. For stock options, the fair value is calculated using the Black-Scholes option-pricing model or other appropriate valuation models such as Monte Carlo simulation. The valuation models require various highly judgmental assumptions including volatility in our common stock price and expected option life. If any of the assumptions used in the valuation models change significantly, stock-based compensation expense for new awards may differ materially in the future from the amounts recorded in our consolidated statement of operations. For all awards, we are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures.

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.

As of ~~September 30, 2016, $16.4~~March 31, 2017, $18.1 million of the ~~$80.7~~$66.3 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries.

As of ~~September 30, 2016,~~March 31, 2017, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. or may be remitted tax-free to the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, RealNetworks could be

subject to additional U.S. income and foreign withholding taxes. It is not practicable to determine the foreign withholding and U.S. federal income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be distributed, an additional provision for U.S. income and foreign withholding taxes may be necessary.


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 our short-term investment portfolio. Our short-term investments consist of investment grade debt securities as specified in our investment policy. Investments in both fixed and floating rate instruments carry a degree of interest rate risk. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Additionally, a declining rate environment creates reinvestment risk because as securities mature the proceeds are reinvested at a lower rate, generating less interest income. See Note 65, Fair Value Measurements, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q, for additional information. Due in part to these factors, our future interest income may be adversely impacted due to changes in interest rates. In addition, we may incur losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. Because we have historically had the ability to hold our short-term investments until maturity, we would not expect our operating results or cash flows to be significantly impacted by a sudden change in market interest rates. There have been no material changes in our investment methodology regarding our cash equivalents and short-term investments during the quarter ended ~~September 30, 2016.~~March 31, 2017. Based on our cash, cash equivalents, short-term investments, and restricted cash equivalents as of ~~September 30, 2016,~~March 31, 2017, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest income or cash flows by more than a nominal amount.

Investment Risk. As of ~~September 30, 2016,~~March 31, 2017, we had ~~investments~~an investment in the voting capital stock of ~~both publicly traded and~~a privately held technology ~~companies for business and strategic purposes.~~company. See Note 1, Description of Business and Summary of Significant Accounting Policies - ~~Valuation of~~ Equity Method Investments, and Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates (Valuation of equity method investments) in our Form 10-K for details on our accounting treatment for ~~these investments,~~this investment, including the analysis of other-than-temporary impairments.

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. We manage a portion of these risks through the use of financial derivatives, but fluctuations could impact our results of operations and financial position.

Where appropriate, we manage foreign currency risk for certain material short-term intercompany balances through the use of foreign currency forward contracts. These contracts require us to exchange currencies at rates agreed upon at the contract’s inception. Because the impact of movements in currency exchange rates on forward contracts offsets the related

impact on the short-term intercompany balances, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. We do not designate our foreign exchange forward contracts related to short-term intercompany accounts as hedges and, accordingly, we adjust these instruments to fair value through results of operations. However, we may periodically hedge a portion of our foreign exchange exposures associated with material firmly committed transactions, long-term investments, highly predictable anticipated exposures and net investments in foreign subsidiaries. To the extent we continue to experience adverse economic conditions, our unhedged exposures are impacted by movements in currency exchange rates and we may record losses related to such unhedged exposures in future periods that may have a material adverse effect on our financial condition and results of operations.

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 Korean won and euros. A hypothetical 10% increase or decrease in the Korean won and euro relative to the U.S. dollar as of ~~September 30, 2016~~March 31, 2017 would not result in a material impact on our financial position, results of operations or cash flows.


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, 2016~~March 31, 2017. 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, 2016~~March 31, 2017, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

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~~first quarter of ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

See Note 1615, Commitments 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~~

Our operations and financial results are subject to various risks and uncertainties. Readers should carefully consider the risk factors included in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2016, which could adversely affect our business or financial condition, including (without limitation) results of operations, liquidity and the trading price of our common stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2016. The risks described ~~below together with all of the other information included~~in our 2016 Form 10-K and in this ~~Form 10-Q. The risks~~ and ~~uncertainties described below~~other reports filed with the Securities and Exchange Commission are not the only ~~ones~~risks 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 business and financial results will be materially adversely impacted if we are unable to successfully implement our growth plans, strategic initiatives, and restructuring efforts.~~

Beginning in mid-2012, we developed a major new growth plan that continues to evolve. We have also embarked upon strategic initiatives intended to simplify and accelerate our operations, and restructuring efforts intended to streamline costs and bring more focus to our businesses. The simultaneous execution of all of these measures is ambitious and we have not attempted to pursue this level of transition in our history. We can provide no assurance that we will be successful in implementing our growth plans, strategic initiatives, and restructuring efforts, either in a timely manner or at all, and our failure to do so would have a material adverse impact on our business and financial results. Moreover, the implementation of our growth plans, strategic initiatives and restructuring efforts has required significant cash outlays, and we cannot guarantee that these expenditures will have the desired return or that our cash reserves will be sufficient for a successful transition.

~~We need to successfully monetize our products and services in order to sustain and grow our businesses.~~

In order to sustain our current level of operations and to implement our growth plans, we must successfully monetize our products and services. The process of developing and distributing products and services is complex, costly and uncertain, and is subject to a number of risks. Providing products and services that are attractive and useful to subscribers and consumers is in part subject to unpredictable and volatile factors beyond our control, including end-user preferences, competing products and services, and a limited number of dominant distribution partners. Any failure by us to timely respond to or accurately anticipate consumers’ changing needs, emerging technological trends or important changes in the market or competition for products and services that we introduce, or that we have launched, could increase the current rate of decline in our market share or result in the loss of market opportunities. In addition, 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 needs of a large enough group of consumers, which may result in no return or a loss on our investments. Moreover, if we are unsuccessful in securing profitable distribution channels with new partners, including mobile carriers, strengthening channels with existing partners, and monetizing our products and services, our revenue will continue to decline and our business will suffer.

Over the past four years, we have invested heavily in the development of new products and enhanced features for such products, and we expect to continue to invest both in further development and in sales and marketing efforts aimed at monetizing certain of these products and services. If we are unable to generate sustained interest in these products and services, and therefore drive revenue growth, our financial results and cash position will continue to be materially negatively impacted.

Furthermore, new products and services may be 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 materially harm our operating results and our ability to grow our businesses.

~~Our historically core products and services face new and continuing challenges, causing our revenues to materially decline.~~

Our products and services that have historically been core to the company were primarily distributed through desktop computers and feature phones. Consumer behavior and tastes continue to change and the market for such products and services has been moving to smartphones and tablets. Although we have developed newer products and services for these emerging platforms there is no guarantee that we will be successful. In addition, as new operating systems are introduced or updated for these platforms, we are likely to continue to face difficulties reaching our traditional customer base and other unknown distribution challenges.

~~Our restructuring efforts may not yield the anticipated benefits to our shareholders.~~

Since 2012, we have taken steps to restructure and simplify our business and operations. In September 2012, we announced plans to divisionalize our business, which we implemented during the first quarter of 2013, and to significantly reduce operating expenses, in part through a reduction in our workforce that was substantially concluded by the end of the second quarter of 2013. In August 2014, we announced a further reduction in our workforce and related cost reductions, and during the second and third quarters of 2015, we recorded $2.0 million and $3.1 million, respectively, in severance and restructuring charges relating to additional workforce reductions. We continue to assess opportunities to further streamline our operations and make our businesses more efficient. There can be no assurance, however, that our past or future restructuring efforts will be successful. Our business and operations may be harmed to the extent there is customer or employee uncertainty surrounding the future direction of our product and service offerings and strategy for our businesses. Our restructuring activities have included implementing cost-cutting initiatives, which may not lead to future profitability and which could materially impact our ability to compete in future periods. If we are unable to effectively re-align the cost structure of our businesses or streamline and simplify our operations, our stock price may continue to be adversely affected, and we and our shareholders will not realize the anticipated financial, operational and other benefits from such initiatives.

~~Our businesses face substantial competitive challenges that may prevent us from being successful in those businesses, and may negatively impact future growth in those businesses.~~

Many of our current and potential competitors in our businesses have longer operating histories, greater name recognition, more employees and significantly greater resources than we do. To effectively compete in the markets for our products and services, we may experience the following consequences, any of which would adversely affect our ~~operating results and the trading price of our stock:~~

~~reduced prices~~business or ~~margins,~~

~~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,~~

~~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.~~

The market for our Mobile Services business, including our ringback tones and music on demand solutions, is highly competitive and evolving rapidly. Increased use of smartphones has resulted in a proliferation of applications and services that compete with our SaaS services and, in many cases, are not dependent upon our mobile partners to make them available to subscribers. Increased competition has in the past resulted in pricing pressure, forcing us to lower the selling price of our services. We expect this pricing pressure to continue to materially harm our operating results and financial condition.

Our RealTimes product faces strong competition from other technology companies and cloud service providers, including some that are firmly established in the marketplace and have access to extensive resources, as well as video and photo sharing services. In addition, as we continue to develop this product and expand its reach, we have seen and expect to continue to see growing competition from companies offering innovative features for engaging with users' video content, some of which are offered for free. To be competitive, our RealTimes product must provide sufficiently engaging and compelling features for users' digital content, enticing consumers directly to the application and creating an appealing value proposition for our distribution partners.

Our RealPlayer software services compete with alternative streaming media playback technologies and audio and video formats which have obtained broad market penetration. Similarly, our codec technology faces strong competition, with

~~successful adoption of newer versions uncertain. If we are unable to compete successfully, our Consumer Media business could continue to decline.~~

The branded services in our Games business compete with other online aggregators and distributors of online, downloadable and social casual PC games. Some of these competitors have high volume distribution channels and greater financial resources than we do. Our Games business also competes with many other smaller companies that may be able to adjust to market conditions, including responding effectively to the growing popularity of casual games on social networks, faster than us. 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 than us. We expect competition to continue to intensify in this market from these and other competitors. Our games development studios compete primarily with other developers of online, downloadable, mobile and social casual PC 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 social networks, in order to maintain our competitive position and to grow the business. If we are unable to achieve future growth in our revenue, our Games business will continue to suffer.

~~Contracts with mobile customers subject us to significant risks that could negatively impact our revenue or otherwise harm our operating results.~~

We derive a material portion of our revenue from the SaaS offerings we provide to mobile carriers, and we have begun to leverage our carrier relationships for the distribution of our photo and video sharing solution. Many of our contracts with carriers provide for revenue sharing arrangements, but we have limited control over the pricing decisions of our carrier customers. Furthermore, most of these contracts do not provide for guaranteed minimum payments or usage levels. Because most of our carrier customer contracts are nonexclusive, it is possible that our mobile carrier customers could purchase similar services from third parties and cease to use our services in the future. As a result, our revenue derived under these agreements could be substantially reduced depending on the pricing and usage decisions of our carrier customers. In addition, some of our contracts require us to incur significant set-up costs prior to the launch of services with a carrier customer. We may be required to record impairments or other charges in future periods related to our carrier customer contracts, which would negatively impact our results of operations.

In addition, none of our SaaS contracts with carriers obligate our carrier customers to market or distribute any of our SaaS offerings. Despite the lack of marketing commitments, revenue related to our SaaS offerings is, to a large extent, dependent upon the marketing and promotion activities of our carrier customers. In addition, many of our carrier contracts are short term and allow for early termination by the carrier with or without cause. These contracts are therefore subject to renegotiation of pricing or other key terms that could be adverse to our interests and leave us vulnerable to non-renewal by the carriers. The loss of carrier customers, a reduction in marketing or promotion of our SaaS offerings, or the termination, non-renewal or renegotiation of contract terms that are less favorable to us would result in the loss of future revenues from our SaaS offerings.

Finally, nearly all of our carrier contracts obligate us to indemnify the carrier customer 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. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. Pursuant to these indemnifications obligations, we have in the past agreed to control the defense on behalf of certain of our carrier customers related to patent infringement proceedings. In 2013, we settled two such litigation matters. Future claims against which we may be obligated to defend our carrier customers could result in payments that could materially harm our business and financial results.

A majority of the revenue that we generate in our Mobile Services segment is dependent upon our relationships with a few customers, and any deterioration of these relationships could materially harm our revenue.

We generate a significant portion of our revenue from sales within our Mobile Services business to a few of our mobile customers and their affiliates. In the near term, we expect that we will continue to generate a significant portion of our total revenue from these customers. If these customers fail to market or distribute our services or terminate or fail to renew their business contracts with us, or if our relationships with these customers deteriorate in any significant way, we may be unable to replace the affected business arrangements with acceptable alternatives. Failure to maintain our relationships with these customers could have a material negative impact on our revenue and financial results.

~~We may not be successful in maintaining and growing our distribution of digital media products.~~

Maintaining and growing the distribution of digital media products through our websites and our other distribution channels has historically been important to our business, including growth through the introduction of new products and

services distributed through these channels. Consumers are not downloading and using our digital media products consistent with past usage, so our ability to generate revenue from those products has been, and we expect will continue to be, reduced, leading to lower than expected adoption of newly introduced products and services. Our inability to maintain continued high volume distribution of our digital media products could also continue to hold back the growth and development of related revenue streams from these market segments, including the distribution of third-party products and sales of our subscription services, and therefore harm our business and our prospects. Our revenue from the distribution of third-party products will also continue to be negatively impacted if those products are not more widely downloaded and used by consumers, including due to the relative market saturation of such products. Most of our revenue from the distribution of third-party products has historically been derived from a single customer, and the terms of this relationship have significantly changed since the third quarter of 2014. Our distribution revenue has been, and may continue to be, materially negatively impacted by these factors, and we cannot guarantee that future revenue will rebound to historical levels.

~~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. Our recent stock price history shows a downward trend, with a closing price of $4.55 on October 25, 2016, and a range from $3.04 to $5.10 per share during the 52-week period ended September 30, 2016. As a result of the rapidly changing markets in which we compete, our operating results may fluctuate or continue to decline from period to period, which may contribute to volatility or continued weakness of our stock price.

In past periods, our operating results have been affected by personnel reductions and related restructuring charges, lease exit and related charges, and impairment charges for certain of our equity investments, goodwill and other long-lived assets. In addition to these factors, the general difficulty in forecasting our operating results and metrics could result in actual results that differ significantly from expected results, causing volatility and continued weakness in our stock price.

Certain of our product and service investment decisions (for example, research and development and sales and marketing efforts) are based on predictions regarding business and the markets in which we compete. Fluctuations in our operating results, particularly when experienced beyond what we expected, could cause the trading price of our stock to fluctuate. Weakness in our operating performance is likely to cause continued weakness in our stock price.

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

In accordance with accounting principles generally accepted in the United States, we are required to test goodwill for possible impairment on an annual basis based upon a fair value approach, 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 market 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 significant negative, and unpredicted, impact on our financial results. The total carrying value of our goodwill and definite-lived assets as of September 30, 2016 was $20.1 million.

~~Continued loss of revenue from our subscription services may continue to harm our operating results.~~

Our operating results have been and may continue to be adversely impacted by the loss of subscription revenue related to our more traditional products and services. Subscribers may 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 declined in recent periods due to changes in consumer preferences and changes on our part to focus on other products and services we offer, and we expect these trends to continue.

~~Government regulation of the Internet 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 over the Internet. 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 through the Internet. 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. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also require us to 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. In May of 2012, we resolved an investigation and complaint filed against us by the Washington State Office of the Attorney General, or Washington AG, relating to our consumer marketing practices through the entry of a consent decree filed in King County, Washington Superior Court. While we resolved that matter, we cannot provide assurance that the Washington AG or other governmental agencies will not bring future claims regarding our marketing, or consumer services or other practices.

~~Global and national economic conditions have in the past and could in the future have a material adverse impact on our business, financial condition and results of operations.~~

Our business and operations depend significantly on global and national economic conditions. 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, our carrier customers and business partners may reduce their business or advertising spending with us 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 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.

~~Rhapsody could continue to recognize losses, which could negatively impact our results of operations and financial condition.~~

On March 31, 2010, we completed the restructuring of our digital audio music service joint venture, Rhapsody America LLC. As a result of the restructuring, we no longer have operational control over Rhapsody and Rhapsody’s operating performance is no longer consolidated with our consolidated financial statements. Rhapsody has generated accounting losses since its inception and we have recognized losses on our investment in the convertible preferred stock of Rhapsody since the restructuring. If Rhapsody continues to incur losses, if it otherwise experiences a significant decline in its business or financial condition, or if we provide financial support to or increase our investment in Rhapsody, we could incur further losses on our investment, which could have an adverse effect on our financial condition and results of operations. See ~~Note 5, Rhapsody Joint Venture, to the unaudited condensed consolidated financial statements included in Item 1 of Part I of this 10-Q, for further discussion.~~

Additionally, given the current proportion of the outstanding equity of Rhapsody that we hold, we need to receive Rhapsody’s unaudited quarterly financial statements and related information in order to timely prepare our quarterly consolidated financial statements and also to report certain of Rhapsody’s financial results, as may be required, in our quarterly reports on Form 10-Q. In addition, we may be required to include Rhapsody’s annual audited financial statements in our annual report on Form 10-K in future periods. As we no longer exert operational control over Rhapsody, we cannot guarantee that Rhapsody will deliver its financial statements and related information to us in a timely manner, or at all, or that the unaudited financial statement information provided by Rhapsody will not contain inaccuracies that are material to our reported results. Any failure to timely obtain Rhapsody’s quarterly financial statements or to include its audited financial statements in our future annual reports on Form 10-K, if required, could cause our reports to be filed in an untimely manner, which would preclude us from utilizing certain registration statements and could negatively impact our stock price.

~~The continued loss of key personnel, 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. We have experienced a significant amount of executive-level turnover in the past several years, which has had and could continue to have a negative impact on our ability to retain key employees. Rob Glaser, our founder, Chairman and initial chief executive officer, resigned as chief executive officer in 2010, was appointed as interim chief executive officer in July 2012, and was named permanent chief executive officer in July 2014. In addition, each member of our executive team was either hired or promoted to his or her executive position within the past four years. We cannot provide assurance that we will effectively manage these executive-level transitions, which may impact our ability to retain key executives and employees and which could harm our business and operations to the extent there is customer or employee uncertainty arising from such transitions.

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. Our ability to attract and retain personnel has been and may continue to be made more difficult by the uncertainty created by our executive-level turnover and by our continued restructuring efforts, which have involved reductions in our workforce. 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. For example, most recently, in August 2015 we completed the sale of our Slingo and social casino games business. 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 significant negative impact on our future operating results. For example, in 2013 we acquired Slingo, Inc. pursuant to which we recorded $8.0 million of intangible assets and $9.9 million in goodwill, and Muzicall Limited pursuant to which we recorded $5.4 million of intangible assets and $1.3 million in goodwill. In compliance with accounting principles generally accepted in the United States, we evaluate these assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that our goodwill, indefinite-lived intangible assets 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 significantly 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; and~~

~~assumption of known and unknown liabilities of the acquired company, including intellectual property claims.~~

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 and services or effectively prevent misappropriation of our technology. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities in China. 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. While we sold to Intel Corporation in 2012 most of our patents, including patents that covered streaming media, we agreed to indemnify Intel for certain third-party infringement claims against these patents up to the purchase price we received in the sale. We may also be forced to litigate, to enforce, or defend our patents and other intellectual property rights or to determine the validity and scope of other parties’ proprietary rights, enter into royalty or licensing agreements on unfavorable terms or redesign our product features and services. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute could fail to improve our business prospects or otherwise harm our business.

From time to time we receive claims and inquiries from third parties alleging that our technology may infringe the third parties’ proprietary rights, especially patents. Third parties have also asserted and most likely will continue to assert claims against us alleging contract breaches, infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights. These claims, even if not meritorious, could force us to spend significant financial and managerial resources. 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. For example, in July 2012, VoiceAge Corporation brought a lawsuit against us alleging breach of our obligation to pay them licensing fees under our patent license agreement with VoiceAge and seeking a material amount in damages. While we settled the dispute with VoiceAge in the fourth quarter of 2013, similar future lawsuits could result in significant legal expenses, monetary damages, penalties or injunctive relief against us that could have a material adverse impact on our financial results. In addition, in 2012 we sold substantially all of our patent assets to Intel. We believe that our patent portfolio may have in the past discouraged third parties from bringing infringement or other claims against us relating to the use of our technologies in our business. Accordingly, we cannot predict whether the sale of these patent assets to Intel will result in additional infringement or other claims against us from third parties.

Our business and operating results will suffer 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. A significant or repeated reduction in the performance, reliability, security or availability of our information systems and network infrastructure could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. 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 our failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, HVAC failures, intentional actions to disrupt our systems and networks and many other causes. The vulnerability of a large portion of our computer and communications infrastructure is enhanced due to its geographic concentration in Seattle, Washington, an area that is at heightened risk of earthquake, flood, and volcanic events. 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.

~~The growth of our business is dependent in part on successfully managing our international operations.~~

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 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 or the Korean won, 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.

~~We may be subject to market risk and legal liability in connection with our data collection and data security capabilities.~~

Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. For example, to provide better consumer experiences and to operate effectively, our products send information, including personally identifiable information, to our servers or servers hosted by third parties. In addition, we sell many of our products and services through online sales transactions directly with consumers, through which we collect and store credit card information. In connection with our direct sales to consumers, we may be the victim of fraudulent transactions, including credit card fraud, which presents a risk to our revenue and potentially disrupts service to our consumers. While we take measures to protect our consumer data, we have experienced unauthorized access to our consumer data in the past, and it is possible that our security controls over consumer data 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 and server products. A security breach that leads to disclosure of consumer account information (including personally identifiable information) or any failure by us to comply with our posted privacy policy or existing or new legislation regarding privacy issues could harm our reputation, impact the market for our products and services, subject us to litigation, and require us to expend significant resources to mitigate the breach of security, comply with breach notification laws or address related matters.

~~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 believe we collect transactional taxes and are compliant and current in all jurisdictions where we believe 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.

~~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.

The U.S. is considering corporate tax reform that may significantly change the corporate tax rate and U.S. international tax rules. Additionally, longstanding international tax norms that determine each country's jurisdiction to tax cross-border international trade are evolving. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.

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 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 and his affiliates 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:

~~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 a 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, and amended in April 2016, which provides that shares of our common stock have associated preferred stock purchase rights. The exercise of these rights would make the acquisition of RealNetworks by a third party more expensive to that party and has 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.


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

(a) Not applicable

(b) 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.

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/ Marjorie Thomas
			Marjorie Thomas
	Title:		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

Dated: ~~November~~May 4, ~~2016~~2017

INDEX TO EXHIBITS



Exhibit Number	Description

10.1	Offer letter dated ~~September 13, 2016~~March 29, 2017 between RealNetworks, Inc. and ~~William Patrizio~~Cary Baker

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 Marjorie Thomas, 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 Marjorie Thomas, 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

4431



	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)



Large accelerated filer	¨	Accelerated filer	ý

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨
		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. ¨



	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	1917
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3127
Item 4. Controls and Procedures	3228
Part II. Other Information	3329
Item 1. Legal Proceedings	3329
Item 1A. Risk Factors	3329
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4129
Item 3. Default Upon Senior Securities	4129
Item 4. Mine Safety Disclosures	4129
Item 5. Other Information	4129
Item 6. Exhibits	4129
Signature	4330
Index to Exhibits	4431


	September 30, 2016			December 31, 2015			March 31, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	38,284		$	47,315		$	38,498		$	33,721
Short-term investments	42,465			51,814			27,778			43,331
Trade accounts receivable, net of allowances	25,287			22,511			26,833			22,162
Deferred costs, current portion	852			460			541			760
Prepaid expenses and other current assets	5,166			7,140			4,843			4,910
Total current assets	112,054			129,240			98,493			104,884
Equipment, software, and leasehold improvements, at cost:
Equipment and software	57,014			66,702			44,640			46,231
Leasehold improvements	3,204			3,122			3,330			3,317
Total equipment, software, and leasehold improvements, at cost	60,218			69,824			47,970			49,548
Less accumulated depreciation and amortization	54,339			61,024			43,181			44,294
Net equipment, software, and leasehold improvements	5,879			8,800			4,789			5,254
Restricted cash equivalents and investments	2,700			2,890			2,700			2,700
Available for sale securities	2,041			1,721
Other assets	1,908			2,307			2,412			1,742
Deferred costs, non-current portion	1,236			212			1,071			1,246
Deferred tax assets, net	1,015			957			836			816
Other intangible assets, net	1,224			2,136			729			938
Goodwill	12,974			13,080			12,915			12,857
Total assets	$	141,031		$	161,343		$	123,945		$	130,437

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,379		$	17,050		$	19,432		$	18,225
Accrued and other current liabilities	16,547			17,320			15,425			15,425
Commitment to Rhapsody							—			1,500
Deferred revenue, current portion	3,883			3,497			3,918			3,430
Total current liabilities	38,809			37,867			38,775			38,580
Deferred revenue, non-current portion	343			105			724			240
Deferred rent	504			620			679			748
Deferred tax liabilities, net	100			88			87			87
Other long-term liabilities	1,935			1,980			1,890			2,201
Total liabilities	41,691			40,660			42,155			41,856
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 36,829 shares in 2016 and 36,298 shares in 2015	37			36
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 37,099 shares in 2017 and 37,501 shares in 2016							37			37
Additional paid-in capital	631,824			627,316			635,963			633,928
Accumulated other comprehensive loss	(58,758		)	(59,480		)	(61,047		)	(61,645		)
Retained deficit	(473,763		)	(447,189		)	(493,163		)	(483,739		)
Total shareholders’ equity	99,340			120,683			81,790			88,581
Total liabilities and shareholders’ equity	$	141,031		$	161,343		$	123,945		$	130,437


	Quarters Ended September 30,						Nine Months Ended September 30,						Quarter Ended March 31,
	2016			2015			2016			2015			2017			2016
Net revenue (A)	$	31,051		$	30,823		$	89,015		$	95,374		$	30,576		$	28,230
Cost of revenue (B)	16,740			18,090			47,610			54,469			17,293			15,172
Gross profit	14,311			12,733			41,405			40,905			13,283			13,058
Operating expenses:
Research and development	6,699			10,501			23,185			34,681			7,349			9,319
Sales and marketing	7,183			11,938			24,157			38,822			7,155			9,225
General and administrative	7,086			7,021			21,380			21,312			5,303			8,077
Restructuring and other charges	499			3,114			1,297			5,563			1,564			385
Lease exit and related charges	1,233			2,121			2,191			2,208			—			831
Total operating expenses	22,700			34,695			72,210			102,586			21,371			27,837
Operating income (loss)	(8,389		)	(21,962		)	(30,805		)	(61,681		)	(8,088		)	(14,779		)
Other income (expenses):
Interest income, net	119			147			316			597			128			117
Gain (loss) on investments, net	6,021			(615		)	5,978			(222		)	—			3
Equity in net loss of Rhapsody investment	(233		)	(735		)	(629		)	(13,831		)	(748		)	—
Other income (expense), net	(243		)	297			(515		)	628			(226		)	(287		)
Total other income (expenses), net	5,664			(906		)	5,150			(12,828		)	(846		)	(167		)
Income (loss) before income taxes	(2,725		)	(22,868		)	(25,655		)	(74,509		)	(8,934		)	(14,946		)
Income tax expense (benefit)	331			(1,684		)	919			(1,075		)	490			225
Net income (loss)	$	(3,056	)	$	(21,184	)	$	(26,574	)	$	(73,434	)	$	(9,424	)	$	(15,171	)

Basic net income (loss) per share	$	(0.08	)	$	(0.59	)	$	(0.72	)	$	(2.03	)	$	(0.25	)	$	(0.42	)
Diluted net income (loss) per share	$	(0.08	)	$	(0.59	)	$	(0.72	)	$	(2.03	)	$	(0.25	)	$	(0.42	)
Shares used to compute basic net income (loss) per share	36,805			36,191			36,693			36,134			37,030			36,520
Shares used to compute diluted net income (loss) per share	36,805			36,191			36,693			36,134			37,030			36,520

Comprehensive income (loss):
Unrealized investment holding gains (losses), net of reclassification adjustments	$	72		$	(596	)	$	239		$	(881	)	$	4		$	151
Foreign currency translation adjustments, net of reclassification adjustments	428			(1,144		)	483			(3,141		)	594			700
Total other comprehensive income (loss)	500			(1,740		)	722			(4,022		)	598			851
Net income (loss)	(3,056		)	(21,184		)	(26,574		)	(73,434		)	(9,424		)	(15,171		)
Comprehensive income (loss)	$	(2,556	)	$	(22,924	)	$	(25,852	)	$	(77,456	)	$	(8,826	)	$	(14,320	)

(A) Components of net revenue:
License fees	$	7,850		$	7,049		$	20,305		$	21,259		$	6,594		$	5,777
Service revenue	23,201			23,774			68,710			74,115			23,982			22,453
	$	31,051		$	30,823		$	89,015		$	95,374		$	30,576		$	28,230
(B) Components of cost of revenue:
License fees	$	1,755		$	1,877		$	4,458		$	5,048		$	1,511		$	1,304
Service revenue	14,985			16,213			43,152			49,421			15,782			13,868
	$	16,740		$	18,090		$	47,610		$	54,469		$	17,293		$	15,172



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



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


	Nine Months Ended September 30,						Quarter ended March 31,
	2016			2015			2017			2016
Cash flows from operating activities:
Net income (loss)	$	(26,574	)	$	(73,434	)	$	(9,424	)	$	(15,171	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	5,897			7,952			921			2,598
Stock-based compensation	4,557			3,761			1,434			3,171
Equity in net loss of Rhapsody	629			13,831			748			—
Deferred income taxes, net	(198		)	(1,531		)	(20		)	(128		)
Loss (gain) on investments, net	(5,978		)	222			—			(3		)
Realized translation loss (gain)	272			(264		)
Fair value of warrants granted in 2015, net of subsequent mark to market adjustments in 2016 and 2015	112			(1,078		)
Fair value of warrants granted in 2015 and 2017, net of subsequent mark to market adjustments in 2017 and 2016							(471		)	44
Net change in certain operating assets and liabilities:
Trade accounts receivable	(1,744		)	(6,279		)	(3,451		)	(487		)
Prepaid expenses and other assets	1,155			3,851			452			1,322
Accounts payable	450			(1,628		)	147			(2,106		)
Accrued and other liabilities	(872		)	(1,372		)	254			(451		)
Net cash provided by (used in) operating activities	(22,294		)	(55,969		)	(9,410		)	(11,211		)
Cash flows from investing activities:
Purchases of equipment, software, and leasehold improvements	(2,009		)	(1,110		)	(207		)	(828		)
Proceeds from sale of equity and other investments	2,110			459
Purchases of short-term investments	(59,124		)	(52,475		)	(6,142		)	(17,876		)
Proceeds from sales and maturities of short-term investments	68,473			60,516			21,695			23,401
Decrease (increase) in restricted cash equivalents and investments, net	190			—			—			(210		)
Acquisitions	(150		)	(161		)
Advance to Rhapsody	—			(5,000		)	(1,500		)	—
Repayment from Rhapsody	—			5,000
Proceeds from the sale of Slingo and social casino business	4,000			10,000
Net cash provided by (used in) investing activities	13,490			17,229			13,846			4,487
Cash flows from financing activities:
Proceeds from issuance of common stock (stock options and stock purchase plan)	166			297			34			16
Tax payments from shares withheld upon vesting of restricted stock	(843		)	(69		)	(181		)	(787		)
Net cash provided by (used in) financing activities	(677		)	228			(147		)	(771		)
Effect of exchange rate changes on cash and cash equivalents	450			(2,910		)	488			719
Net increase (decrease) in cash and cash equivalents	(9,031		)	(41,422		)	4,777			(6,776		)
Cash and cash equivalents, beginning of period	47,315			103,253			33,721			47,315
Cash and cash equivalents, end of period	$	38,284		$	61,831		$	38,498		$	40,539

Supplemental disclosure of cash flow information:
Cash received from income tax refunds	$	531		$	1,035		$	—		$	389
Cash paid for income taxes	$	1,876		$	1,136		$	446		$	624
Non-cash investing activities:
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements	$	(6	)	$	(124	)	$	37		$	44
Acquisition of intangible assets	$	—		$	312



Note 1	Description of Business and Summary of Significant Accounting Policies


	Fair Value Measurements as of								Amortized Cost as of		Fair Value Measurements as of								Amortized Cost as of
	September 30, 2016								September 30, 2016		March 31, 2017								March 31, 2017
	Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash	$	27,401	$	—	$	—	$	27,401	$	27,401	$	22,671	$	—	$	—	$	22,671	$	22,671
Money market funds	49		—		—		49		49		15,427		—		—		15,427		15,427
Corporate notes and bonds	—		10,834		—		10,834		10,834		—		400		—		400		400
Total cash and cash equivalents	27,450		10,834		—		38,284		38,284		38,098		400		—		38,498		38,498
Short-term investments:
Corporate notes and bonds	—		42,465		—		42,465		42,460				27,778		—		27,778		27,784
Total short-term investments	—		42,465		—		42,465		42,460		—		27,778		—		27,778		27,784
Restricted cash equivalents and investments	—		2,700		—		2,700		2,700		—		2,700		—		2,700		2,700
Equity investment in publicly traded securities	2,041		—		—		2,041		362
Warrant issued by Rhapsody (included in Other assets)	—		—		941		941		—
Warrants issued by Rhapsody (included in Other assets)											—		—		1,244		1,244		—
Total	$	29,491	$	55,999	$	941	$	86,431	$	83,806	$	38,098	$	30,878	$	1,244	$	70,220	$	68,982



	Estimated Fair Value
Within one year	$	39,565
Between one year and five years	2,900
Total short-term investments	$	42,465



Note 76	Allowance for Doubtful Accounts Receivable and Sales Returns


	Allowance For						Allowance For
	Doubtful Accounts Receivable			Sales Returns			Doubtful Accounts Receivable			Sales Returns
Balances, December 31, 2015	$	765		$	158
Balances, December 31, 2016							$	633		$	169
Addition (reduction) to allowance	52			15			9			—
Amounts written off	(6		)	(3		)	—			—
Foreign currency translation	29			—			(15		)	(1		)
Balances, September 30, 2016	$	840		$	170
Balances, March 31, 2017							$	627		$	168



		September 30, 2016						December 31, 2015
		Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Amortizing intangible assets:
	Customer relationships	$	31,476	$	30,851	$	625	$	30,182	$	29,236	$	946
	Developed technology	24,725		24,253		472		24,047		23,244		803
	Patents, trademarks and tradenames	3,801		3,674		127		3,717		3,398		319
	Service contracts	5,447		5,447		—		5,269		5,201		68
	Total	$	65,449	$	64,225	$	1,224	$	63,215	$	61,079	$	2,136



		March 31, 2017						December 31, 2016
		Gross Amount		Accumulated Amortization		Net		Gross Amount		Accumulated Amortization		Net
Amortizing intangible assets:
	Customer relationships	$	30,980	$	30,512	$	468	$	29,308	$	28,781	$	527
	Developed technology	24,440		24,262		178		23,574		23,263		311
	Patents, trademarks and tradenames	3,715		3,632		83		3,530		3,430		100
	Service contracts	5,378		5,378		—		5,205		5,205		—
	Total	$	64,513	$	63,784	$	729	$	61,617	$	60,679	$	938



	FORM 10-Q



Note 2	Recent Accounting Pronouncements



~~Note 3~~	~~Acquisitions & Disposals~~



Note 87	Other Intangible Assets



Balance, December 31, 2015	$	13,080
Effects of foreign currency translation	(106		)
Balance, September 30, 2016	$	12,974



Balance, December 31, 2016	$	12,857
Effects of foreign currency translation	58
Balance, March 31, 2017	$	12,915


	September 30, 2016		March 31, 2017
Consumer Media	$	580	$	580
Mobile Services	2,096		2,037
Games	10,298		10,298
Total goodwill	$	12,974	$	12,915



	Employee Separation Costs
Costs incurred and charged to expense for the nine months ended September 30, 2016	$	1,297
Costs incurred and charged to expense for the nine months ended September 30, 2015	$	5,563



	Employee Separation Costs
Accrued liability at December 31, 2015	$	1,404
Costs incurred and charged to expense for the nine months ended September 30, 2016	1,297
Cash payments	(2,279		)
Accrued liability at September 30, 2016	$	422



	Employee Separation Costs
Accrued liability at December 31, 2016	$	209
Costs incurred and charged to expense for the three months ended March 31, 2017	1,564
Cash payments	(664		)
Accrued liability at March 31, 2017	$	1,109


Accrued loss at December 31, 2015	$	2,595
Accrued loss at December 31, 2016				$	3,186
Additions and adjustments to the lease loss accrual, including estimated sublease income	2,287			—
Less amounts paid, net of sublease amounts	(1,257		)	(727		)
Accrued loss at September 30, 2016	3,625
Accrued loss at March 31, 2017				2,459
Less current portion (included in Accrued and other current liabilities)	(1,824		)	(612		)
Accrued loss, non-current portion (included in Other long term liabilities)	$	1,801		$	1,847


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


	Quarters ended September 30,											Nine months ended September 30,											Quarters ended March 31,
	2016			2015			$ Change			% Change		2016			2015			$ Change			% Change		2017			2016			$ Change			% Change
Total revenue	$	31,051		$	30,823		$	228		1	%	$	89,015		$	95,374		$	(6,359	)	(7	)%	$	30,576		$	28,230		$	2,346		8	%
Cost of revenue	16,740			18,090			(1,350		)	(7	)%	47,610			54,469			(6,859		)	(13	)%	17,293			15,172			2,121			14	%
Gross profit	14,311			12,733			1,578			12	%	41,405			40,905			500			1	%	13,283			13,058			225			2	%
Gross margin	46		%	41		%						47		%	43		%						43		%	46		%
Operating expenses	22,700			34,695			(11,995		)	(35	)%	72,210			102,586			(30,376		)	(30	)%	21,371			27,837			(6,466		)	(23	)%
Operating income (loss)	$	(8,389	)	$	(21,962	)	$	13,573		62	%	$	(30,805	)	$	(61,681	)	$	30,876		50	%	$	(8,088	)	$	(14,779	)	$	6,691		45	%


	Nine months ended September 30,						Three months ended March 31,
	2016			2015			2017			2016
Cash provided by (used in) operating activities	$	(22,294	)	$	(55,969	)	$	(9,410	)	$	(11,211	)
Cash provided by (used in) investing activities	13,490			17,229			13,846			4,487
Cash provided by (used in) financing activities	(677		)	228			(147		)	(771		)