Crosstown rivals Microsoft and Real Networks announced a truce this morning that will make them partners in the digital-music business and end one of Microsoft's biggest remaining antitrust headaches.

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Crosstown rivals Microsoft and Real Networks announced a truce this morning that will make them partners in the digital-music business and end one of Microsoft’s biggest remaining antitrust headaches.

RealNetworks, which contended that it suffered from Microsoft’s anticompetitive business practices in the 1990s and sued for damages in 2003, will receive $761 million in cash. Microsoft will also promote RealNetworks’ Rhapsody music service and support its product development for 18 months.

The deal also restores the relationship between Microsoft Chairman Bill Gates and RealNetworks founder Rob Glaser, who left Microsoft to start his company in 1994. RealNetworks pioneered the field of digital media, but in recent years it has lost customers and its leadership position to both Apple Computer and Microsoft.

“Today we’re closing one chapter and opening a new one in our relationship with Microsoft,” Glaser said in a news release issued before he and Gates shook hands at a press conference at the Experience Music Project in Seattle.

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Gates said the agreement “will provide MSN’s millions of customers with easier access to subscription services for the music and games they love.”

Over the next six months or so, consumers will see RealNetworks’ presence increase dramatically on Microsoft’s MSN portal and within MSN’s search and music services. Music samples from RealNetworks will appear when users search for a particular band, for instance.

Microsoft and RealNetworks become friends

THE BATTLE: RealNetworks sued Microsoft in 2003, accusing the software maker of illegally forcing Windows users to accept Microsoft’s digital media player.

THE TRUCE: A three-part deal valued at $761 million that includes a digital music and games partnership.

WHAT MICROSOFT’S GIVING: Microsoft will give RealNetworks $460 million in cash right away, plus $301 million in cash and support services over the next year and a half. It also will offer RealNetworks digital games through MSN Games and an upcoming version of its Xbox Live online game service.

WHAT MICROSOFT’S GETTING: RealNetworks said it will take steps to support MSN Search. The companies also agreed to jointly promote use of Windows Media technologies with one of RealNetworks music subscription services.

— The Associated Press

RealNetworks is dropping its U.S. antitrust lawsuit and ending complaints that were central to the European Union’s case against Microsoft. The European Commission, the EU’s administrative body, ruled that Microsoft violated antitrust laws, a ruling the company is appealing. The EU said today that the RealNetworks settlement would not affect the looming court clash.

“The role of the (European) Commission is to ensure proper application of EU competition law for the benefit of consumers and companies in Europe,” spokesman Jonathan Todd said.

The RealNetworks case is one of the last major antitrust actions taken against Microsoft in the wake of the landmark case brought by the U.S. government in 1998. The $761 million adds to the billions Microsoft has paid out to settle those cases, including settlements with companies ranging from computer giant IBM to a small operating system developer called Be Inc.

Microsoft spokeswoman Stacy Drake said two companies have antitrust cases pending against Microsoft: handheld pioneer Go Computer and Novell, formerly a major networking software maker and now a top distributor of the Linux operating system. Novell reached a $536 million settlement on an earlier action in November 2004.

RealNetworks’ stock jumped nearly 30 percent to around $7.38 this morning, while Microsoft was down about 1 percent, to $24.38 in midday trading.

Brier Dudley: 206-515-5687 or Material from The Associated Press is included in this report.