RealNetworks settled its antitrust lawsuit against Microsoft for $761 million, in a deal designed to help both parties better compete against rivals Apple Computer and Yahoo in the battle for digital

LOS ANGELES -- RealNetworks settled its antitrust lawsuit against Microsoft for $761 million, in a deal designed to help both parties better compete against rivals Apple Computer and Yahoo in the battle for digital music customers.

The settlement includes integration of the Rhapsody music subscription service into Microsoft's MSN search, instant-messaging and music-store services. The two companies also agreed to make their digital-rights-management technologies interoperable and partnered on several online gaming initiatives.

Just a week before, Microsoft had broken off licensing negotiations with major record labels for a music subscription service of its own. Now Rhapsody will become the de facto MSN subscription service.

The two companies are developing a Web-based version of Rhapsody's player to more easily allow users to sample the service, which will be featured on all music-based MSN Search results, added to MSN Messenger clients and included on the MSN Music Store home page.

The terms of the deal call for Microsoft to pay RealNetworks $460 million upfront, and another $301 million in installments during the next 18 months. RealNetworks will credit a predetermined amount to Microsoft for each Rhapsody subscriber generated through the MSN promotions, reducing the amount due.

Microsoft executives note that the partnership does not preclude developing a music subscription service independently of Rhapsody. But both companies stress their intent to work together beyond the 18-month span of the agreement, underscoring the gaps each addresses in the other.

Microsoft lacks a subscription element in its music service, which lags behind Apple's iTunes Music Store in sales and traffic. In the search and instant-messaging areas, Microsoft is playing catch-up with Yahoo, which has integrated its own music subscription into these community tools.

For its part, Rhapsody needed access to search and instant-messaging tools for viral promotion of its content online.

"There's very strong economic incentives for both parties to" work together, RealNetworks senior VP of marketing Michael Schutzler says. "We'll both be in a much better position to compete."