Microsoft Caves to Universal in Music Deal

Microsoft Caves to Universal in Music Deal

by Paul Thurrott, thurrott@windowsitpro.com

Sending yet another signal of the same desperation that led to
the creation of its Zune music player project, Microsoft this
morning announced that it has entered into a highly unusual deal
with Universal Music Group. Under the terms of the deal,
Microsoft will pay Universal $1 for each Zune device sold; in
return, Universal will license its collection of music for sale
to the Zune Marketplace online service.

But wait, you say. Doesn't Universal already keep the majority
of income from sales of its music online? And doesn't Universal
already license its collection to other online music services,
including that owned by market leader Apple? The answer to both
questions, of course, is yes. And Apple certainly isn't paying
Universal $1 per iPod sold, though one might imagine that
Universal tried to wrest from Apple a royalty similar to what
Microsoft is paying.

Well, that's how the music industry crumbles when you're
Microsoft. Sensing that the software giant was in no position to
bargain, given the failure of its previous digital music
initiative, PlaysForSure, and the uncertain nature of its new
Zune go-it-alone approach, Universal demanded the per-player
royalty payment. The deal comes "after weeks of tense talks,"
according to a report by "The New York Times".

If Microsoft had vetoed the payments, it would have been forced
to go to market with only a portion of the music available on
the Apple iTunes Store. (Universal sells one-third of all music
worldwide.) That limitation would likely have killed Zune before
it even had a chance to fail in the market on its own.
Meanwhile, Apple hasn't been forced to make a similar deal
because it enjoys the dominant position in the market. If
Universal pulled out of the iTunes Store now, that action would
harm Universal more than Apple.

But it gets worse for Microsoft. The software giant also
announced that it will offer similar royalty deals to other
music industry partners. "We need people to rally behind the
Zune," Microsoft's general manager of global marketing said.
"It's a higher-level business relationship."

Universal's explanation for its royalty demands is as
indefensible as it is greedy. "Each of these devices is used to
store unpaid-for material," music mogul David Geffen told "The
New York Times". "This way, on top of the material people do pay
for, the record companies are getting paid on the devices
storing the copied music." In the article, Geffen refers not to
stolen music but rather music people rip from CDs (that,
presumably, were previously purchased). A recent JupiterResearch
report estimated that Apple sells only 20 songs per iPod; the
remaining songs on the devices, 95 percent or higher, are songs
customers ripped from previously purchased CDs.

The music industry believes, of course, that a good portion of
those ripped songs were stolen in some way, either from others'
music collections or from online file-sharing services. And that
belief, coupled with innate greed, appears to color everything
the music industry does.

Correction:
In yesterday's article "It's Gold: Windows Vista Hits RTM" we
incorrectly stated that Microsoft announced on Wednesday,
November 11, 2006 that it had released Vista to manufacturing.
The company actually made the announcement on November 8. We
regret any inconvenience this error might have caused.

End of Article