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November 9, 2006

Microsoft pays off the music mob with a Zune Tax

Posted by David Hunter at 10:10 AM ET.

More years ago than I care to recall, a friend remarked on a deal negotiated between a computer company and some music labels to the effect that while technology people always think they are slick negotiators, they can never match the ferocity and rapacity of the music mob. More empirical evidence for this hypothesis is provided by today’s expected announcement of an agreement between Microsoft and Vivendi Universal giving Universal a tax on every Zune sold:

Microsoft Corp. has agreed to pay Universal Music Group a fee for each new Zune digital music player it sells when the iPod rival launches next week, the companies said on Thursday.

The groundbreaking deal could redefine the digital music business pioneered by Apple Computer Inc.

Rivals including cell phone makers eventually could pay for hardware sales as well as for the music itself, Universal said.

Microsoft is trying to break into an industry closely aligned with archival Apple, which is credited with nearly single-handedly building the legal Web music world with its iPod players and iTunes music store.

But Apple does not give a cut of sales of iPods to music companies. It only pays labels for songs sold on its iTunes music store.

“We felt that any business that’s built on the bedrock of music we should share in,” said Doug Morris, chief executive of Universal, owned by French media giant Vivendi.

I wonder how good Mr. Morris’ Godfather impersonation is? The formal announcement will be later today, when we’ll get the definitive word on how Microsoft plans to spin this turkey, but here’s a hint:

Redmond-based Microsoft Corp. is pursuing similar agreements with other major record labels, Chris Stephenson, general manager of global marketing for Microsoft Entertainment, said late Wednesday.

By paying record labels a portion of Zune player sales, Microsoft hopes to have more freedom to allow song-sharing or other promotions, Stephenson said.

“There’s certain marketing elements that we’re looking at going forward, all based around the sharing and wireless scenarios,” he said. He declined to provide specifics.

But in an interview late Wednesday, Universal Music Group Chairman and CEO Doug Morris told The Associated Press that the wireless song-sharing feature of the Zune was not a major factor behind the company seeking a revenue sharing deal on the player.

“The only factor was that we feel that there’s a great deal of music that’s (stored) on these devices that was never legitimately obtained, and we wanted to get some sort of compensation for what we thought we’re losing,” Morris said. “I want our artists to be paid for the music that makes these devices popular.”

Gosh! It’s all about the poor starving artists, I guess. Actually, it may be better for the artists than the music labels’ arrangement with YouTube before the Google acquisition:

The media companies had their typical challenges. Specifically, how to get money from Youtube without being required to give any to the talent (musicians and actors)? If monies were received as part of a license to Youtube then they would contractually obligated to share a substantial portion of the proceeds with others. For example most record label contracts call for artists to get 50% of all license deals. It was decided the media companies would receive an equity position as an investor in Youtube which Google would buy from them. This shelters all the up front monies from any royalty demands by allowing them to classify it as gains from an investment position. A few savvy agents might complain about receiving nothing and get a token amount, but most will be unaware of what transpired.

That kind of makes you wonder if the Zune Tax actually counts as a license payment, doesn’t it? 

Anyhow, Microsoft is coming from a position of weakness since the Zune is starting from way behind the iPod and so they apparently folded like a house of cards when the music labels came knocking and offered them some “protection.” As I said at the start, I’m not really surprised, but one wonders how Steve Jobs got to be savvy enough to face down the media bruisers. Maybe his time at Pixar stood him in better stead than we can imagine.

Update: For a similarly dyspeptic view with a gangster theme, see Om Malik’s Microsoft, Zune & The Music Mafia.

Update: For an alternative view, watch Jupiter Research’s Joe Wilcox try to put lipstick on the pig.

Update: This is apparently the press release although I coudn’t find it on either the Microsoft or Universal Music Group websites. There’s not much there besides more starving artist platitudes from both Microsoft and UMG, but here’s another theory: Microsoft To Give Portion of Zune Sales To Universal In Attempt To Hurt Apple. I enjoy a good conspiracy theory, but ineptness seems to be an adequate explanation here.

Filed under Apple, Argo, Coopetition, Microsoft, Universal Music Group, Zune

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One Response to “Microsoft pays off the music mob with a Zune Tax”

  1. Zune edges SanDisk in 1st week sales -- Microsoft News Tracker Says:

    [...] Steve Gordon at The Register analyzes Microsoft’s Zune deal with Universal Music Group and says “Zune means zilch for artists.” So much for the poor starving artists rationale. [...]

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