I woke up to some sad news today: Microsoft, once the most feared company in the world, is a total wuss. They've cut a crazy deal with Universal Music Group to pay a $1 royalty for every Zune device they sell (in addition to any royalties for UMG music they actually manage to shift). The New York Times has the details:
In a rare move, Microsoft said yesterday that it had agreed to pay a percentage of the sales of its new portable media player to the Universal Music Group.
Universal Music, a unit of Vivendi, will receive a royalty on the Zune player in exchange for licensing its recordings for Microsoft’s new digital music service, the companies said.
UMG is shaking down the new kid on the digital music block, trying to get from them what they haven't been able to get from Apple: a cut of the hardware sales. Microsoft, desperate to have all the major labels on board, folded like a cheap suit, and set a precedent that'll affect their relationships with the other major labels (who probably have "most favored nation" clauses in their contracts with Redmond).
It's clear that the overriding motive for Microsoft was desperation:
In discussing the rationale for the royalty, Chris Stephenson, general manager for global marketing in Microsoft’s entertainment unit, said the company “needed people to rally behind” the new device and service.
“It’s a higher-level business relationship,” he said.
A higher level of punk-itude, maybe. Anyway, I'm sure it wasn't lost on anyone at Microsoft HQ that this would eventually make life tough for Apple when it came time to renegotiate their licenses with the majors.
The rationale for the major labels is simple: Apple's done better, in gross dollar and margin terms, from the hardware than they have from the music they've sold, and they want a piece of Apple's cake, too.
Remember, these companies have sold many of us the same music over and over again (In my case, I can pick out tracks on my iPod that I've bought on vinyl, tape, CD, and now as downloads). Apparently making money from the business they're supposed to be in isn't enough. The fact that every MB of disk space on an iPod isn't occupied by tracks from the iTunes Store is all the backup UMG et al need to justify their position:
The move also reflects Universal’s recognition that, for all the runaway success of gadgets like the iPod, consumers are still not buying enough digital music to make up for declining sales of music on compact disk. Universal said it was only fair to receive payment on devices that may be repositories for stolen music.
“It’s a major change for the industry,” said David Geffen, the entertainment mogul who more than a decade ago sold the record label that bears his name to Universal. “Each of these devices is used to store unpaid-for material. This way, on top of the material people do pay for, the record companies are getting paid on the devices storing the copied music.”
He added: “It certainly changes the paradigm.”
Yes, from one where record labels got money for the music they sold, to one where they get money because they assume their customers are thieves.
It would appear that Universal's thirst for royalty justice is small, however: a one dollar royalty is, after all, the equivalent of one track per device. I'm with Om "GigaOm" Malik when he says:
If Apple had to pay at least $1 per device for every iPod sold over past two fiscal years, its cost would be $62 million at minimum: or about one more song per device. If music industry cannot sell one additional song to consumers (and has to blackmail for more money) then, you as a business, have lost grip over your core competency.
Which makes it all the more appalling that Microsoft has caved in. Surely Apple's precedent meant that they didn't have to.
Tags: UMG, Microsoft, Zune, royalty, shakedown, Apple, iPod, Big Content