Microsoft to pay Universal for 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,” Yinka Adegoke reports for Reuters.

“The groundbreaking deal could redefine the digital music business pioneered by Apple Computer Inc.,” Adegoke reports. “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.”

Adegoke reports, “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,” Adegoke reports. “He did not disclose the amount of the fee for the Zune, which launches next Tuesday.”

“The iPod has a nearly 80 percent share of digital media player sales, and its iTunes music downloads site is also the dominant online music store,” Adegoke reports.

Adegoke reports, “Like other record companies, Universal has a revenue-share deal with iTunes but no share of iPod sales. ‘We have a current contract with him and at the end of that I’m sure we’ll negotiate,’ said Morris, whose company accounts for nearly one in three CDs sold in the United States. Morris said the deal could set a precedent in negotiations with other device manufacturers, including mobile phone makers, who are increasingly seeing music as important to the future of their businesses.”

Full article here.
We’ve been saying for quite awhile that Microsoft seems to want the Zune to fail; the choice brown, the muddled business plan, the crippled Wi-Fi, the hobbled DRM-laden “sharing”, the weak advertising, the fake scroll-wheel, the “uncoolness” of Microsoft, the lack of a compelling price advantage, the lack of video content, etc. But, we couldn’t figure out why Microsoft seems to want the Zune to fail. We thought maybe they needed a tax write-off or they were just mismanaged and/or deluded. But, maybe their “plan” is to set a precedent for the next round of iTunes Store negotiations? Perhaps Microsoft hopes to hurt Apple by trying to force this weird profit sharing on iPods?

To share hardware profits with the music labels makes no sense. Did phonograph makers share record player profits with music labels? No. Did Sony share Walkman profits with music labels? No. Do AM/FM radio makers share profits with music labels? No. Do TV makers share profits with TV networks and producers? No.

We do not see Zune becoming much of a success. Universal Music Group certainly isn’t going to get rich from Zune sales. We just can’t imagine Steve Jobs caving and sharing iPod revenue with the music labels; not with iPod+iTunes market-dominating clout.

As we’ve said before, if Zune, improbably, shows any real traction, Steve Jobs can simply license FairPlay to device makers and/or music outfits (already smarting from being stabbed in the back by Microsoft’s abandonment of “PlaysForSue”) and consign Microsoft Zune to a quick death by isolation.

One would safely assume that Apple can draw up the licenses at very favorable terms and companies will still jump at the chance to participate in the iPod+iTunes ecosystem. Surging Mac sales (and sales into new markets, ie. “iTV,” “iPhone,” etc.) will more than make up for any iPod and iTunes revenue losses engendered by FairPlay licensing (remember, this licensing won’t happen for quite some time).

Apple can quickly and effectively make Microsoft Zune a very remote island that will have no chance of competing or generating meaningful revenue for Microsoft. The result will be that Apple controls the standard and owns the best-known brands while still selling the device(s) (iPod family) and the online content service (iTunes Store) that started it all. Microsoft would have no recourse and would shut down the isolated, unprofitable Zune brand.

Related articles:
Warner’s Middlebronfman: ‘We sell our songs through iPods, but we don’t have share of iPod revenue’ – October 05, 2005

Analysts: Microsoft Zune may end up being a flop – November 08, 2006
Are 58% of iPod owners really thinking of a Zune switch? – November 08, 2006
Survey: 58% of iPod owners planning another MP3 player purchase will consider Microsoft’s Zune – November 01, 2006
Zune is from Microsoft, but Microsoft doesn’t want anybody to know about it – November 07, 2006
Microsoft Zune to be US-only, no firm plans to launch anywhere else globally – November 03, 2006
Five Microsoft Zune TV commercials – November 02, 2006
JupiterResearch: Apple’s iPod will dominate for foreseeable future; Microsoft’s Zune insignificant – October 25, 2006
Ellen DeGeneres Show gives away Microsoft Zunes, studio audience goes berserk – October 23, 2006
More Microsoft Zune myths explored – October 20, 2006
Five more Microsoft Zune myths – October 18, 2006
Microsoft Zune intensifies chaos in Apple iPod+iTunes also-ran market – October 16, 2006
Newsweek Q&A: Apple CEO Steve Jobs discusses iPod’s impact, Microsoft’s Zune, and more – October 15, 2006
Microsoft’s Ballmer: Zune device not money loser, wishes Apple’s 30GB iPod was $299 instead of $249 – October 11, 2006
Microsoft’s consumer electronics track record: long string of failures – October 11, 2006
MP3.com founder: ‘Zune will be an expensive failure for Microsoft because consumers aren’t stupid’ – October 06, 2006
Microsoft fails to secure key Zune domains – October 04, 2006
Microsoft rigs Zune with tricky pricing and proprietary money schemes – October 03, 2006
Why Microsoft’s Zune won’t kill Apple’s iPod – October 03, 2006
10 Apple iPod vs. Microsoft Zune myths – October 02, 2006
Analyst: Zune could lead to ‘civil war’ between Microsoft and Windows Media partners – September 29, 2006
Thurrott on Microsoft’s Zune: ‘The makings of a disaster, what the heck are these people thinking?’ – September 29, 2006
Analyst: Microsoft Zune’s as good as dead on arrival – September 28, 2006
Microsoft sets 30GB Zune price at $249.99 – September 28, 2006
How Microsoft’s Zune can kill Apple’s iPod – September 21, 2006
Microsoft’s Zune insanity – September 21, 2006
The Microsoft Zune 1.0 dud – September 20, 2006
Microsoft’s underwhelming Zune a ‘viral DRM’ device – September 18, 2006
SanDisk teams with RealNetworks against new common foe: Microsoft Zune – September 18, 2006
Creative does Apple’s dirty work by immediately attacking Microsoft’s Zune – September 17, 2006
Motley Fool’s Jayson: Microsoft’s ‘just plain ugly’ Zune a meager offering, not an iPod killer – September 15, 2006
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Crave at CNET: ‘Microsoft Zune, all the excitement that brown can bring’ – September 15, 2006
Microsoft’s Zune underwhelms – September 15, 2006
Enderle: Microsoft Zune ‘a design mistake’ – September 15, 2006
Microsoft hypocrisy exposed with Zune: What ever happened to ‘choice?’ – September 14, 2006
Analyst: Microsoft Zune with fake scroll wheel ‘hardly an Apple iPod killer’ – September 14, 2006
Analyst: Microsoft Zune won’t spoil Apple’s biggest iPod Christmas ever – September 14, 2006
Microsoft unveils Zune 30GB player, Zune Marketplace; declines to disclose prices – September 14, 2006
Analyst: Microsoft’s Zune an ‘underwhelming’ repackaged Toshiba Gigabeat; no threat to Apple iPod – August 30, 2006
Microsoft confirms brick-like Zune to be made by Toshiba – August 25, 2006
Microsoft Zune is chunky brick made by Toshiba – August 25, 2006
Microsoft to sell single Zune model this fall, rumors of Wi-Fi capability were greatly exaggerated – August 10, 2006
Microsoft to spend hundreds of millions, several years on Zune trying to catch Apple iPod+iTunes – July 27, 2006
Zune: Apple cannot lose. Microsoft cannot win. – July 26, 2006

73 Comments

  1. inferno 10, I’m not saying that Apple should pay the labels a cut of iPod profits. I’m simply stating the difference between MDN’s examples and Apple’s proprietary sales model.

    I don’t think Apple should be collecting a cut of iPod accesory makers profits either, but they are..

  2. If the dea lis to share PROFITS then Universal is stupid since it’s already been stated the Zune’s are already selling at a loss.
    And, if MS is still going to pay Universal for every one sold that’s an even bigger loss for MS to shoulder.

    Must be nice to have cash cows like Windows and Office to buy your way into a market with

  3. Advocate – “Apples proprietary marketing” which MS has decided to copy with Zune.
    So ? Don’t like it, use another service which works as well, if you can find one, and get a non-DRM laden MP3, if you can find one legally.

    The only thing Apple is guilty of at this stage is NOT licensing the DRM to other player makers.
    If they wanted to shut Zune down they’d do that.
    I’m sure they are talking to Creative and maybe others about that.
    iTunes still sells more music than anyone else and being able to play it is a big plus for any device manufacturer. And, iTunes is in many countries where Zune is ONLY opening in the US as far as anyone has stated.

    At this point Apple has a big lead and will hopefully make some partnerships and licensing deals to maintain that

  4. Universal no doubt thinks it can get away getting iPod profits because of the little twit Bronfman, who thinks he’s a media genius.

    But guess what, Apple doesn’t need Universal to succeed. By the time the current contract expires, Universal will need Apple much more than Apple will need Universal. And Steve can finally give the labels the bitch slaps they deserve.

    I see this Zune ploy as nothing but an anti-competitive move by Microsoft to try to set a precedent which it hopes will spread and infect the iPod.

  5. Universal needs iPod and not backwards. iPod is the best selling music player in Latin America countries and there is no iTunes on those countries, you can put any music in your ipod (i put some from my old CD’s) so if universal does not get with iTunes, you can alway get it in other way where universal does not get any compensation. If any record label wants to survive to the digital era, they have to be on iTunes.

  6. Advocate – Name another service that plays on both Windows and Mac? Not very proprietary now is it? You don’t have to carry your music with you? Just burn a CD and play it on your Diskman® if you want to – You can’t do that with a Plays fro Sure® subscription now can you????

  7. I hae a better Idea,
    “‘We felt that any business that’s built on the bedrock of music we should share in,”
    Why not Universal and other companies pay a fee to Apple and zune because heir music is going to be played in their hardware? To liste to music, you need a player, if you do not have a hardware manofacturer to build those players, you can not sell any music, that is more fear.
    iPod can be use to watch moviens, play games, liste to podcast. So, if I do not use my iPod to play universal music, should apple pay a fee to universal? That is crazy!.

  8. The Advocate said: “Yes, the labels force DRM, but they did not force proprietary iPod only DRM..”

    What’s your point? Is there another, better, DRM out there that could have been used instead?
    It’s not really iPod only DRM – it will play on both macs and peecees. Please show us a more open DRM, oh wise one…

    Don’t forget, DRM only applies to iTunes Store – Rip your own music without DRM. If DRM bothers u so much, get off your fat arse and go and buy the CDs. Or sit on your fat arse and order the CDs online from amazon or something. Keep in mind that you can’t do this with the Zune, as it will apply DRM to even your own music.

  9. And meanwhile, David Pogue of the NYT has given his verdict…

    Zune has no adavantages, is not cool, is a load of hassle, awkward to use, and is the result of a lot of wasted effort by Microsoft because it is green with envy.

    Oh, and the iPod has a list of advantages that go all the way to Steve Ballmers house and back again.

    His review will stop about 50% of Zunes prospective 5,000 sales in its first year.

    How anyone feels the need to support anything done by Microsoft beats me.

  10. Guys, guys, (and Gals), Microsoft is only following its OWN model.

    Did the vast majority of PC makers pay Microsoft (a content provider) a fee REGARDLESS if Windows was installed on the computer or not?

    YES!

    The hardware makers paid MS a fee per system sold even if the system did not ship with a Windows OS or any other MS product indstalled. Microsoft thinks that all hardware makers should pay them this fee… and now they are a hardware maker and it is only reasonable to pay Universal (the content provider) a fee for their hardware, even if it doesn’t ship with any Universal content. It’s the way things are done… the Microsoft way.

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