Did Microsoft have no choice, but to sign bad Zune royalty deal with Universal?

“So the big Zune news this week is that Microsoft’s deal with Universal Music Group includes a per-unit royalty on each Zune player they sell,” John Gruber writes for Daring Fireball. “What we’ve got here is a nice, warm, shit sandwich from Universal Music, and Microsoft concluded that they had no choice but to eat it. Oddly enough, this puts me in the same boat as Paul Thurrott,1 whose analysis of the deal — Microsoft Caves to Universal in Music Deal — almost completely jibes with mine. Thurrott writes:”

Sensing that [Microsoft] 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.

Gruber writes, “Don’t get me wrong — if this deal somehow does wind up polluting Apple’s deals with the music labels, Microsoft won’t be shedding any tears. Misery loves company. But this is Universal’s idea, not Microsoft’s.”

Gruber writes, “Far from seeing this Universal dollar-per-Zune deal as some sort of nefarious Redmond plot, I think it’s actually giving Microsoft a nice taste of its own medicine. Thurrott is right: Microsoft needed Universal’s support, Universal knew it, and they’re making them pay.”

Gruber writes, “Even in the worst case, I don’t see this precedent as posing much of a problem for Apple (or, really, for Microsoft, for that matter — one dollar per unit amounts to a rather small turd in this particular shit sandwich). A few dollars on a $249 iPod amounts to very little. I mean, they lose one dollar on each unit just by pricing them at $249/$299 instead of $250/$300 — another couple of dollars for the record labels wouldn’t amount to much.”

Gruber writes, “Apple, though, surely will continue to resist, if not outright laugh off, such deals. Partly out of general principle, but mainly because unlike Microsoft, Apple has leverage over the music labels because they have something the labels need: popularity.”

Full article with much more here.
So, what do you think, did Microsoft just get PlayedForSure by Universal or are the Microsoft sleazebags trying to poison Apple’s future negotiations with the even sleazier music labels or is it a combo platter of a “nice, warm, shit sandwich from Universal” with a tall glass of Microsoft poison?

Related articles:
Universal Music Group CEO calls iPod users thieves – November 11, 2006
Following Zune deal, Universal expected to demand iPod royalties from Apple [UPDATED] – November 10, 2006
Microsoft attempts to poison Apple’s licensing deals with music labels – November 09, 2006
Microsoft to pay Universal for every Zune sold – November 09, 2006
Study shows iPod owners significantly less likely to steal music than the average person – January 13, 2006
Warner’s Middlebronfman: ‘We sell our songs through iPods, but we don’t have share of iPod revenue’ – October 05, 2005
Warner CEO Bronfman: Apple iTunes Music Store’s 99-cent-per-song model unfair – September 23, 2005
Real CEO Glaser calls Apple iPod owners thieves – May 11, 2006
Microsoft CEO Ballmer: ‘Apple iPod users are music thieves’ – October 04, 2004

37 Comments

  1. I don’t know how much of this deal had to do with iTunes as much as it has to do with the future of Zune. (In fact, it may be kind of arrogant to assume every deal that any company makes revolves around “poisoning” the iTunes water.)

    Zune Marketplace and iTS is nothing without content, so the labels have the upper hand. Especially when it talks with an upstart like Zune.

    Then again, Zune’s strategy may be to give labels a small buck if they allow better deals. I think this is all about long-term deals, though: Zune may be in a better bargaining position because they’ve ponied up a bit of change.

    After all, MS is still making a profit on each Zune sold, just “not as much as [they] would like to” according to the Execs.

  2. This is a UMG thing and expect WMG’s Bronfman to start in on this topic soon.

    As I’ve said already: Apple should use its cash and market cap to acquire WMG and EMI ($8 billion combined) and give it to Eddy Cue as his personal plaything.

    In the words of the Emperor Palpatine: “Kill them, kill them all”.

  3. Well,

    This arrangement was created by a genius and nothing less ( most likely by the Universal Music Group ). This is an exmple of a very important key move played by the music industry to once again take further control of the “industry” and its profits. It all hinges on Microsoft’s success however. If Microsoft is able to market their product and create an installed base, this will allows or would give greater strength to Univerasal to alter its contract with Apple Computer. Hence, they sell music and make even more money from both key groups ( Apple and Microsoft ) while dictating the rules of the contract. If however Microsoft does not do well, in the short term, they have lost nothing ( Universal Music ) and Apple will not be affected. This is an opinion. ” width=”19″ height=”19″ alt=”grin” style=”border:0;” />

  4. Well let’s see. . . just in the last week or so Microsoft refused to say which labels would be a part of the Zune Marketplace at launch. Then recent reviews mention the Zune Marketplace only having 2 million songs compared to iTune’s 3.5 million. Then just a few days before launch, voila, a deal with Unversal was struck. You figure out what happened.

    Does anyone really think that Microsoft, which has been working on the Zune launch for months, suddenly prior to launch decided they wanted to “make sure the artists got paid”, but only artists on Universal? Please!

  5. If Apple were to accede to Universal’s blackmail, it will do nothing but benefit Apple. With the sole exception of maybe the Sansa, all other manufacturers of portable music players are struggling to make a profit (assuming they are).

    If Universal is getting $1 per player, and has a 33% share of total music sales (at the label level), then ostensibly, with all labels charging a prorated share, the total fee would be $3.00 per player.

    Add another $3.00 to your COGS, that in the face of the iPod is barely breaking even, and all of a sudden it is non-profitable. This would be especially true of the smaller for the smaller/weaker manufacturers.

    Now if you current device has been abandoned by MSFT (PlaysForSure) and now your manufacturer has gone out of business, how likely are you going to be to buy another similar product that has the same potential problems? If one in ten owners opted for the iPod instead, Apple gains 2% of the player market as a result.

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