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Gadgets Universal to Take a Cut of Zune Sales
Brandon Hill (Blog) - November 9, 2006 1:28 PM
Print 41 comment(s) - last by JeffDM.. on Nov 10 at 7:43 PM
Universal stretches out its hand and Microsoft gladly hands over the cash

Universal Music Group wants a piece of the action when it comes to Microsoft's Zune music player. Not only will the company receive a cut of each song sold, but it will also get paid for each Zune player that is sold.

The announcement could set a major precedent for mobile devices that playback music. Not only will Microsoft's Zune be affected, but future players from Apple, Creative, SanDisk and others could see a "tax" placed on player sales.

Apple, which is the dominant player in the music player market, currently doesn't pay music studios for each player sold although that could change in the future.  "We were very early in working with Steve on the launch of the iPod and he's been a very good partner and done a lot for the industry. We have a current contract with him and at the end of that I'm sure we'll negotiate," said Doug Morris, chief executive of Universal.

BetaNews was able to provide these additional details concerning the royalty payments:
The formula for these proceeds will be calculated based on the number of Zune units that eventually sell through to consumers. This fact is critically important, especially since it distinguishes the type of royalty payments Microsoft will be making, and how they may be regulated under current US law. The royalty payments, UMG told BetaNews, will not be a percentage of the revenue from retail sales, but instead a flat fee based on the number of Zunes that end up in consumers’ hands...Though the spokesperson would not reveal the formula used to determine the amount of Microsoft payments, we were told it would be a flat fee, not a percentage. The fee will not be $1 per Zune sold, contrary to what The New York Times reported this morning, leaving us with subtle indications that the fee is actually higher.

It's interesting that Microsoft would agree to such terms with Universal given that the Zune will be a money-losing proposition for the company in the short term. Microsoft's 30GB Zune player is set to launch on November 14 at a price of $249. Songs will be priced at 99 cent each while an unlimited Zune Pass subscription will cost $14.99 per month.

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But Why?
By TomZ on 11/9/2006 2:08:49 PM , Rating: 3
But what is the real reason that Microsoft is paying Universal for each Zune device that is sold? I don't really understand the justification. Anybody know why?




RE: But Why?
By Ralph The Magician on 11/9/2006 2:14:05 PM , Rating: 5
To hurt Apple. That is the only reason. By doing this, they gain favor of the record companies. Next time Apple goes to renegotiate, Universal can say, "Well, we aren't going to give you that $0.99 per song deal anymore. We want floating prices and/or a cut of all your hardware sales. You know how Mac's have iTunes on them? we deserve a cut from that too. What? You won't give it to us? Fuck you. We're going to lunch with Steve Ballmer later anyway. Have a nice day without any of our content on iTunes."


RE: But Why?
By Napkin Sketch on 11/9/2006 3:02:06 PM , Rating: 5
Microsoft has no dominance in the marketplace so of course they have to pay Universal to gain some support. It would be interesting to note who contacted who on this situation.

Apple can simply tell Universal to enjoy screwing themselves if they want to pull the same with apple. It simply won’t happen as there is to much for Universal at stake in regards to iTunes.


RE: But Why?
By hiscross on 11/10/2006 10:19:25 AM , Rating: 3
Let's see, Universal says good bye to a clear money maker so they can go with a company that doesn't know zip about the entertainment business or the consummers that purchase entertainment. Apple doesn't have a lock on anything, but they did music (and video) right. Microsoft and all the other music people still think consummers treat their MP3 playes like a DOS prompt (configure, configure, configure). My question to those DOS people, why do you put up with that stuff? This is 2006 (almost 07).


RE: But Why?
By sidekickkato on 11/9/2006 2:45:00 PM , Rating: 4
What will ultimately happen is the consumer will lose. Apple has been able to hold pricing to .99 per track despite the labels wanted to raise the price point. If Microsoft's tactic is able to make a dent in Apple's marketshare then you can bet the labels will have their way with pricing.


RE: But Why?
By Scorpion on 11/9/2006 5:23:46 PM , Rating: 1
Exactly. Wow this really aggrivates me. Microsoft is doing this to hurt Apple, to gain marketshare, but by giving in to a greedy and wrong system anyways, they are going to end up hurting the consumer.


RE: But Why?
By TomZ on 11/9/2006 6:04:49 PM , Rating: 3
First, Microsoft is not doing anything for the point of hurting Apple; they are doing this to increase their profit. That's what corporations are supposed to so.

Second, how can Microsoft's entering the market hurt consumers? Consumers today face a near-monopoly with Apple being able to set (fix) pricing and terms and conditions (e.g., DRM restrictions) for the entire online digital music market, practically on a global basis. More competitors will mean more choices, probably lower prices for consumers, and more innovation. That's good for consumers, right?


RE: But Why?
By Scrogneugneu on 11/9/2006 10:01:00 PM , Rating: 1
Wrong.

Microsoft and competition entering the market means Microsoft and Apple will compete to get the right to sell songs from the record companies like Universal. If Universal raised the prices before, Apple would just say "we won't buy it", so the whole market goes down... result : no raising in prices. Now, if they decide to raise the prices, should Apple (or Microsoft) answer they won't buy it anymore, the competitor will, and thus either you lose your place in the industry or you pay a higher price.

Record companies know how to make it their way. Competition at the selling point level is what drives prices higher between the record companies and the selling points. And this increase will have to be seen in consumer's products (whether it is in higher prices or more restrictive DRM).


RE: But Why?
By Scorpion on 11/10/2006 12:56:15 PM , Rating: 2
Why did I get modded down when the guy I replied and agree with got modded up? Tomz you are wrong, and Scrogneugneu is right and explained basically the reason I had for making my statements.

Microsoft's competition helps consumers with reducing the price of DAPs, but that's not what I'm argueing about here. I'm talking about the price of online music and DRM restrictions.

Apple has held a monopoly in online music sales. Through that monopoly they've been able to tell the labels to go shove it when they try to force their pricing structure on Apple, as well as any addition DRM restrictions. Now that Microsoft is siding with the record companies in order to draw some of Apples market share away, they are possibly putting the control of DRM and pricing schemes into the hands of the labels. Basically if you leave it up to the labels to decide things they'll charge us high prices and completely restrict any fair use. I don't think anyone would disagree with that. If Microsoft's buddying up with the labels to gain approval, they are hoping other labels will be attracted to Microsoft's camp, forcing Apple to follow, because once there isn't anyone to push back against the labels, you either follow in line or you lose your place in the industry. Similar analogies in politics and government abound, once you give up rights, they're twice as hard to get back. If you try to stand up to the man, and Joe Brown next door is giving in to his demands, who's going to end up losing? Are you seeing the point now?


RE: But Why?
By sdsdv10 on 11/9/2006 2:48:43 PM , Rating: 4
I see a slightly different reason. Apple may eventually be hurt by this but I don't think that is why it was done.

I believe it is simply because of Universal Music's greed. I think Universal feels that they were duped into a contract with Apple, having terms way too beneficial for Apple. But since there wasn't any other option at that time, Universal signed on the dotted line.

Now, several years later and MS is at the door. Universal knows that the Zune needs their music to be competitive with iTunes, so now the shoe is on the other foot. What is Universal going to do, you guessed it put the screws to MS. "You want us, your going to have to pay and pay and pay.... Muwah ha ha ha ha ha (slowly dieing evil laugh)."

Universal got the short end of the stick from Apple, now they are in turn going to hand it to MS. Greed, pure and simple.


RE: But Why?
By Nekrik on 11/9/2006 3:03:21 PM , Rating: 3
That's what I was thinking, this seems to be pioneered by Universal, not Microsoft.

"Universal got the short end of the stick from Apple, now they are in turn going to hand it to MS."
- Agreed, and this is a perfect chance for the Apple spin and Steve comes out like a hero because he 'did for his customers'. Right.


RE: But Why?
By TomZ on 11/9/2006 6:13:28 PM , Rating: 4
quote:
I think Universal feels that they were duped into a contract with Apple, having terms way too beneficial for Apple.

Oh, so you are buying Apple's marketing department's story that Steve went to bat for you and I against the evil record labels, to hold prices "low"? LOL. I take that with a grain of salt, and I seriously doubt that Universal is naïve enough to be "duped" as you believe into a licensing agreement that does not compensate them fairly in their view. All marketing spin, I say.


RE: But Why?
By sdsdv10 on 11/9/2006 11:05:10 PM , Rating: 3
No, that’s not it at all. Remember back to when iTunes opened, what other large on-line music store was out there? Answer: none. The only major competitor was Napster, and Universal wasn't getting anything from them.

And no, I don't think Steve Jobs is anyone’s friend. The way I think it went down was Stevie boy offered all the major labels a chance to get into paid on-line distribution of music. At that point the market wasn't very big, mostly because there wasn't really a market, and most didn't know what to expect (in terms of revenues and sales numbers). All the labels knew was that they needed to get on-line before pirates took away all the sales. Enter "they call me Mr. Job's" on his white horse to save the day. Again, since most label executives didn't know what to expect from this internet venture, Steve was able to negotiate a contract very favorable to Apple (i.e. the record labels only get money for songs downloaded, nothing else). Fast forward five years, the iPod has exploded, tens of millions are sold, millions of tracks are downloaded and Steve is sitting on piles of money. What do the labels get out of all of this, less control of the content than they like a few measly pennies on each download (which they have to reluctantly share with the artist). This scenario is what I meant by "duped". So yes, I very much think the record labels were naive when it came to digital transfer of musical content and the internet in general. If not, then please explain why they waited so long to get on-line, why it took them so long to address Napster and piracy, and why they needed Apple's help when it finally came time for digital distribution of their material. Naive doesn't go far enough, they were just plain stupid. I wouldn't be shocked if the record executives either didn't have computers or needed help from someone else to turn them on and off.

Ah but were not finished yet, now comes the good part. Here we are at the end of 2006 and Microsoft is developing their own DAP, but they need content. And where do they get content, you guessed it.... the record labels. However, this time they are neither naive nor stupid, they know exactly the type of money numbers involved. And since MS needs them more than they need MS, Mr. Allard and company must bend over and take it like a man (i.e. money for each song download and money for each Zune sold).

Now granted this is all speculation on my part, but knowing what I know about large corporations I would be very surprised is went down very differently.


RE: But Why?
By chaos386 on 11/9/2006 8:02:03 PM , Rating: 2
Maybe the Zune will come pre-loaded with a couple songs from Universal?


RE: But Why?
By crystal clear on 11/10/2006 5:17:32 AM , Rating: 2
This is for TOM in response to his comment-

Just as A TV is a useless device without content(TV programmes),or a console without games,similarly Zune is a device without contents is useless.
If you want buyers for your stuff ,you got to put in an attractive package(contents) & to beat the competition you got even more further down the road.
To become an IPOD killer you got put in one good killer package deal.
MS intends to get in their net some more fishes like-
SONY,WARNER,EMI,BMG to make it a real killer.

By the way read this link -
Big labels are f*cked, and DRM is dead - Peter JennerClash, Pink Floyd manager lifts the lid
http://www.theregister.co.uk/2006/11/03/peter_jenn...

Gives you an indication whats coming or cooking........

Back to the subject-
MS would be ready to pay $1 to a content provider per Zune sold as a Blanket license to use the contents.
Rember they are just entering a new market where IPOD rules
with a strong grip on the market.
You want to beat them you got have some thing really HOT
to sell -not only a device but the contents.
MS has the money power & wants to use it to its full potential.

I dont find this shocking rather expected some killer tactics to shake the market.


RE: But Why?
By JeffDM on 11/10/2006 12:54:25 PM , Rating: 2
Microsoft probably could have completely side-stepped the whole special content issue if they made their Zune Plays-For-Sure compatible and not bothered with yet another store, which is a smaller and taller walled garden than before. They already had an operating media store, or they could have left it to the other PFS stores tying into their media player. I'm not buying their explainations on why Zune is it's own little store. I think their explainations are full of "content" - the same kind of content you'll find in haggis.


Like VHS?
By ninjit on 11/9/2006 2:12:15 PM , Rating: 2
I remember reading a while back how some countries had an addition tax on VHS recorders and similar media recording devices, that was then put into a fund to compensate content providers for the expected recording/replaying of the media they produce.

I may not have the details straight, but that might be the reasoning behind this agreement too.




RE: Like VHS?
By mracanelli on 11/9/06, Rating: 0
RE: Like VHS?
By TomZ on 11/9/2006 2:58:43 PM , Rating: 2
I think that Zune will have strong DRM, so I don't see licensed content being able to be freely copied with Zune, unless Microsoft decides to sell unlocked content, which I seriously doubt. So the similarity to VHS and CD ends there. If MS should decide to license unprotected content, however, would help justify the payments that are now being reported.

quote:
It's relatively prevalent in Europe, who are definitely forward thinking in a lot of ways.

Hope you didn't hurt your arm too much patting yourself on the back. :o) All countries see themselves as progressive, obviously; it's all a matter of perspective.


RE: Like VHS?
By ninjit on 11/9/2006 3:38:36 PM , Rating: 2
quote:
I believe we may move towards this in this country... in America


Hope you didn't strain yourself too much reading the first 3 lines of the guys post before giving up on reading the rest.

if you had you may have realized he's here in the US.


RE: Like VHS?
By TomZ on 11/9/2006 5:23:04 PM , Rating: 2
LOL, read the whole post, but it is not clear that he/she is from the U.S. Even you are reading a bit between the lines. I just guessed that he/she is from Europe, but maybe I guessed wrong.


RE: Like VHS?
By akugami on 11/9/2006 3:49:18 PM , Rating: 2
DRM aside, one thing that is positive with the MS Zune accounts and music bought on it is the ability to designate "guests" who can download and listen to music you have bought on their Zunes. This is very similar to games on Xbox Live with the "guests" being able to play your bought games on their account for a time.

Not that I'm going to be buying a Zune or anything. It has some positives but not enough for me to switch from my iRiver and iPod.

I have yet to see anything from the Zune that would truly be compelling enough, and not hampered by design issues or DRM, to make users of iPods and other MP3 players switch.


RE: Like VHS?
By BladeVenom on 11/9/2006 8:09:40 PM , Rating: 3
It's not forward thinking. It's government corruption. Government taxes people to give to the greedy music cartels.

Why should I be forced to pay the music companies when I make a Linux CD? Or a demo CD, game mod, hard drive backup, etc.


RE: Like VHS?
By jconan on 11/9/2006 9:16:25 PM , Rating: 2
since most government elected officials/politicians are funded by lobbyist/special interest groups they must cater to special interest groups ie by setting up laws in the lobbyist/sig's favor not in the consumer's interest. government officials (e.g. jack abramoff, tom delay) = corruption

how many laws have been passed or written in favor of lobbyist or sig's as opposed to the consumers or citizens? software patent laws, dmca, etc... as we become more and more of a digital society in terms of technology there is no such thing as property ownership just license. buy once and buy again to use if not compatible; not buy once and use anywhere

however if the music publishing association were smart they would have created a universal standard drm independent of ms and apple and other so that consumers can transport their music just like they do with physical media... if their price was reasonable they'll be able to dictate their own pricing and portals independent of apple and ms and have their media played anywhere...


RE: Like VHS?
By Flunk on 11/9/2006 3:50:28 PM , Rating: 2
Yes, up until recently the Canadian goverment was taxing all blank media and giving the money to the recording industry (blank media included tapes, CDs, DVDs and MP3 players). The tax was particularly bad on MP3 players where it was by the megabyte. I actually imported a MP3 player from the states to get around the taxes. This law was overturned a few years ago, but I can't recall when. So there is plenty of precidence for MS to do this, they are just pre-emptively avoiding a lawsuit.


RE: Like VHS?
By JeffDM on 11/10/2006 7:43:16 PM , Rating: 2
Given that the law was overturned, I don't understand why the precidence would be considered valid.

Does Microsoft give Universal $1 per copy of Windows because WMP can play unauthorized copies of Universal's medai? Was the developer of WinAMP sued?


By tdawg on 11/9/2006 3:04:07 PM , Rating: 3
In case anybody was actually interested in some facts on this, here you go: http://news.moneycentral.msn.com/ticker/article.as...

Hopefully this will make these arguments at least a little more knowledgable.




By TomZ on 11/9/2006 3:08:48 PM , Rating: 2
Interesting. The other users can then listen to the songs three times over three days before deciding whether to purchase the tune themselves. Wow, how generous. I hope Microsoft didn't pay much for that!


By tdawg on 11/9/2006 3:16:20 PM , Rating: 2
That's how it was going to work before this agreement. You could run into another zune user and beam songs to each other to listen to up to 3 times within 3 days before they expire and you'd have to buy them.

With this agreement, they are talking about an increase in usage rights, so we'll have to see what that brings us. If it doesn't bring anything new to the table in terms of how we can use/share our music, then it seems like a pointless and unnecessarily costly agreement.


By tdawg on 11/9/2006 3:22:41 PM , Rating: 4
By the way, anybody wish we could rate the actual article besides just rating the comments? I know it's monumentally popular to bash MS here and by the tone and lack of information (begetting misinformation), I'm surprised that that Microsoft wasn't spelled out as Micro$oft!

You'd think before this newsbyte was written, some background checking would have occurred, or if not that much, at least a consideration of, "Why would Microsoft give money away?" before spreading this "news", causing the reporter to hopefully do some digging before blogging.


By TomZ on 11/9/2006 5:25:05 PM , Rating: 1
I agree, which is why I started my "But Why?" post because that is an obvious question that is left unanswered by the article.


Ridiculous
By psychobriggsy on 11/9/2006 2:17:18 PM , Rating: 2
Okay, so this sets a precedent that will hurt Apple more if they're forced to pay a fee on each device sold, which seems like typical Microsoft behaviour. However Apple have enough presence to be able to tell the industry to stick it where it doesn't shine ... at the moment anyway.

However the ENTIRE concept is stupid and wrong. Music players and music creators should be in a symbiotic relationship, both helping each other. How much money goes to Universal when I buy a CD Player? Some goes to Sony and Philips because they developed the format - simple licencing fees.

Hopefully all the other labels will start pestering Microsoft as well asking for their 'fair share'. Of something they aren't licensing patents/technology for, or had a hand in designing ...

If Universal would only make their music available in UniversalDRM format, then that would be a reason to pay them. But not simply because it's an audio player and Universal happen to be in the provision of audio business.

Or does it mean that since we've paid Universal, we can put any Universal music we want on the player, without paying for it?




RE: Ridiculous
By Ralph The Magician on 11/9/06, Rating: -1
RE: Ridiculous
By kamel5547 on 11/9/2006 2:30:06 PM , Rating: 5
For what? Having a 0% market share in that business? For paying licensing to another company? Neither one of those smack of monopolistic behavior. On the other hand Apple's behavior toward the music companies does.... if Apple went to the DOJ more likely than not all the music companies would point the finger at Apple and say they were using their market share to get unfair licensing terms.

Sorry but Apple can't do anything about Microsoft's strategy that will not come back to haunt them.


I just refuse...
By Shadowself on 11/9/06, Rating: 0
RE: I just refuse...
By tdawg on 11/9/2006 3:13:13 PM , Rating: 2
You do realize that the price of the zune doesn't change. It was $249 before this agreement, and is still $249.

There are other places to buy music online, or you could just buy a cd and rip it to your computer and load it onto whatever device you wish.


RE: I just refuse...
By Shadowself on 11/10/2006 9:21:15 AM , Rating: 2
It is the principle of the thing.

True, the price of the Zune is unchanged, but why should $10, $15 or more dollars of every Zune go as a DUPLICATE payment to the music houses? That's just double dipping. Thus I won't support it.


10% of a negative number...
By shamgar03 on 11/9/2006 4:11:20 PM , Rating: 2
So wait, the "cut" from each player would be negative wouldn't it...microsoft you are INGENIOUS




Moderated
By Spar on 11/10/06, Rating: -1
If you ever had a doubt...
By Ralph The Magician on 11/9/06, Rating: -1
RE: If you ever had a doubt...
By KeithTalent on 11/9/2006 3:30:57 PM , Rating: 3
WTH are you talking about??

From all of the more useful, informative, and fact-based articles I have been reading (this DT article is terrible) about this deal, it is is to allow users to more freely exchange songs wirelessly.

Universal is relaxing restrictions since they will now receive this payment and the end Zune users will have the ability to exchange their songs using Wi-fi, something that was still somewhat up in the air before due to copyright restrictions.


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