Microsoft Makes Desperate Licensing Deal With Universal With Big Implications

Drastic Move By Microsoft May Change Portable Player Paradigm

In a move reeking of desperation, Microsoft revealed that it has agreed to pay a percentage of the sales of its new Zune 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.

Universal disclosed it would pay half of what it receives on the device to its artists. The company is expected to receive more than $1 for each $250 device. The deal represents a big departure from the standard set by Apple Computer, which pays record companies for songs sold through its iTunes service but does not give them a cut of the sales of its hugely successful iPod.

Under the deal, Universal, the world’s largest music corporation, will receive a percentage of both download revenue and digital player sales when the Zune and its related service are introduced next week. The pact comes after weeks of tense talks and averts a standoff that might have crippled Microsoft’s attempt to compete against the iPod.

The accord also could represent a sea change in the dynamics between technology developers and the media companies that provide the content that plays on their devices. It illustrates how music companies are scrambling to attach themselves to fast-developing online businesses. 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.

A recent study estimated that Apple has sold an average of 20 songs per iPod — a fraction of its capacity. The rest of consumers’ music files — 95 percent or more — come from ripped CDs, possibly including discs from their own collections, and illegal file-trading networks, the study said.

As a result, music companies have long coveted the revenue being generated through devices like the iPod. But so far, they have had little recourse. In 1999, a federal appeals court ruled that one of the earliest digital music players, the Diamond Rio, was not covered by a federal law that required makers of certain audio recording devices to use anticopying technology and pay a royalty to the record labels.

In announcing the deal with Universal, Microsoft said it would now offer similar royalty deals to the rest of the industry. 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. However, it’s obvious to industry veterans that Microsoft was determined to achieve licensing deals, no matter what the cost.

The deal may provide some leverage for Universal to insist on a cut of future iPod sales when its existing contract with Apple expires next year. However, Steve Jobs, Apple’s CEO, has already called the labels “greedy” and will probably not acquiesce.

Under federal legislation passed in the early 1990s, the recording industry receives a royalty on sales of certain audio devices like digital-audio tape machines. But the devices covered by the law do not generate much: the nonprofit organization that oversees those royalties distributed just $3.5 million to labels and artists last year, according to its Web site.

Given the industry’s sluggish sales, Universal and the other major labels have had plenty of reason to try new business models and take a firmer stance with technology companies. CD sales continue to decline, and digital music has not offset the drop. In addition, the pace of growth in digital sales has been slowing by some measures.

Microsoft ultimately had plenty of incentive to make a deal with Universal. Microsoft is laying a huge wager on the Zune. If it had not struck a deal, it would have been left in the position of trying to mount a credible challenge to the iPod without Universal, which accounts for a third of new albums sold in the United States.

Author: FutureMusic

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