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Microsoft, Zune & The Music Mafia

The New York Times reports that Microsoft has cut a deal with Universal Music Group which will allow the music giant to get a percentage of the sale of its upcoming digital music player, Zune. The report says that the amount being paid to UMG is going to be at least $1 per $250 device. Microsoft is going to extend the same deal to others in the music business.

UMG had been holding off on licensing music to Microsoft, which would have threatened Zune plans to take down iPod and Apple. Classic Mafia shakedown: pay us or else. The argument being made is that people are not buying enough via digital downloads, so the music industry should get a piece of the hardware action.

The New York Times brings up the tired old study that shows 20-songs per iPod to support the music industry argument. Music industry argues that people are ripping their CDs and putting music on their iPods. Or they are stealing their music from P2P networks!

“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.”

Copied music? What a bunch of crap? Any business that perceives its end customers as crooks and thieves should go the way of the a broken ice cream cone on a hot summer afternoon. The CDs I buy, I pay for, and I can do whatever with them. Play them on my CD player, rip and transfer to my MP3 player, or simply put them in the microwave and nuke the damn thing.

In this battle of the monopolists, Microsoft blinked and decided to pay up. (Would this have happened a few years ago, when Microsoft ruled the technology planet?) Remember how Jobs stood up to these music industry bullies. Today they are asking $1 a device; what is to stop them from asking for say $10 or $20 per device down the road. This shakedown should result in a serious investigation into the music industry cartel.

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.

46 Responses to “Microsoft, Zune & The Music Mafia”

  1. Someone asked a very good question (sean I think). What about the musicians? Well most of them get nothing from CD sales at all. Not unless they make it to the top of the pops or whatever. I know this because I used to be in a band and I had to deal with this. You get an advancement and a contract you can’t get rid of, and never see any money from them again unless yousell hundrends of thousands of copies of whatever they create. And most of the time you need to use the money you get to record things anyway, so the income is practically zero. For Musicians get money from live-shows.

    What I do is I buy music streight for the bands – if they offer it ofcourse. If the music industry goes down it, well, that’s fine by me. They do not make the music, people do. And the people who do make music would be much better of without them.

    Sorry for getting a bit of topic, but the music industry has been stealing from the artists for decades now. I felt somebody had to point this out. Do some research about the contracts offered to the artists and what they actually mean and you will see my point.

  2. Ted Avery

    Werner, It has already been said by Doug Morris that the Apple renegotiation is coming up.

    Sure, ITunes represents 80% of the pie now but that number would quickly be replaced by any number of distribution outlets if Apple ceased to exist. They have very little leverage in any negotiation with rights holders. Sure, the sales are nice but the right to be able to sell the songs is a much larger trump card.

  3. ” 2) UMG will use this deal as a precedent for next year’s negotiations with Apple.”

    Why do people assume Apple renegotiate’s every year? The first round of deals was for 2 years, and the second round the term was undisclosed but much likely probably longer.

    As for thinking this precedent has any weight, it doesn’t. UMG says, “Well, Microsoft paid it.” Apple says, “We represent 80% of all digital sales, are the #3 distributor of music (soon to happen) of any media (hard or digital), we sell several million tracks per week.”

    Oms final statement is brilliant and deserves repeating: “If Apple had to pay at least $1 per device for every iPod sold over past [five] fiscal years, its cost would be $62 million at minimum: or about one more song per device [or 12.4 million per year or .2 songs per year]. If music industry cannot sell [two-tenths of an] additional song to consumers [per year] (and has to blackmail for more money) then, you as a business, have lost grip over your core competency.” [Revised for accuracy.]

    Or more appropriately consider the varying degrees of leverage if Microsoft somehow, miraculously sold as many Zunes in year one as Apple has sold over five years: MS nets $62 million for UMG, Apple nets .65 (% given to studios per track sold) x 1,000,000,000+ x 1/3 (the % of the market UMG represents) = $216,666,666+. That makes Microsoft’s/UMG’s leverage equal to 28% of Apple’s share to/leverage over UMG presuming that Microsoft can equal Apple’s market over 5 years in one year. Absurd.

  4. I have to agree that Microsoft’s arrangement with Universal is actually a bid to crush the competition, especially iTunes. A classical monopolistic tactic is to make arrangements with vendors which cannot be matched by your competitors, You accept losses only as long as needed to crush your opponents, then you can set whatever prices and arrangements you want.

    Microsoft’s current monopoly was created by forcing anti-competitive arrangements on their partners. Why would they ever regard this as a bad idea?

  5. I think it’s pretty clear that Microsoft and UMG are entering into an agreement because 1) Microsoft needs the content to open Zune Marketplace and 2) UMG will use this deal as a precedent for next year’s negotiations with Apple. The biggest problem, of course, is that this does nothing to advance the monetization of music files. If such a levy was enacted to provide Zune customers to download music freely, it would be a ground breaking moment.
    This is more akin to Ed Whitacre falsely claiming Google was getting a free ride through his network. Erecting tolls on device manufacturers will not save the music industry from extinction; only by embracing the idea of selling files and licensing usage can we move forward. Sadly, this is more of the same old techniques of being king makers for those who play nice with the content emperor.

  6. For a company that is battling Sony in the console business and beat Palm in the PDA OS market I find it incomprehensible that they would make this move.

    It seems like a desperation move by Microsoft even before the battle has begun with Apple or its bribery to make the Music industry feel more comfortable in working with them.

  7. stevenk – it’s scary if you really are a college professor. People who don’t agree with you are “smoking crack” or “twits”. Your class must be a circus if this is how you interact with your students.

  8. Ted Avery

    It’s interesting to read these comments because it shows the demographics of GigaOm’s readers. Just to let you people know, yes p2p is mainstream. Yes, the majority of music on most Ipods have been downloaded or ripped from friends collections.

    Sure, there are good upstanding working class people like others who have posted comments here on GigaOm that would never steal music but by and large the stats say YOU are not the majority in this case. Readers if GigaOm tend to be gainfully employed making more than the national average. That’s great for Om’s Rate card but it’s bad for getting comments based in market reality on topics like this.

    I think up to 5% of the wholesale price of Zune is a fair licensing fee to the labels. The majors can take 4% of that and dole out the remaining to the RIAA to disburse to the indies as required.

    If I’m not mistaken blank CD media makers have to pony up a fee. Same deal.

    Radio stations do. Same deal.

    You Tube, Yahoo Music, AOL Music same deal.

    These are businesses built on music use. Can you deny that fact? No, you can’t. So why shouldn’t they recieve a fee? Try enjoying an MP3 player with no new music over the next 5 years from the labels. It cannot be done unless you are very old and very unhip.

    Fair is fair. I can’t believe anyone is arguing against this one.

    50% of the licensing fee will go to the artists.

  9. Music industry? Last time I heard, Universal didn’t distribute any of the Bhangra music or Pakistani pop on my MP3 player. Even if they could argue that ripping my CDs to MP3 wasn’t approved DRM, they still don’t have any rights to this stuff.

  10. GJD,

    Go look at traffic statistics and take a look at how much of that traffic is p2p related. Then take a look at how much of that is music. Cisco makes money off this. It is mainstream.

  11. Harpo. Did you even take a class in basic logic? How does anything you’ve stated here refute what I’ve said. Apple sells more than Borders? And that leads you to believe Apple has leverage? Please explain how that is so? If the music companies pulled licensing from iTunes how much would their sales go down? Theoretically less than 5%. But it would be less because there are other options. Distribution is largely fungible. You twit.

  12. So if everyone pays a buck per MP3 player, will the lawsuits stop? Can someone sued in court just say “well, I already paid my $1 piracy fee, leave me alone!” ?

  13. So, you buy a Zune for Microsoft, Universal gets its $1 for the music you have or will steal from them. Bloody cheeky presumption that all Zune buyers will have music legally or illegally from Universal artists on it.
    What if you don’t happen to like or listen to any music on Universal labels? I doubt I have any music from labels owned by Universal. Maybe we should ring Microsoft and tell them to claim their 1$ back?

    I thought copyright in the US allowed you to rip CDs onto computer for personal use? It doesn’t in the UK I know (and blissfully ignore) as there isn’t any fair-use provision.

  14. The record company cartels are used to being the ones who benefit the most from a format switch. The vinyl-to-CD boom made them millions because it allowed them to resell old product to existing customers. They’d love to do that all over again with the download format. But they can’t. Transferring music from CD to MP3 for personal use is not only easy, it’s also 99.99% legal. The record companies can’t force a mass migration to MP3 on their own terms, by selling CDs with near-perfect, unprotected digital copies of songs, they’ve given users the ultimate, future-proof format.

    The reality is that record companies will not be able to sell us a format that is better than the CDs we already own. Sure, it might be more convenient to make future purchases by download, but you’re not going to pay for the same content all over again.

    Meanwhile, the real money in the new MP3 format age is being made by the hardware manufacturers and the cartels are green with envy. Apple knew the real money was in the hardware-software bridge. The record companies were still panicking over P2P when Apple cajoled them into supporting the iTunes Music Store. The record companies were getting the same fat cut they always got from music sales, but Apple realised that after the advent of CD, the real money was in the constantly evolving playback hardware.

    The movie studios are now learning the lessons of the record industry as they move into the digital age. Fortunately for them, they have two trumnp cards: CSS DVD protection and high definition movies. The legal minefield of ripping CSS-protected DVDs will prevent Apple from ever integrating the easy DVD-to-iPod conversion into iTunes, thus making it more convenient for some users to pay for an iPod-format download. The movie industry hasn’t quite reached the point where consumers have the highest quality product available at home, so protecting the new HD formats from potential ripping is the holy grail for the studios.

  15. Maybe the solustion is to stop handing out $20-60M contracts for folks like Britney and Mariah. All for lucarative contracts, these are excessive values and I dont think the music labels can recoup the environment in this environment. You cannot pay out more than you get (unless you are GM)and its high time the labels looks at their basic business model instead of holding on to an era (my hok or crook) that simply wont last. Rather they take the lead and come up with a better business model that is sustainable instead of bitching ..

  16. Some good posts. DRM says if I purchase a song, then I can put transfer it to whatever media format for MY use.

    I have a hard time believing the real economics behind this $1 fee. They’re telling us that they can’t sell 1 more song.

    Is this just Microsofteconomics or Music industry greed? It’s definitely not what they make it to be.

    Agree OM!

  17. stevenk, I have to take issue with your statement. This ’20 songs per iPod’ is simply the number of songs Apple has sold through iTunes divided by the number of iPods the company has sold. It bears absolutely no relation to the number of legitimately bought songs on each iPod.

    The iPod is mainstream. P2P filesharing isn’t. A college campus is not representative of the market as a whole. College students tend to have less cash than the average iPod buyer. But they do tend to be tech-savvy, have access to high speed campus networks and a friends with loads of CDs.

    The vast majority of the 64 million iPods out there are owned by people who simply rip their own CDs and then stick them on their iPod.

    Yes, some of these people will physically swap the odd CD and rip it, there are others who will dabble in P2P/bittorrent downloading (many of whom will end up buying a CD copy), and some who will download songs from iTMS.

  18. Charging people a levy to own a device to cover it for illegal use legitimises that illegal use and undermines the whole concept of paying for music. Far greater harm could be done by this than the short term gain of making a few dollars off hardware sales.

    I’d be interested to know how this money is divided up as well – will any of this reach the artists whose licensing rights are being traded here? In what proportion will it be divided out among them? Or is it all going to shareholders?

  19. In response to the ‘college professor’s’ comments: iTMS was outselling both Borders and Tower records by November 2005 (source: If you think that translates to ‘zero’ leverage with the record industry then YOU are the only one smoking crack here. Furthermore if the iPod stolen songs fallacy had any validity at all then Steve Ballmer wouldn’t have been forced to eat his own words when he spouted said nonsense? (source: What do you lecture in exactly? Comedy?.

  20. My iPod is full of tracks that I’ve downloaded from CD’s. Why should the music industry be unhappy about this? I’ve paid for these CD’s, the industry have already made their money from my original purchase of the CD’s. I’ll do what I like with MY own music.

  21. I think you are smoking crack if you think most ipods aren’t loaded with stolen music. You are out of the mainstream. I’m a college professor and it is quite clear most music is ripped from CDs and then passed around to friends. And then there are people like you or my friend Cody who has thousands of songs downloaded. The 20 songs an iPod is reality where you want to accept it. Do the math.

    Apple never stood up to the media companies. That’s is a mischaracterization. The media companies never viewed electronic distribution as being a big thing and so let Apple have their way. These companies own the media and next they will come after Apple. This got out of hand for them. Apple has ZERO leverage against their demands. “Don’t like it Apple? Then you can’t sell our songs on iTunes.” The iTunes/iPod integration story is also wrong. It is the player only that made it successful. iTunes is a cumbersome non-intuitive application on Windows. It’s much better on my Mac. But the kids today are using a number of other solutions.

    You are squarely not the primary demographic of the iPod no matter how hip and young you might think you are. :)

  22. Ridiculous! Perhaps Microshaft could recoup the cost by charging the clothing & accessories manufacturers that create the products that are used to carry the mp3 player?
    Ultimately it’s the consumer that pays. Just makes me less inclined to buy a Zune and less inclined to buy sub-standard downloads and copy protected CDs from backward major labels.

  23. Jake Worrell

    Hang on… I may totally misunderstand here but I get the impression that this $1 is to cover any money that Universal is missing out on due to illegal music copying (i.e. downloading from P2P). Doesn’t that mean that if I buy a Zune I have also payed for the damage that illegal download apparently causes. If thats the case I could download more Universal music with a clear conscience knowing that I have already payed for the losses. That can’t be right surely?

    But if they’re making us pay for illegal download. Well then its payed for… So we can do more.

    This strange logic (again, if i haven’t misunderstood) just proves that record companies are being greedy.

  24. M. Smith

    Missconeption again, when you buy a record, you purchase the right for you to listen to that record in any form of media you choose, you cannot however allow anyone else to here the recording (even in its orriginal form). This is also the rationale as to which the record labels would like us to pay again when buying second hand records.

  25. Misconceptions here. When you buy a ‘record’, you actually buy a piece of plastic or whatever. You do NOT buy the music. You do NOT OWN the music. Technically, even copying from your ‘own’ CDs is illegal. YES! What needs to be done is parallel to buying software, whereby you buy a CD and a box and a LICENCE to use the ‘software/music’ PERSONALLY. EDUCATION, people (and I include the music biz people in that!).

  26. May be Music industry did not ask for this. Microsoft gave it anyways to set a new standard in this business. Microsoft with its cash in bank can afford to have its margin crunch down but it will make life very difficult for Apple if all music companies start asking for royalties. Also may be Apple can pay but imagine if creative will have to do the same thing. By doing this Microsoft can easily vault to number 2 in hardware business and that will not be a bad achievement for a 1.0 product. if you cannot win the game then change the game I (Microsoft) say.

  27. That line about the iPods being used to house unpaid for music ripped from P2P networks is old and tired and simply false.

    I may be just outside of the mainstream, but I’ve purchased more than 1,200 songs from the iTunes music store in the last 3 1/2 years. I don’t buy CDs any more at all.

    The iTunes Library Confirms This:

    Those 1,200 songs represent more than 1/3 of my iTunes library. The rest? Overwhelmingly from CDs I already owned, which I imported, and a small percentage from DJs who offer their works (often hour-long sets) as downloads via the Web. Web-focused pioneers including DJ Lithium, DJ Irish and Underworld are good examples here.

    iPod and iTunes won because they have the widest offering of music, they offer the greatest user experience, and simplicity. It’s so easy to find new music I like and so easy to download it. I don’t think Microsoft can outdo iTunes/iPod on features and the end-user experience, even if they try to buy their way in.