C|NET: Microsoft Strikes Deal for Music

[Jason Dunn]

<div class='os_post_top_link'><a href='http://news.com.com/Microsoft+strikes+deal+for+music/2100-1027_3-6133901.html?tag=nefd.top' target='_blank'>http://news.com.com/Microsoft+strikes+deal+for+music/2100-1027_3-6133901.html?tag=nefd.top</a><br /><br /></div><i>In a rare move, Microsoft said Wednesday that it had agreed to pay a percentage of the sales of its new 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, which releases recordings from acts like U2 and Jay-Z, said 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, according to executives who were briefed on the pact.</i><br /><br />This is huge - no hardware maker has ever agreed to cut a piece of their profit pie off and hand it to a music company. This is a sign of bad things to come, but it's also a sacrifice that Microsoft was evidently willing to make in order to secure music from Universal for the Zune Marketplace. The question is, will we start to see a bump in the cost of audio players as every studio will now take this as a sign they can withhold their music in exchange for a cut of the hardware costs? No matter how you slice it, this is extortion - Universal should make money when people buy the music their artists produce, not when someone buys a music player and loads it up with whatever music they wish. There's nothing but bad here...

[Felix Torres]

Just for the hell of it:
How is this different from paying a tax on blank tapes or disks to compensate the studios for piracy?
For one thing, it is voluntary (more or less) and at 1% or less, MS can afford it. For another, how are direct negotiations worse than government-mediated intimidation? Is it really better to have the studios lobby the government for a mandatory tax?

As is, the outfits who sell unbundled players (Sandisk, Creative, etc) don't have to negotiate with the studios.

Seems to me the only outfit that has to fear this precedent is Apple...
Which probably makes this a *plus* in MS eyes... :twisted:

[Janak Parekh]

Felix,

Please tell me you're not advocating giving more money to these money-grubbing studios.

--janak

[Phronetix]

What were they thinking? 8O

So, I believe it goes like this: Microsoft is willing to do whatever it takes to gain the favor of the studios, even sign on to a deal that voluntarily takes on a studio as a parasite of their income. If they can gain the studios favor, then I believe they hope that studios will migrate their loyalty over to MS, at the expense of Apple and the iTMS.

I'm not sure that Apple need be all that worried... it seems like a ridiculously self destructive way to do business for MS. They are like the nerd of the class buying the favor of the jocks, so they bring him to all the good parties. In the end, he's still the same nerd, just with questionable judgment.

How can Apple respond? Hmm, by doing nothing and watching how the market responds. Heck Apple could, if they wanted to, set up their own music label, and market their artists via the iTMS, and offer a better cut than the studios can offer now. I would say that Apple has considerable clout.

This is getting interesting, very interesting.

[Felix Torres]

Felix,

Please tell me you're not advocating giving more money to these money-grubbing studios.

--janak

I'm advocating nothing.
I'm merely questioning the assumptions of the conventional wisdom.
(Notice my first line? :twisted:)

It is easy to decry the money grubbing studios and feel good. A bit harder to step back and consider all the ramifications and come up withna viable substitute for the MGS's.

We live in the real world, where politicians the world over can be cheaply bought (just ask Microsoft what it cost them to offset the donations of the old Netscape CEO to the Clinton campaign in 92) and government action or new laws brought to bear on opponents dirt cheap. People decry competition by litigation (and that rarely works) but competition by bureaucractic meddling and by purchased legislation works every time.

Over in Canada the "money-grubbing studios" got the tape tax applied to all DAPs, didn't they Mr Dunn? (I think it got overturned but I'm not sure.)
Several countries in Europe have similar laws on the books.

Efforts to enact such a tax in the US are ongoing but so far the "lobbying" efforts are cancelling out and the status quo prevails. With the change in Congress this week, things may be different next year, though.

Much as we might all like the "money grubbing studios" to quit their whining and go home, the reality is these are publicly owned companies run by folks whose jobs depend on "the numbers". And when "the numbers" trend down, jobs get lost. So the MGS's are *not* going away until they get their pound of flesh, one way or another.

Now, we really don't know what went on in those negotiations between MS and Universal and who got what. For all we know, MS offered-up that half-percent royalty in exchange for the right to let users zap music around. Or maybe it was a straight extortion play on a company that is two days away from launching their DAP-and-online-store combo product that simply couldn't afford to fight an antitrust claim against the MGS's. We don't even know if these deal will apply to the other 4 major studios or if Universal was merely the last holdout. Makes a difference, no? Half a percent to one studio stings less than 2.5% to 5.

But, for the sake of argument, lets say the precedent gets applied to all studios and all DAP-and-online-store combo plays. That is MS. Apple. Who else? Sony? Ha! Deep pockets all. I'm not crying for any of them.

All the other major players are Playsforsure licensees, no?
They *don't* do combo plays; that's what PFS is about. PFS is about not needing to write drivers, library-management apps, and not having to run an online store.

Folks have been angsting about the impact of Zune on PFS and the loss of MSN Music is a big minus to those of us with PFS players, but this deal *at its worst* strengthens PFS. Cause PFS players don't need studio deals and don't have to shell out 2.5% to the MGS's. That is likely a good chunk of the PFS licensing fees right there.

So, yes; maybe MS got strongarmed. Or maybe they figured out a *cheap* way to strengthen PFS and put a bit of extra pressure to Apple. Cheap, cause best estimates are MS is likely to sell maybe 600,000 Zunes this year. Even at 2.5% that is barely $3million.

After, that, it all depends on Zune's success and Apple's ability to avoid the same terms. We may yet see this lead to a fight between Apple and the MGS's (a win-win for MS) or Apple having to pay the same royalties, which would increase their costs but not those of the PFS manufacturers.

Hence my thought that as an alternative to a government-mandated tax that applies to all players, a fee that only applies to combo plays may not be the worst of all worlds. Because I prefer that players and music stores be separate, unbundled products, anything that strengthens the "independents" and hurts combo plays is, if not good, at least not bad.

Remember, things are never so bad they can't get worse.

I for one can think of a worse scenario that this: one where there is no consumer choice and no music transportability; A world where all music is locked up in iPods, walkmans, and Zunes and there are no independents. That is not a planet I want to live in and if the MGS's are the only thing that stands between me and that nightmare, I'll grit my teeth and put up with them. At least until they've served their purpose and die their natural death of disintermediation... (But that's a topic for another day; this is already too long.)

Of course, the Pod-people won't see things this way but then, they live on a different planet anyway. :twisted:

[Jason Eaton]

Maybe I am in the minority here but I guess I have to give this the digital equivalent of a shrug.

I guess it depends on how you view what went on. Did the studios hold Microsoft’s feet to the coals and coerce an agreement out of them by holding the media hostage? Or did Microsoft enter the deal willingly to secure media rights and potential future sales for Zune?

I don’t think the view really matters. Call it what you will but in the end this is just business and the rest is just spin to make it look like one side got the better of the offer.

In my opinion once you boil down the layers and track down the reasons for the compromises and deals it all comes down studios struggling to change their business model. Before they had a physical object to sell and now we have bytes. So the industry is trying to stay afloat by switching where their profit comes from.

The symbiotic nature of this new beast will eventually find the middle ground each can survive on least both die by default. In the end for consumers you can either pay for it through the DAPs or pay for it through the music. In the end it is just economy semantics.