At first, I thought I was reading something wrong when I got this press release this morning: “Microsoft Corporation (Nasdaq: MSFT) and Universal Music Group, the world’s leading music company, announced today an agreement which creates a groundbreaking, new revenue stream for UMG and its artists: in addition to the standard payments it will make to UMG for the sale of its music, Microsoft will also pay UMG a portion of Zune device sales.”

Wait, what? Microsoft is giving money away from hardware sales to a company in exchange for … um … well, nothing, actually?

Believe it or not, that’s exactly what’s happened. Mighty Microsoft is paying tribute money to Universal, and getting nothing in return.

Let’s be clear: paying for music is a good thing. I’m happy to pay a cover at a club to hear a live artist. I’m happy to buy a CD directly from the band. I’m happy to purchase a download from a band’s website. I’m happy to purchase an album from an independent label, many of which really can do a good job of promoting their artists’ work and sharing profits from record sales. I’m happy to support real-world record stores and independent online stores that support those labels. And, of course, I’ll buy mainstream big-label records because I enjoy some of the music — again, if possible, from an independent distributor.

And I’m equally happy to support license fees, which simplify the problem of how to cover more intangible uses of music. To take ASCAP as the US example, the idea is that a venue (like a bar) that uses music (bands playing covers, jukeboxes playing tunes) makes money off that music (and they do) so artists should get paid. (CESAC is the European equivalent.) I know people who have made a little money off ASCAP checks. ASCAP the organization is not an evil industry conglomerate. It’s run by members, and those members are publishers, composers, songwriters, and lyricists. It’s also a service organization that provides training, group health insurance, equipment insurance, community events, and contests to its members. You can argue with ASCAP on some matters, but at least what it does is determined by the people actually producing the music. (I’ll also say, both ASCAP and rival BMI are very supportive of contemporary concert music, which is a rare asset.)

There’s one underlying principle in all of these models: you’re paying for the music. And while any of these systems can be abused, the basic model makes sense.

Here’s a different model, proudly unveiled in a press release from Microsoft and Universal Music Group today. It involves paying the label (not the artist) for your hardware (not the music):

1. Instead of license fees covering music, they’ll cover audio hardware — with no music involved.
2. Instead of license fees being paid to the musicians, they’ll be paid to the record label. One (large, corporate) label.
3. Instead of a fair, standard license fee, that license fee will be negotiated independently by individual labels. Arbitrarily.
4. Hardware manufacturers, who theoretically ought to profit off a product they design, manufacture, market, and distribute, will now have to share those profits with a separate company that wasn’t involved in the hardware at all.

It’s easy to understand Universal’s logic here; this is great for them. Microsoft, like Apple with iPod, stands to get rich off music player sales. Record labels do not, because record sales are flat, and Apple has effectively blocked any increase in the royalty fee on download purchases. (Windows players are even worse; the subscription model is cheap for consumers but offers less revenue to music labels.) Universal wants more money, so they have to make up a new model by which they can get it.

And so, Universal made up a new model, by which they get paid for sales of music player sales. That makes about as much sense as Green Day announcing they want a slice of headphone sales. Or flannel shirt sales. But if you’re a business person charged with making up new ways by which someone pays you, I suppose it works.

The interesting question is, why would Microsoft agree unless they’re completely out of their minds?

Don’t bother bringing up the “pirated music” argument, because that doesn’t make any sense, either. Piracy, of course, isn’t mentioned in the Microsoft press release. The New York Times claims piracy was part of the argument. But let’s not kid ourselves: this isn’t about piracy, it’s about money. My strong anecdotal suspicion is that most of the music on people’s iPods, for instance, is actually ripped from their CD collection. But record labels don’t care that that’s theoretically legal, because they’d rather charge you again each time you move from one storage medium to another. The record companies were always in the business of making money off of distribution. If the money to be made shifts to electronics manufacturers and they don’t get a piece of it, they’re unhappy — not because they’re concerned about the ethics of the situation, but because they want to make more money than they’re making now, not less. And frankly, that’s their prerogative; the job of corporations is to make money, which is why we don’t look to them for a moral compass. But why Microsoft, also in the job of making money, would give money away is another question. Apparently, Universal scared them into doing so under the threat of removing their releases from Microsoft’s Zune store. This is tribute money, nothing else. But the fact that Microsoft agreed is a little scary, and it’s even scarier in terms of what it means for artists.

So let’s look back at the press release.

Translating from Universal Media Group Reality to Our Reality

This is going to be challenging, but I’ll do my best:

“announced today an agreement which creates a groundbreaking, new revenue stream for UMG and its artists.”

No argument there. It certainly creates a new revenue stream from UMG, which now can make money off a product it doesn’t manufacture. (Coming soon: “Universal Media Group and Post Cereal announce a groundbreaking new revenue stream for UMG and its artists: profits from Grape Nuts now go to a guy who manages alt-country acts!”)

“This move demonstrates there can be a win-win situation where consumers have a great experience while labels and artists are also fairly compensated.”

Wrong, wrong, wrong, completely wrong. This is a lose-lose situation for the music hardware industry, the music sales industry, and artists everywhere, period. If Universal really wanted to make the argument that music players were somehow stealing revenue from artists, by piracy, then the labels should have called for a blanket license fee. It’s not clear who would collect such a fee, partly because our intellectual property law in the US and in international treaty is hopelessly outmoded. You could try to argue this was a mechanical license, going to an agency like Harry Fox, or if you really wanted to stretch things, a performing license, managed by groups like ASCAP. But regardless, you’d have license fees going to the proper artists in some form.

Instead, Universal’s choice to unilaterally negotiate a fee on a product that doesn’t even have its music on it until a consumer puts it there endangers the entire music industry. It says, rather than find a solution that works for all labels, labels will be left to fend for themselves. And instead of doing something logical, like ask for more royalties on online music sales from Zune Marketplace, Universal gets paid money without providing any service.

Who really gets hurt? Independent labels, for one. Microsoft generously put some really cool, independent labels (like Sub Pop) onto the Zune, promoting their artists. That’s terrific. Now, a significant slice of Microsoft’s profits go instead to pay Universal, in return for … nothing. It proves that it’s the big labels calling the shots, yet again.

And, of course, artists completely lose out — again. Especially if they’re not on Universal.

Consumers lose, too, because the mightiest record labels get exactly what they want, squeezing out (again) those of us who want more musical choice.

And, while it’s their own darned fault, Microsoft loses. Microsoft is effectively making a commitment to hand out cash to any label. The labels can squeeze Microsoft by threatening to remove their music from Microsoft’s online Zune store (which is really what this whole thing is probably about). It’s like the old anti-competitive practices of old — only this time, Microsoft is on the receiving end. (And Microsoft never did something this strange; this is the equivalent of charging PC makers an extra license fee just in case someone pirated a copy of Office.)

Why Microsoft is then releasing a press release saying “We Proudly Announce We Got Out-Negotiated by Universal Music Group” is beyond me.

Some users are already saying they’re dumping their Zunes. That’s a little silly; it’s just a piece of electronics. If you’re going to dump anything, it seems like it should be the music sales services from iTunes and Microsoft that are getting manipulated by the record labels. And go out and buy some CDs — at an independent record store. Or better, from the band. Out of their guitar case. At a live gig. Rip them to your Zune, and enjoy.

“We believe that the music consumer will appreciate knowing that when they buy a Zune device, they are helping to support their favorite artists.”

Heck, yeah. When you’re using your Zune to listen to music you love, bought from the artists and independent labels that support it? Absolutely. Just don’t try to convince us, Microsoft, that by you paying cash to Universal artists gain anything at all. And next time, you might want to consider skipping the press release when you make bad business deals.

Updated: I should add, theoretically UMG artists will benefit from this deal. NYT quotes an anonymous source that suggests 50% of the proceeds (expected to be $1 on a $250 Zune sale goes to the artist). But it’s not clear how that fifty cents would get divided among UMG’s stable of artists, why UMG is making 50 cents off of a hardware sale they had nothing to do with, or what that dollar is suppose to represent in the first place. And negotiating this side deal, rather than advocating a blanket license fee that would benefit everyone, is doing a severe disservice to artists, many of whom aren’t signed with UMG.

For Microsoft’s take: Cesar Menendez is working on the Zune project for the company and has a Microsoft-sanctioned blog, in which he defends today’s move.

On the Universal Deal [Zune Insider]


Why? We’re about supporting artists, and ensure they continue to prosper with the emergence of the digital music model. The distribution of digital music isn’t that old, and the current method isn’t really doing a lot to compensate artists fairly …
Yes, UMG will share a portion of the proceeds with their artists. No, neither MS or UMG are disclosing the specifics. And we’re already talking to labels (yes, both indies and majors) and offering up the chance to participate in a similar way.

Given that musicians don’t really have a role in hardware sales, perhaps a better way to ensure the emergence of a new digital music model: give that per-device amount to Save the Music and ensure the next generation of musicians has a future, for when people unplug Zune earbuds and pick up an instrument.

Previously on CDM

More Zune Coverage; Why Hobble Wi-Fi?

Microsoft Not Turning Back on PlaysForSure with Zune Player

MTP, Portable Player Standard? Microsoft’s McLauchlan Sets Us Straight

Roll Your Own Zune

Think you can do better than Zune? Put your money where your mouth is, and build your own music player:

DIY Portable Music Player Kits

  • Right, but:

    1. Beamed music should be covered under the existing subscription license. That license should cover the music, not the device. Why not increase the license payment on subscription songs?

    2. Paying tribute money doesn't help you increase market share, unless there's part of this deal Microsoft isn't sharing. (Like some kind of reciprocal favoritism from UMG when it comes to online sales.) Whatever that end of the deal may be, I'm fairly certain it has nothing to do with "supporting your favorite artists."

    And related to that, I doubt seriously that UMG would give up their relationship with Apple over some cash — especially since this isn't all that much cash we're talking about here. Apple still represents the bulk of the market to Universal, so it'd be unlikely that a little payoff would compel UMG to favor Zune over iTunes. Equal treatment, maybe — but then the formula for UMG becomes squeezing cash out of Microsoft because they're the weaker player, not the stronger one.

  • bliss

    What The F^@&!?

  • Crap; our comment system just nuked the original comment by Matrix. We'll have to see if we can fix it.

  • Will anyone ever buy a Zune anyway? I mean, it cripples your music – any music – with its DRM system, even if you copy free .mp3s onto it. This device is utter crap.

  • velocipede

    Righteous, Peter.

    I missed Matrix's comment, but I also think that behind this deal is an alliance against Apple. Microsoft's business people can't be that stupid. If it was really a bad deal, someone would have stopped it. Why else would M$ voluntarily give up money like that? I cannot imagine that UMG would withhold their catalog from Zune.

    Long-term, they must figure that exclusive access to UMG's catalog will help them overtake iTunes and the iPod. When does Apple's current contract with UMG end?

    If this leads to the balkanization of music distribution, with some labels on iTunes and other on Zune, though, I think it could actually harm the large labels. Artists will choose smaller labels that aren't fettered.

    Then again, maybe UMG is actively going to help market and sell Zune and this is just a kind of sales commission.

  • none

    Actually Warner Bros owns 49% of Sub Records (they did this back in the 90's), so Sub Pop is what you would consider only 51% Indie. The other 49% is The Corporate Music Industry.

  • Oh well, I'll repost it. The jist of my comment was that MS is probably paying UMG to gain market share from the iPod. I'm only speculating but it might have something to do with the wireless song sharing between Zunes. You can beam a song to a friend who can then listen to it for three days (I wonder if you can just continue rebeeming?) I have no idea, but I doubt MS would do the deal unless it's in their favor. If the wireless sharing, larger screen of the Zune and the UMG deal help them gain market share from Apple then it makes sense. Once they have enough market share they can renegotiate. The deal seems a lot like a huge corporate affiliate program. MS gives UMG a cut for selling Zunes through their catalog and song sharing. I completely agree that if artists are not getting a cut, this overall sucks doo doo. : )

  • Adrian Anders

    Here's Techdirt's coverage on the deal:….

  • Danny

    You can see how this would happen given that Apple is cleaning up while the labels don't really do all that well money-wise from iTunes given that the average iPod owner doesn't buy that many from the store and MS needed universal.

    What I'd like to see is how Universal plans on passing on the Zune take to artists. They say they will but of course no one can really buy that. However, the opportunity is that if they are getting hardware money than they must pass more DL money onto the artist. I find it hard believe though that they can't better sony's .045 payout for digital downloads and if I was getting signed right now I'd sure be bringing that up.

    As for having to deal with Universal in the first place…hey all the indie labels are great but Emusic, the only store I use, hasn't exactly taken over the world with that business.

    Also, MS has made it clear that this offer is on the table to all the labels including ones they already have deals with. I'd imagine that they are happy to have universal's might win them a better deal.

    Lastly, I don't think you are right about most music on iPods being ripped from cds. At least this is not the case for a pretty large segment of users. My experience is that this is true for older users but not at all for younger ones. I don't know many kids under 25 who pay for music, ever. At all. They just cart their iPods around sucking up each other's collections. I confronted someone who works me over this and she said, "Pay? For music?"

  • Vin

    I think the music industry is accustomed to making money off of the medium the music is stored on. Since they can't make money off the physical CDs maybe they want to make money off the physical hard drives the music is stored on instead. Makes sense when seen from that perspective.

    Of course there's another way to look at it. The hard drive is an integral piece of the actual device itself. So it would be like Universal making $$$ on the CD, the CD player, and maybe the stereo receiver as well. That sux for us because it may drive the price of hardware up. And God or Bog help us if this trend spreads to other types of hardware (like our home stereos, CD players, tape decks, DVD/CD drives, car stereos, speakers, headphones) because instead of taking a loss the manufacturers will very likely mark up their products to offset the Entertainment Industry Tithe.

    What's really sad is music has become such a commodity these schemes may be the only way for the big labels to money anymore. Because you can limit access to physical products like CDs, tapes, and DVDs through RFID tags, security guards, locked doors, etc you can control who gets a product and dictate the terms around that transaction. Once a product becomes digital it is no longer real so the solutions used to secure real products don't work. No alarm bell will go off if I give a neighbor a disk filled with pirated MP3s. If I email my favorite song to my brother an armed guard will not visit my house looking for a receipt. This is why the industry is scared shitless – they no longer can control access and therefore cannot dictate the terms of the transactions. At least by having a finger in the hardware side they can utilize some of the same tactics used in the past (although not all because, once again, there is no real product at all).

    I have my own small label. By small I mean one artist (me) and no money. If I had any semblance of influence or power I would probably pursue similar deals with hardware manufacturers myself. Selling 1 million songs and making $1 million is pretty good. Selling 50,000 Zunes and making $1,000,000 is MUCH BETTER IMHO. I'd rather win the money making contest than the popularity contest any day and I bet Universal feels the same way.

  • Danny, I'm all for supporting artists who might lose revenue on pirated music. But those license fees should be compulsory, and they should apply to all labels. Otherwise, what — Universal artists are worth more than artists on another label? Other labels need to negotiate with Microsoft one by one (apparently, in a bizarre twist, costing Microsoft MORE)?

    This just makes no sense.

  • Vin

    Almost forgot. Microsoft isn't completely insane. Maybe they really think the Zune will take off. If they can sell enough of them they *might* be able to make up for the loss incurred by the Entertainment Industry Tithe. But I have a very hard time believing they can compete head to head with Apple at present. Whether it makes sense or not, a lot of people really trust Apple. Microsoft is going to have to work overtime to build that kind of trust from consumers. Heck I like the looks of the Zune and think it could even be a good match for the iPod if they opened up the Wi-Fi functionality but even I don't trust them, their DRM model, their software, their business model, or even their device to meet my expectations. Much can be said about Apple and their proprietary DRM but at least they have been wildly consistent in regards to their dealings with consumers and their business partners. The only consistent things Microsoft has managed to do is consistently piss off anyone who partners with them and consistently release feature incomplete products to market that haven't been QA'd enough.

    … all that being said… if they improve the Zune's functionality by letting you purchase music over Wi-Fi like the MusicGremlin, improve compatibility, and do something about that onerous DRM crap they could wipe out all other competition and polarize the media device market the same way they polarized the personal computer market. That's one thing they are good at, apparently. Look at what they did to Sony in the video game console market and how they owned Apple in the PC market. They did all that without necessarily making higher quality products. So don't count them out yet…

  • kevin

    So i have to pay again for my music which i already bought for when i bought the cd ?

    All the music on my ipod is from my cd collection, no downloads at all.

    Just another illegal buck for vivendi who just plainly rip off artists.

    They should go bankrupt with all their bad choices they make.

  • understand, this is not an all-together new thing. i mean, it's an interesting twist, but overall i think that the Microsoft empire is likely getting its idea from the Audio Home Recording Act of 1992 (commonly known as the Digital Audio Recorders and Tape Act or DART Act), wherefore almost 14 years the US government has imposed a 3% tax on the wholesale price of blank digital audio tapes, and a 2% tax on the wholesale price of digital tape recorders.

    but the differences here are two-fold: first off, we're talking portable music players here, not tapes. not a big deal, but obviously a new thing. (not that anyone really goes around pirating songs onto digital tapes anymore anyway, but it's the thought that counted.) the big deal however – as stated in the headline – is that the DART Act didn't screw artists over; it actually gave back to them via the RIAA and AARC – as opposed to just shelling out to UMG.

    with this new deal though, it's like Microsoft's PR department is trying to spin Zune as the new 'good guy' by pretending to put their foot down on what turns out to be a big pile of shit. …but i guess that's what happens when you're so driven by money that you don't care to watch where you're going.

  • DK

    Looks like Zune will be joing the iPod on my hate list.

  • Vin is funny

    Zune is crap. why bother. whoever wants to inhibit freedom is a moron. that's why W is history…

  • frank line


    what other things are on your hatelist?…are all portable music players on your hatelist?

  • Heck, yeah. Put them all on our hatelist for battery issues, firmware weirdness, and limited compatibility / restrictive DRM.

    Then go build your own via those DIY kits!

    Then fashion them into a case with real sex appeal (leather? polished wood?).

  • stryd_one

    You voted for it!

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  • Jeff

    Come on, its obvious. Microsoft have just set a precedent that Apple are going to have to fight hard against the next time they talk to any of the labels. Where Microsoft have given up a few hundred thou, Apple will have to give up millions.

    Hi-tech is all about margins, and if you can reduce the other guys profits, that counts as a win for you, even if it costs you money.

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  • It's pretty obvious why Microsoft is doing this – they hope this will force Apple to have to do the same, which will cost Apple much more than Microsoft.

  • Jeff's got it. Just as Vinod Valloppillil identified for Microsoft in the notorious 1998 "Halloween Document" that open source software may be superior and more beneficial to consumers than commercial software, and therefore Microsoft must wage war on the open source process in order to lock out that superior software and remain competitive, here Microsoft is taking an imperfect situation and making it worse for everyone, to assure they come out on top. Classic Macchiavelli/Art of War tactic.

  • I wonder if it could be about competitors *other* than Apple. Dangerous precedents are all the more dangerous to the smaller players in the field – from Creative down to the two guys in the garage.

    Historically, Microsoft didn't mind Apple as long as it kept to its 5% of the market. Having a tame competitor is useful. However, Microsoft has no use for any other competitors.

    Last week, it announced a deal with Novell that amounted to a thinly veiled threat that Linux infringes patents. Now it's a deal which amounts to a thinly veiled threat that MP3 players infringe copyright. Not an actual threat – just enough to chill the air.

    Remember also that they cut loose all their Plays For Sure licensees with Zune. Maybe they're just trying to make sure they're dead.

    Or maybe I'm paranoid. It's always hard to tell.


  • Good points, all; thank you.

    Sabik, I'm not sure that there's any incentive to Microsoft beating up Creative Labs. Microsoft benefits from the growth of Windows Media Player, the Windows platform, and (even though Zune chose not to support it) PlaysForSure.

    But I agree there are some eerie parallels to the Novell deal. "We're proud to give a little money from OUR player to compensate for its role in piracy" is essentially the message, and that's absolutely loaded.

    Whether that's the real story here is dependent on what happened in the negotiations. The NYT suggests the negotiations were tense; that seems to point to UMG as the ones in the driving seat, which means the rest of this from Microsoft would just be spin after they got squeezed.

    Regardless, it's clear that this is not a good model for artists or electronics, because — whether this was UMG, MS, or both making this argument — it ties revenue to alleged piracy rather than the actual value of music.

  • There's a single reason that Microsoft paid Universal. Access. UMG is worried about losing money, so they said to Microsoft 'If you want to play with UMG artists, you'll have to pay us $1 per player.' Microsoft may do well with all the indies they've signed up, but it's not going to even begin to compete with the iPod until they can offer content from all the majors and the indies. And then there's the whole Mac thing, but that will come, even if it's from a 3rd party.

  • Actually, Zune supports Media Transfer Protocol (MTP), which while it's only aggressively supported on XP, can actually be compatible with Mac OS X and Linux. So you could use the Zune to load non-DRMed music on these platforms (and Windows, of course).

    Wikipedia links to all the various drivers and implementations on different platforms:

    Media Transfer Protocol

    And if the USB Implementers Forum does pick up MTP as a standard, we could see broader compatibility. Note that this aids some other devices, too, like cameras and even some Symbian phones. (Really.)

    Contrast this to iPod, which out of the box doesn't allow drag-and-drop file management outside iTunes.

  • Reason 5,749,387 for not buying that piece of ready to create another MS monopoly.

    There is no depth to how low MS can sink and every time I am surprised. First getting everyone to join the Play For Sure pr pitche, then turning their backs on everyone by havong Zune run WMP, then cozying up to despicable Novel to pay rolyalties for supposedly Linux IPs, then turn around and court more linux distros, then lick Universal's boots just to get a foot in the door. And watch out for Universal getting ripped off at one point or another by MS.

    Universal is an old rigid business model that can't adapt to modern rimes. I agree with the author that paying for music in a bar, online through independentdistributors is not only good but normal. However, paying for hardware that could or could not house "stolen" songs? What is this saying, people who will buy Zune are all criminals? Silly, maybe but criminals?

    Two very despicable companies setting up an ugly trend.

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  • deb

    hi everyone

    i hope this is not too off topic, but i did see the link to save the music in the article, so i thought i would share this:
    run by a personal friend of mine. donations greatly appreciated and help teach music to at risk first nations youth.


  • Diego

    You may find this interesting.,7204,2

  • Houston Stackhouse

    Nice post, lotta good comments; its good to see some folks are outraged at the shyster tactics of the major record labels. Here's an interesting quote from the USAToday article:

    "Absent a deal with Universal, Microsoft faced the prospect of unveiling Zune without content from the world's biggest recording company, home to artists such as U2, Eminem and Shania Twain.

    Morris said the agreement with Microsoft marks a turning point in how the company will approach similar deals in the future.

    "I don't want any business built on our music without getting paid a part of the business," he said."

    I knew Doug Morris and his ilk were arrogant and greedy, but this pronuncement still shocked me. Morris doesn't even bother with the usual,"Our feeling is that…" spin, he goes straight to telling us everything will be done HIS way from now on.

    So, yeah, OBVIOUSLY Universal and the other major labels are going to demand the same deal from Apple when they re-negotiate. And while they're at it, they want variable pricing, too, remember last year?

    If the labels take this all or nothing approach, Apple may be forced to go along. And if iTunes prices go up, no one will pay for online music anymore, everything will be pirated. Everyone loses, but the record labels just love cutting off their noses just to spite their face. Remember what a failure Rhapsody and PressPlay were?

    So the obvious solution to take now – boycott Zune!!! It's ridiculous to argue the merits of the Zune on ANY basis other than a means of extortion. Let Microsoft know why the Zune must fail. I know Zune sales are dismal anyway, but there should be no one buying these things at all so that Microsoft and Universal get the message.

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  • Mubai

    Hey guys, you no longer have to worry so much about the poor, penniless artists. An excerpt from a NY Times article:

    "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."