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