Microsoft Music Player To Share the Wealth

By Mike Musgrove
Washington Post Staff Writer
Friday, November 10, 2006

It's still unclear whether Microsoft's new Zune music player, scheduled for release Tuesday, will make a dent in Apple's hold on the digital music market. But already, it's shaking up the music-download business model more than any other competitor.

Under a precedent-setting deal announced yesterday, Microsoft will pay Universal Music Group a portion of the sales price of every Zune music player sold. Details of the agreement were not disclosed, but industry insiders familiar with the deal said it amounted to just over $1 from the sale of each of the $249 players.

Microsoft, whose plan for tying the device to its online music store is similar to Apple's iPod-iTunes marriage, said it is making similar offers to other music labels.

The Zune device -- Microsoft's response to Apple's iPod -- is tied to a proprietary online music store that's also scheduled to open Tuesday. Like other music companies, Universal will receive royalties for its music sold through the store -- just as it does with music sold on Apple's iTunes store.

The Microsoft deal marks the first time a recording company has shared in the revenue brought in by a consumer electronics device, said Gary Shapiro, president and chief executive of the Consumer Electronics Association, a trade group. Shapiro said he was surprised by the announcement.

"It has created quite the buzz in the consumer electronics industry," he added. "It's a big deal."

Industry analyst Michael Gartenberg said the deal is a possible way for Microsoft to drive a wedge between Apple and the music industry.

Music labels, still feeling the pain of online music piracy, have been eager to work with companies that offer legal music downloads, such as Apple.

Recording industry executives have repeatedly tried to persuade Apple to adopt a business model that uses variable pricing for music downloads. But the company has resisted, sticking to its flat-rate 99-cents-per-song model on its iTunes music store. And with the dominant share of the digital music player and legal music download markets, Apple has had the advantage in negotiations with the labels.

Industry analyst Phil Leigh said music labels have been "filling with resentment" toward Apple over the pricing and might be happy to find an alternative. "They did not calculate that Apple's iPod would be so popular and that Apple would not license" its technology to others, he said.

Universal Music Group chief executive Doug Morris said the payment the company will receive for each Zune player sold is one way to make up for some of the lost revenue from pirated music.

"It's not fair to the artists or the songwriters," he said.

Now, Microsoft's deal with Universal may change the landscape between Apple and the labels, Gartenberg said. "The obvious question is: What happens the next time Apple meets with Universal?"

Morris said he intends to point to the Microsoft agreement when he sits down with Apple chief executive Steve Jobs.

"We're going to try and make a deal with Apple, too," he said. Jobs "has been a very good partner . . . [but] he's not the kind of guy you're going to tell what to do."

A spokesman for Apple declined to comment.

Zune product manager Scott Erickson said the deal was struck as a "collaboration" with Universal.

"Digital music is changing the way we listen to music," he said. "It's a question of how can we make sure we have viable business models out there that are sustainable."

EMI Group confirmed yesterday that the company had received an offer from Microsoft to share in the device's sales revenue. EMI spokeswoman Jeanne Meyer said the music publisher is still considering how to proceed.

"The Zune device -- any device like this -- needs music to make it compelling," she said. "We're glad Microsoft gets it."

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