Last week Universal Music Group (UMG), one of the major record companies, announced a deal with Microsoft, under which UMG would receive a royalty for every Zune music player Microsoft sells. (Zune is Microsoft’s new iPod competitor.)
This may be a first. Apple doesn’t pay a per-iPod fee to record companies; instead it pays a royalty for every song it sells at its iTunes Music Store. UM hailed the Zune deal as a breakthrough. Here’s Doug Morris, UMG’s CEO (quoted by Engadget): “We felt that any business that’s built on the bedrock of music we should share in.” The clear subtext is that UMG wanted a fee for the pirated UMG music that would inevitably end up on some Zunes.
There’s less here than meets the eye, I think. Microsoft needed to license UMG music to sell to Zune users. Microsoft could have paid UMG a per-song fee like Apple does. Instead, UMG presumably lowered the per-song fee in exchange for adding a per-Zune fee. Microsoft, in a weak bargaining position, had little choice but to go along. If there’s a precedent here, it’s that new entrants in the music player market may have to accept unwanted terms from record companies.
There’s an interesting echo here from Microsoft’s antitrust history. Once upon a time, Microsoft insisted that PC makers pay it a royalty for every PC they sold, whether or not that PC came with Windows. This was called a per-processor license. PC makers, in a weak bargaining position, went along. Microsoft said this was only fair, claiming that most non-Windows PCs ended up with pirated copies of Windows.
Eventually the government forced Microsoft to abandon this practice, because of its anticompetitive effect on other operating system vendors – users would be less likely to buy alternative operating systems if they were already paying for Windows.
To be sure, the parallel between the UMG and Windows per-processor licenses has its limits. For one thing, UMG doesn’t have nearly the lock on the recorded music market that Microsoft had on the OS market, so anticompetitive tactics are less available to UMG than they were to Microsoft. Also, the UMG license is partial, reducing per-song costs a bit in exchange for a relatively small per-processor royalty, where the Microsoft license was total, eliminating per-copy costs of Windows on covered PCs in exchange for a hefty per-processor royalty. Both factors make the UMG deal less of a market-restrictor than the Windows deals were.
My guess is that the UMG/Zune deal is not the start of a trend but just a concession extracted from one company that needed UMG more than UMG needed it.