In the course of launching its iPod rival the Zune, Microsoft has made a weird deal with Universal Music. Universal was balking at allowing Microsoft to sell its music on the new Zune-compatible online music store, so Microsoft agreed to give Universal a percentage of the revenue from the Zune itself. Bear in mind: Universal will still get the revenues from the sales of its songs, but now it'll also get revenues from sales of the player.
Medialoper breaks it down:
Basically, what [Universal CEO Doug Morris] is saying is this:
- Every single person who buys a portable media player is a thief and a pirate.
- All music comes from Universal.
- Therefore, you should pay extra for any device you use to store music, you fracking thief.
I don't get it. Why would Microsoft do this?Why would they enter into a deal that will cost them money and potentially fuck up a market they're trying to enter? The answer, I think, is pretty simple: to the extent that they do fuck up the market, it will be Apple, which owns something like 88 percent of the market for legal music downloads and 75 percent of the market for digital music players, that suffers.
Remember, for Apple the iTunes Store is almost a loss leader: after paying royalties to the record companies, Apple's profits on each 99-cent song are measly. But making most of the popular-music canon easily and cheaply available online sure helps them sell those iPods, which are high-margin items. Ever since this arrangement began, the record companies have been grumbling about having their product turned into a commodity to help Steve Jobs sell iPods, but they don't have much choice if they want any kind of revenue stream from music downloads to replace CD sales. (Remember CDs?) Microsoft is offering them a better deal, and setting a precedent for them to use in negotiations with Apple. (Right now "negotiations with Apple" consist of Steve telling the labels how it's going to work, and the labels saying "Thank you sir, can I have another?" But it won't always be that way.)
The likelihood of this panning out for Microsoft is not huge. But the Zune was always a long-shot bet; the Universal deal is a way for Microsoft to diversify the potential upside a bit, by adding the possibility that they could mess with Apple's profits.
Update: Other people have come to the same conclusion. Gruber disagrees, and I think he's probably right.