Microsoft to Pay Universal for Every Zune

In a move which may have wide ramifications throughout the digital music industry, Microsoft Corporation has agreed to pay the world’s largest music label, Universal Music Group a royalty on every Zune media player device it sells. This royalty would be in addition to a percentage on every track by Universal artists sold through the online Zune Marketplace. Microsoft is apparently ready to extend similar royalty arrangements on Zune sales to other music distributors.

Microsoft’s Zune media player will be introduced next week at a price o $250; from each sale, approximately $1 will go to Universal.

According to the New York Times (subscription required) and Reuters, Universal will pay half of what it receives on Zune device royalties to Universal artists; the rest, presumably, will go into Universal’s coffers.

The agreement may establish a new precedent for the online music industry, currently dominated by Apple’s iPod/iTunes combination. Apple pays music labels for songs purchased through its iTunes Music Store, but does not pay music distributors a royalty on each iPod media player sold. However, music labels have been unenthused about revenues generated by Apple’s iPod/iTunes business: earlier this year, they fought to break Apple’s universal $0.99-per-track pricing model on the iTunes store, and labels have frowned at industry studies which claim iPods, on average, contain about 20 songs purchased through the iTunes Music Store. Record labels seem believe that the rest of an iPod’s capacity is taken up by pirated music, and feel they are owed a share of portable music player hardware sales as compensation for the device makers encouraging music piracy.

Music labels do receive a royalty on sales of blank CD media, digital audio tape systems, and other technologies which the industry felt contributed to music piracy.

“It’s a major change for the industry,” music David Geffen told the New York Times. “Each of these devices is used to store unpaid-for material. This way, on top of the material people do pay for, the record companies are getting paid on the devices storing the copied music.”

Microsoft may have had little choice but to agree to a hardware royalty on its Zune player: in order for the Zune to have a hope of competing credibly with Apple’s service, Microsoft needs to have all major music distributors on board—including the largest, Universal.

Imposing a “piracy royalty” on the sales of portable media players is sure to irk consumers, however, in part because it characterizes all users of portable media players as criminals regardless of their actions. Many users may not purchase music through iTunes or other online music stores, but instead convert them legally from CDs and other music sources (like DVD and vinyl) they already own, or listen to music available for free. Under hardware royalty agreements, these users will pay a fee to music labels for acts of music piracy they have not—and will not—commit. Microsoft apparently hopes to smooth over the royalty by emphasizing a portion of the money goes to artists, not the music companies.

By forcing Microsoft to accept a hardware royalty agreement, the labels may be able to leverage similar agreement out of other players in the industry—including Apple Computer—by threatening to withdraw their artists’ music from their digital music services.

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