Microsoft courts Universal with Zune revenue sharing deal

Stan Beer
Thursday, 09 November 2006 13:19

Opinion and Analysis

In what is being viewed as the first step in a campaign to cosy up to record companies, Microsoft has signed an agreement with the giant Universal Music Group, which will see Universal get a cut in all sales of its new Zune player in return for rights to content. It is likely to be the first of many attempts by Microsoft get between Apple and its record company suppliers.

The general manager of global marketing for Microsoft, Chris Stephenson, has said that Microsoft is pursuing similar deals with other record companies besides Universal. And why wouldn't it?

For Microsoft to have a hope of putting a chink in the dominance of the Apple iPod in the portable music player business it must win the support of the record companies. However, with somewhere between 75% and 80% of the US portable music player market and an even higher share share of the legal music downloads market through iTunes, Apple wields a powerful axe that record companies are afraid to go up against.

We saw evidence of that earlier this year when Apple flatly refused to alter its pricing model for music downloads, in the process staring down the combined might of the global recording industry.

Microsoft appears to be staking a lot on the as yet unproven model of allowing limited wireless sharing of music between Zune players. The scheme will allow music purchasers to share music wirelessly with friends who get to play a track three times before having to buy it.

There are, however, a couple of forces working in Microsoft's favour with Zune. One is that record companies would like to see another strong downloads client in the market to weaken Apple's stranglehold. The other is that Microsoft's model of sharing revenues from music player sales presents an interesting proposition for record companies.

Sales of CDs are dropping and, while downloads are climbing, overall the music market appears to be declining in the face of illegal downloads. Much of the music sitting on portable music players and hard drives is technically illegal, for which both artists and recording companies miss out on revenue.

Striking deals with music player makers in which record companies and artists get a revenue cut from the sale of players is a novel approach to recouping declining revenues from music sales.