ShareA number of news and blog sites (NYTimes, Reuters, Engadget, Tai-Pan Way) have noted that Microsoft has agreed to pay a record company, Universal, a certain undisclosed amount ($1.50?) for each Zune device Microsoft sells. They note that this is a major concession by Microsoft, since Apple only pays record companies for each song sold, not for each sale of an iPod device.
The record companies are upset by the deal they originally struck with Apple, since Apple has a tremendously large business with rich profit margins based on iPod device sales, but each iPod has on average only 20 or so songs sold on iTunes. That’s alot of music on iPods that was either legally ripped from CDs, or illegally traded.
Many parties seem to think Universal has done a number on Microsoft by convincing Microsoft to make a payment for each Zune sold. However, to my mind this isn’t so bad for Microsoft either. The true loser in this deal is … Apple.
Microsoft’s Zune has just been introduced, so it doesn’t cost much to Microsoft to make a payment on each hardware device sold to Universal today, and it will take awhile for its sales to ramp up to a point that such payments cost Microsoft much. Microsoft also hasn’t historically put the same emphasis that Apple has on trying to make money from the hardware (PCs, Xboxs, cell phones); Microsoft is content to make money from its software (Windows, Office, Xbox games, Windows mobile).
Apple already has a huge number of iPods it sells every month. And Apple’s contracts with the record companies are going to expire in a year. If Universal insists on the same deal from Apple that they got from Microsoft, in both dollar amounts and in business model structure this is going to cost Apple alot more than it costs Microsoft.
Microsoft is therefore using Apple’s strength (the massive lead in devices sold) against Apple, a neat act of business model judo. …and since record company contracts often contain a provision that states if you give another record company a better deal you will give me the same deal as well, it’s not just Universal that will get this payment from Microsoft, or demand this type of payment from Apple… all of the record companies will.
Of course for Microsoft to truly succeed, and for the record companies to obtain some real type of leverage against Apple, the Zune and its successors must still be great products. The early reviews indicate the Zune is a promising device… but time will tell.
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