A New Way Forward?

So Microsoft has agreed to pay Universal music a royalty on every Zune player it sells. The royalty rate was not disclosed in this New York Times piece, but it does say that it will be greater than $1 for every Zune player that is sold. Further, the article says that Microsoft plans to pay royalties to other music labels. And Universal plans to pay out 50% of those royalties to its artists.

It's interesting to see how this plays out. First, how many record companies does Microsoft need to make a deal with? Just the majors? Or the indies too?

And is paying out 50% to the artists fair? Should it be more?

And will Apple be forced to follow suit? Hard to imagine that will happen anytime soon.

But even with all the issues that this raises, this is a model I like. I wish they'd take it one step further and offer a unlimited music service like Rhapsody on the Zune and pay a big portion of that monthly subscription to the artists and the businesses that serve them.

Because we are in an age of abundance. Music is everywhere. It makes no sense to pay by the song or album anymore. It just leads to a world where, according to the Times article:

A recent study estimated that Apple has sold an average of 20 songs per iPod — a fraction of its capacity. The rest of consumers’ music files — 95 percent or more — come from ripped CDs, possibly including discs from their own collections, and illegal file-trading networks, the study said.

I won't buy music from iTunes for reasons I've articulated time and time again on this blog and elsewehre. DRM is nuts.

But providing a technology platform that allows for the discovery and consumption of music and getting a piece of the action when consumers use that platform makes total sense. This is the beginning of a new way forward. Greed and fear may still get in the way of real progress toward nirvana, but we are getting closer.

Comments

[hockeydino]

DRM is not nuts. If the artist wants to protect his music let him. If the artist wants to only get 50%, then let him. If he wants more, then go somewhere else.

Music is not free, nor should it be. It can be and it is when you steal it, but that is up to the artist ultimately, whether he listens to his audience or not.

You are seeing content providers going after Youtube and what not for royalties and permissions, it's only a matter of time.

Shameless plug: www.9thXchange.com

[Kyle S]

Totally a PR move on MS/UMG's part, IMHO, especially the size of the cut to the artist. Sure, 50% is much better than the artist usually gets, but that 50% must be split among all artists at the entire label; it's not like the Chili Peppers are getting $6 out of the $12 you spent on their CD.

Also, how many Zunes is MS going to sell? Apple has sold about 38m iPods in the ttm period. If MS can sell 20m in the next year (and I'd be shocked if they did), that's what, maybe $30m to Universal extra per year [if the royalty is a buck fifty]? $15m to the artists? better than nothing, sure, but really just a drop in the bucket.

[Michael]

I have 500 Megs free on my 60 GB iPod and haven't bought a singe song from iTunes. Not only b/c of the DRM but also b/c of the quality of the file. I'll stick with ripping from CDs so that I have control over what i can do with the files as well as the sound quality.

[jackson]

It ain't easy stuffing everything back into Pandora's box, is it?

[CD]

I tend to think the licensing deal could be for 2 other reasons:
- zune allows sharing music with other zune owners for a limited time, so the fee could be to allow this feature
- zune is going to come preloaded with content, which isn't going to be free

If I'm wrong, then I agree with you and hope this deal leads the way for new approaches to digital music.

[scott]

I absolutely don't get it. This makes zero sense.

Ok, so let's say MS strikes deals with all the labels (big 5, isn't it?). So $5.00 of my Zune purchase (ya right) goes to pay royalties. But what do I, as the purchaser, get for the $5.00?

I still haven't subscribed to the Zune service (which, I assume, pays royalties on a portion of my $xx.00/month).

I didn't buy any Zune songs. If I bought a Zune song for 79 points ($1.00 -- how user friendly!), how many widgets does the artist get from that? The label?

And still.. where did my $5.00 go and what did it get me?

And if it's for $5.00 worth of crappy pre-loaded content, then I don't want it.

The only reason I can think for Microsoft to pay this is that they are praying to sell millions of these things, cut huge enough checks ot the labels to make the labels want to demand the same thing from Apple or, even more hopeful, withdraw their songs from iTunes. There's no way a few million Zunes can compete with what will next be 2 billion songs sold.

My hunch is the Zune is going to be a huge flop -- at least initially. Maybe MS can stick it out and eventually take market share, but they are still LOSING MONEY per unit, just like Xbox.

In the long run, I don't see losing money as a good business model ;-)

[Bill Seitz]

I think this is a horrible trend. Why should Universal get paid if I never listen to one of their tunes? These deals always favor the big players over the small ones, and I'd rather support the trend going in the opposite direction...

http://webseitz.fluxent.com/wiki/z2006-11-08-MicrosoftUniversalZuneDeal

[Anonymous]

I guess MS should give game publishers a cut of their Xbox sales since Xbox games can be pirated.

Seriously wtf is Microsoft thinking here? This kind of BS just pisses the hell out of me.

[Altay]

Sure this move was prompted by greed and fear. You really think a deal between Microsoft and Universal would involve altruism and harmony?

Apple knew from the beginning that the money would come from hardware sales, not music sales. Universal didn't, happily licensed their content to Apple, and learned the hard way that physical content distribution doesn't directly translate to the internet. Now that Microsoft is aping Apple, Universal is careful to avoid making the same mistake this time around -- there's money in hardware, so they want a piece.

Fred, as for your question of how this works with indie labels... most indies outsource their digital licensing to a third party (e.g., Digital Rights Agency or IODA). Unsigned bands do the same through companies like CDBaby. So it's not like Microsoft would have to deal with each of the thousands of indies. Will these third parties negotiate a cut of hardware sales, too? Who knows. It's kinda cool that there's a precedent now, though... the more revenue in the music value chain that can be funneled towards artists, the better. (Oh, and I'd bet that in an indie hardware deal, more than 50% will go to the artist.)

That said, I'm still not convinced that the numbers add up to a sustainable career, from the artist's point of view. It's great that even the big guys are starting to experiment with new models, but I'd say the future of music is still an unsolved problem...

[Jeff Schrock]

Why am I not surprised? MSFT making another stupid deal with a content company. And UMG's overstimulated greed gene sewing the seeds of it's eventual demise.

This precedent inhibits innovation. What company, in their right mind, would enter this business now? If you can't make $$ from the content stack and the music industry has their fingers in the hardware stack now (who thinks they'll stop at $1 per label?), where are the incentives for technology companies (who make all of this happen, btw)? And even if there were adequate incentives, why are consumers going to switch from one of the proprietary, closed, DRM based systems which have locked up your content?

Investor beware.

[rick gregory]

No, no, Fred. This is most certainly NOT the way forward.

First, because there's no reason to compensate labels or artists for ripping music I've already bought. So, if that's the reason for the fee it's a non-starter. Whoever made the CD already got paid.

Second, because we are not in an age of abundance today anymore than we were ten years ago. I mean, did you go into a Tower Records in the mid-90s? They had tons of music then. Yes, it's easier to find now, but music has been abundant for at least 3 to 4 decades. But there's another reason this argument fails - abundance isn't relevant. Want the new Killers disc? Then it doesn't matter that there are new albums out there by other artists... there are two discs by The Killers... that's it. The absolute number of discs might be 50,000, 500,000 or 5 million... but if you want a certain artist that doesn't matter.

Third, from an artist's point of view it doesn't matter if another artist's album hits and they make huge money - none of it trickles out to other bands. Bands that sell should get compensated for selling more than bands that don't via the simple method of getting royalties on more albums.

Fourth, charging a hardware tax would be akin to you and other VCs expecting to get a fee for every Dell sold - yeah, I get why you'd like that, but it makes no economic sense.

At the end of the day, I simply don't get the reluctance to compensate artists for the artistic product they make. Look, when one of your portfolio companies starts selling their product or service, do you have any issue with them getting paid for it? Of course not...

[mister slim]

So if I buy a Zune $5 goes to the big five record labels, whom I hate and try to avoid? That's actually a disincentive to buy. I'd rather buy an iPod and send 5 bucks to CDBaby or eMusic.

[jim]

I assume this is a royalty payment under Section 1004 of the Copyright Act (the Audio Home Recording Act, codified at 17 USC 1001, et seq., and available at http://www.copyright.gov/title17/chapter10.pdf). Sec. 1004(a)(3) says the amount of the royalty shall not be less than $1 nor more than $8 per device (expect in certain circumstances the royalty can go as high as $12/device). The rate is set by statute; it's the only instance of the Copyright Act actually directly regulating technoloy. That being said, I don't think there's a new model here. If the device is going to be like Rhapsody, then it will be subject to Sec. 114, 115 licenses; those of course aren't set by statute, but by negotiation (because they are content licenses rather than AHRA technology licenses). As intuitively appealing as it would be to pay for songs by, e.g., file size rather than track or album, this would be a battle that copyright holders would be willing to fight to the death for.

[David G]

c'mon Fred, Scott is right on this; it makes no logical sense!
This is a scorched earth move by Microsoft - they can't win, so they'll just spoil it for apple. MS doesn't win here, they're now locked in to declining margins on this beast, consumers don't win (other than in access to selection they already have access to). All that happens here is that the labels become even more powerful; the last thing the music industry needs.
Not very social to charge a covert charge!
I'd rather buy a red (product) ipod and have my $5 go to Africa!

[howard lindzon]

Here is my problem with Microsoft. They have to prove themselves here and the history is not good.

The last time we trusted them to load something, we spent the rest of our time uninstalling the crap.

In this case the underdog is breaking an American tried and true cultural trend - rooting for the underdog. America hates them and America loves every underdog.

No chance - even if they paid you to buy a zune.

[Dean]

As an entrepreneur in the social media space I'm very encouraged by the Zune/Universal deal. Artists typically share in the intrinsic value of the music and video they create. However, in a new land of abundance an even larger value can be created by aggregation. Artists should share in this value also.

[Jason]

It sounds more like a licensing deal than a royalty deal. UMG will license music to MS for $x per Zune; but download royalties per song are paid by MS to the PROs and to either the SRCO* (UMG in this case) or to a PRO that handles the royalties for the SRCO (SoundExchange comes to mind).

Wave of the future? Crazy wave if it is.. I'd rather see licensing & royalties per download, not per hardware device. Fix the d/l model and track the d/l and stream metrics & then pay the PROs.. this takes control away from the huge labels & toward the relationship between the distributors and the PROs.

*Sound Recording Copyright Owner.. I.e., "the dudes who own the masters"