Universal’s Zune Deal: A Case Study in Creative Revenue Sharing

Early in November, Universal Music Group announced an innovative deal with Microsoft.  As part of the negotiations leading up to the launch of Zune (Microsoft’s competitor to the iPod), Universal cut a deal to get a royalty payment for every Zune player sold by Microsoft.  This is separate from the royalties generated by the sale of downloaded music from Universal’s catalogue. 

How did Universal negotiate this and why did Microsoft agree to share its (probably slim) margins on the device?  Let’s call it an alignment of interests.  Microsoft needs the big music catalogues on side if its Zune is going to put a dent in Apple’s mighty iPod.  Secondly, the Zune is marketed by Microsoft as a “social” vehicle: the wireless capability of the Zune player allows users to share their music with other Zune owners.  In legal terms, this means that content subject to copyright can be distributed to unnamed users who have not directly acquired any rights to the music.  Sound like a recipe for a copyright lawsuit?  Not if you cut a deal that aligns interests.  If Universal enjoys a cut of sales of the device, then it has a vested interest in having as many Zune owners as possible.  To answer any fears that one Zune owner can distribute music infinitely, the technical protection measures kick in.  The device can only share with other Zune devices within range, and the shared music actually times out after three days.  Music sharing?  It’s more like a short-term loan. 

For its part, Universal had two other motivators: one, the Diamond Rio case in the U.S. made it clear that MP3 players were not subject to the type of copyright levy applied to blank CDs and other digital recording media.  In Canada, the Federal Court of Appeal came to the same decision in 2004. So iPods and Zunes are not generating tariffs for copyright owners the way blank CDs are.   Second, Universal also has its eye on upcoming negotiations for the renewal of its contract with Apple. With the Microsoft deal in its back pocket, Universal will very likely look to Apple for a cut of iPod sales.  Unfortunately for Universal, it does not have the upper hand in that round of negotiations.  Apple’s iTunes accounts for the lion’s share of the legal download market and any threat by Universal of pulling its catalogue from iTunes would be akin to shooting the goose that’s laying the golden eggs. 

Instead of positioning themselves for a future battle over copyright, Universal and Microsoft used a little creative thinking to align business interests.  It will be interesting and instructive for business owners to watch as the deal-making unfolds.  

Calgary – 08:38 MST

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