Microsoft has agreed to pay a royalty to Universal Music for each Zune player sold, in addition to the normal royalties per song sold. This is a first for hardware manufacturers. Universal Music controls about 35% of all new music released in the world. Universal has agreed to pay 50% of the hardware royalties directly to artists.
The hardware royalty reportedly will be about $1 per Zune player which will retail for about $250. Microsoft will offer similar deals to the other record labels. The labels have long argued that sales of digital music do not make up for the loss in CD sales. They also argue that much of the music on these digital music players is pirated illegally.
Om Malik says "UMG had been holding off on licensing music to Microsoft, which would have threatened Zune plans to take down iPod and Apple. Classic Mafia shakedown: pay us or else. The argument being made is that people are not buying enough via digital downloads, so the music industry should get a piece of the hardware action."
The New York Times reports "The accord also could represent a sea change in the dynamics between technology developers and the media companies that provide the content that plays on their devices. It illustrates how music companies are scrambling to attach themselves to fast-developing online businesses. The move also reflects Universal’s recognition that, for all the runaway success of gadgets like the iPod, consumers are still not buying enough digital music to make up for declining sales of music on compact disk. Universal said it was only fair to receive payment on devices that may be repositories for stolen music.
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."
Details of the deal were not disclosed. For example it is not known if the royalty per song was reduced to compensate for the hardware royalty, or if the first song or two would be sold royalty free. Whatever the case, a $1 royalty per Zune is equivalent to the royalty for one or two extra songs per device. If Microsoft strikes similar, proportional (Universal controls 35% of all music), deals with the other labels it would cost another $2 to $3 per device to cover 100% of the available music.
Zune will be available later this year. See this post for a review of the Zune and comparison to the iPod.