Microsoft To Give Portion of Zune Sales To Universal In Attempt To Hurt Apple

| About: Microsoft Corporation (MSFT)

By Carl Howe

Today's New York Times notes that Microsoft (NASDAQ:MSFT) has agreed to share some of the revenues from its upcoming Zune music player sales and services with Universal Music:

Universal Music, a unit of Vivendi, will receive a royalty on the Zune player in exchange for licensing its recordings for Microsoft’s new digital music service, the companies said.

Universal, which releases recordings from acts like U2 and Jay-Z, said it would pay half of what it receives on the device to its artists. The company is expected to receive more than $1 for each $250 device, according to executives who were briefed on the pact.

The deal represents a big departure from the standard set by Apple Computer (NASDAQ:AAPL), which pays record companies for songs sold through its iTunes service but does not give them a cut of the sales of its hugely successful iPod.

Under the deal, Universal, the world’s largest music corporation, will receive a percentage of both download revenue and digital player sales when the Zune and its related service are introduced next week.

Microsoft's Zune

While this sounds like a simple "we wanted to get a major music label on board deal," it's really an attempt to poison next year's licensing contract renewal between Universal and Apple. After all, Microsoft is unlikely to sell more than two million Zunes in the next six months to a year, so this costs them little. But I estimate that Apple will sell nearly 20 million iPods just this quarter (more about that tomorrow), and hundreds of millions of songs as well. And if Apple has to forfeit a dollar of every $79 iPod shuffle sale to Universal (and presumably to Sony, Warner, and EMI as well), well, that's a nice way to make Apple pay for Microsoft entering this market.

This is classic Microsoft: crafting deals to attack competitors instead of spending the time and energy to positively market the product uniquely and powerfully. The problem: Apple already pays Universal millions of dollars in licensing fees for music it sells, so it has huge leverage with the labels that Microsoft just doesn't have. Unlike Microsoft, Apple is a proven distributor of music, and the digital distribution fees it pays to the record labels is one of the main reasons Universal is still in business. And don't forget, Apple negotiated to buy Universal back in 2003, so it has a pretty good idea of the pressure points to use to get the deal done. I don't rule out Apple negotiating a device/song revenue split, but let's just say that Jobs knows he has invested a lot more in digital music than Universal has, and fully expects to keep most of the profits from creating that market.

We've said it before, and we'll say it again: Zune is just the last in many attempts for Microsoft to buy its way into the music market without doing the hard work of creating a unique and defensible niche. But until they figure out that good marketing is as important as the technology and deals behind the product, Microsoft won't succeed.

One final note to illustrate Zune's limp marketing: what is up with the Zune Web site? Strike one: it's not, but; a lot of people aren't going to find it easily because of that. Strike two: if you do a Google or a (Microsoft's own search engine) search for Zune, you don't get as a response until way down the page (it's not even on the first page of's results). Strike three: are those Zune commercials lame or what? Free advice: ditch the puppy dogs; they aren't helping.

zune adds
A "lame" Zune ad

In the meanwhile over at the Channel9 forums at Microsoft, a reader has posted the 13 things that have put him off the Zune. Most of them are illustrative of the marketing challenge facing Zune: the features and benefits they are announcing are reminiscent of where the iPod was five years ago when it was launched, not where the market is now. For Zune to be successful, it would have be be pretty much at consumer benefit parity with iPods with additional differentiation. The fact that they are launching with a benefit deficit compared with the iPod and promising to reach parity later is the reason we can expect poor consumer acceptance. The consumer value proposition just isn't compelling enough to overcome the consumer downsides of not buying the market-leading product.

David Pogue of the New York Times and Walt Mossberg of the Wall Street Journal also have Zune articles today. Both reach similar conclusions that Zune is a tepid value proposition for different and more technical reasons.

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