Music publisher to profit from Zune hardware sales

Apple stands to lose from Microsoft, Universal Music deal

When Microsoft Corp. launches its Zune music player and online music store next week, it will pay Universal Music Group a license fee for each Zune player sold.

Zune will compete with Apple Computer's iPod music player and iTunes Store, which dominate the market for music downloads.

Apple gives music rights holders a share of its revenue from file downloads, but no share of hardware sales. But Microsoft will give Universal a per-player fee in addition to a share of revenue from music downloads, according to a report in The New York Times. Other details of the deal were published by a number of news outlets, all citing Zune Marketing General Manager Chris Stephenson.

Universal Music officials and representatives of Microsoft's public relations agency Waggener Edstrom could not comment on the agreement Thursday morning local time. An Apple spokeswoman in London said the company doesn't comment on its contracts with music publishers, or on competitors' products.

The agreement with Universal is Microsoft's attempt to cozy up to music companies in light of Apple's sometimes combative relationship with the major music labels, said Jonathan Arber, research analyst for Ovum. Microsoft could benefit by receiving exclusive content from Universal to draw new users to the Zune service, he said.

"It's clearly the right move for them if they can get the record companies on their side," Arber said.

Apple has taken advantage of sharp divisions in the music industry, and of its 70 percent share of the music player market to resist pressure to introduce tiered pricing for songs, said Peter Jackson, principal analyst for Forrester Research.

"Apple basically keeps everyone including its hardware partners pretty much at arms length and won't let anybody close to the Apple experience," Jackson said. "Microsoft is coming from a position of being behind."

A Zune player with a 30G-byte hard disk will retail for US$249.99, according to Microsoft. Apple's 30G-byte iPod retails for the same price, but lacks the Zune's FM radio tuner and Wi-Fi connectivity. The Zune download service will sell music tracks for US$0.99 -- the same price as Apple's iTunes Store -- or listeners can pay US$14.99 a month for a Zune Pass for unlimited access to the Zune music catalog for as long as they continue to subscribe.

Microsoft and Apple each need to succeed in the markets for music and for music players, as they present the two as a complete system. What ties the Zune player to the Zune store, and keeps it apart from Apple's iPod and iTunes, is DRM (digital rights management), a technology used to limit how, when and where songs can be copied and played.

The companies have each chosen to use incompatible DRM systems so that music bought from, say, Microsoft's store won't play on an Apple device.

But Zune is incompatible with another Microsoft DRM specification, PlaysForSure. Microsoft has said that Zune players won't work with download services based on PlaysForSure, such as RealNetworks' Rhapsody service, or others from Yahoo and Napster.

This fragmentation of the market for devices and services means Microsoft will have to build its own following for Zune. That will take time, especially since the Zune service is only launching with music, while other services offer video too, wrote IDC analyst Susan Kevorkian in a September research note. But Microsoft does have the resources to chase Apple long-term, she wrote.

"The Zune device and service represent a good start for Microsoft but fall short of being the slam dunk the company needs to be a definitive success ... this holiday season," Kevorkian wrote.

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Jeremy Kirk

IDG News Service
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