Microsoft yesterday announced a licensing deal with Universal Music Group under which Microsoft will pay Universal royalties of about $1.00 per unit from sales of its new Zune portable music player, in addition to royalties on downloads from Zune’s online store. Universal said that it would, in turn, pay about half of the royalties it receives to its artists.
This licensing deal represents a shift in industry practices. Apple, for example, pays music companies a royalty on sales from its iTunes online music store but pays nothing on sales of iPods. The recording companies have been trying to get a piece of hardware sales because royalties from online music purchases are only a small piece of the Apple pie. Each iPod contains, on average, about 20 songs purchased from iTunes. At about 4 megabytes/song, that works out to about 80 megabytes — about 1/12th the capacity of the $79 one gigabyte iPod Shuffle or 1/1000th the capacity of the $349 top-end 80 gigabyte model. Apple sold 14 million iPods in the last quarter of 2005 alone, and over 42 million total since introducing the iPod.(1) That’s a lot of non-revenue-generating capacity for record companies to ignore. $1.00 per unit may not seem like a lot compared to the royalty potential in even 11/12ths of the capacity of the iPod Shuffle but it is $1.00 more than the record companies get now.
The Microsoft-Universal deal sets a benchmark for other music industry deals with Microsoft. If the Zune is successful these deals will put pressure on Apple to consider similar deals. Apple has had considerable leverage in its negotiations over music rights because of its 42 million + units sold, but every Zune purchase that results in an unsold iPod shifts the balance of power.