Microsoft 'Raising Stakes' With Zune?

By Ed Sutherland

November 09, 2006

Royalty deal with Universal music comes on eve of launch of iPod-killer music device.

In a deal likely to foreshadow future agreements between makers of digital music players and content companies, Microsoft said it will pay Universal Music Group (UMG) a cut of each upcoming Zune device sold.

Expected to launch Tuesday, the Zune player faces stiff competition from Apple's iPod, which dominates the digital music market. Microsoft hopes to emulate the iPod and iTunes success by offering the $249.99 Zune in conjunction with a Web site where consumers can purchase music.

Microsoft refused to comment on reports the pact will give UMG and the artists it represents $1 for each Zune device sold. The licensing agreement was in addition to the standard payments made to music publishers, Microsoft said.

The software giant said it plans to offer a "similar arrangement" to other music labels.

Currently, companies such as Apple, pay music publishers a cut of the songs they sell through their music stores.

"This move demonstrates there can be a win-win situation where consumers have a great experience while labels and artists are also fairly compensated," Doug Morris, UMG Chairman and CEO, said in a statement.

The music industry has long felt digital music devices, such as the iPod contributed to ripping CDs and the use of file-sharing rather than purchasing music.

"We look forward to working with the industry to make sure labels and the artists have a very bright future," Bryan Lee, Corporate VP of Microsoft Entertainment and Devices, said in a statement.

The tactic could put some pressure on Apple. The Cupertino-based company's agreement with UMG is set to expire next year. "There could be some pressure on Apple to reconsider their stance," Gartner's Mike McGuire said.

However, Apple is in a much better negotiating position than Microsoft. With Apple driving much of the digital music market, there could be an industry stand-off, he said. McGuire said it would be unlikely that Apple gave music publishers a cut of the sales of its wildly-popular iPod.

Today's licensing agreement "raises the stakes on everyone else," McGuire said.

The industry is undergoing transition, according to the analyst. Until consumers move totally to digital music purchases agreements such as the one between Microsoft and UMG will be seen more often, according to McGuire.

Originally published on .

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