Universal Music to Get Cut of Zune Sales

By Scott M. Fulton, III, BetaNews

November 9, 2006, 12:20 PM

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Back when music publishers first explored the question of who’s responsible for compensating rights holders – specifically, the people who broadcast on radio or the people who manufacture the radio – courts helped determine it was the broadcasters who were inevitably responsible. To this day, broadcasters pay collective groups that represent rights holders, such as ASCAP, a nominal annual fee.

But there are no broadcasters in the MP3 business model, nor is there an intermediary group such as ASCAP negotiating the fees. The UMG/Microsoft deal is unprecedented for so many reasons, just one of which being that it enables publishers to make royalties deals on behalf of the end listener, while bypassing the traditional intermediary groups. Such groups are only necessary, the UMG spokesperson told BetaNews, when dealing with a government-regulated industry such as radio. There, the FCC and Congress help set the fees which broadcasters pay to ASCAP and other delegated agencies.

Online sales, we were told, are not regulated by the government. They’re a form of electronic commerce, as opposed to the transmission and reception of content directly for free. An online digital store cannot be regulated by the government; it’s a private affair, not taking place over the public airwaves. As such, the spokesperson indicated, since the government should not be involved, negotiating agencies acting on publishers’ behalf are not necessary.

The UMG spokesperson’s comments speak volumes about how little the music industry these days is reliant upon radio for its livelihood.

In a statement this morning, UMG CEO Doug Morris said, "This move demonstrates there can be a win-win situation where consumers have a great experience while labels and artists are also fairly compensated." Microsoft’s corporate VP Bryan Lee chimed in with a similar comment: "We believe that the music consumer will appreciate knowing that when they buy a Zune device, they are helping to support their favorite artists."

With very little having been revealed about the terms of the deal, it’s unclear at present how proceeds from the sale of Zune would actually be distributed to artists. Typically, music publishers such as UMG, EMI, Warner Music, and BMG represent the music, not the artists. Today, ASCAP offers Web sites an “experimental” license arrangement for playing digital songs, though that arrangement only applies to the transmission of performances – such as Pandora – rather than the purchasing of downloads.

In a famous 2000 case, early Internet per-download pioneer MP3.com pulled its own plug under pressure from the major record labels, after it had already made licensing agreements with ASCAP and BMI – which represent the artists – thinking that these are the two they were supposed to do business with. Since that time, contrary to what many may believe, the question of which parties absolutely represent the artists with respect to digital recording, has never been absolutely resolved. However, there’s no question that these publishers do represent the music in their respective portfolios.

Yesterday, Microsoft general manager for global marketing Chris Stephenson made comments during a Merrill Lynch investor’s conference, indicating that his company is willing to extend similar deals (assuming we know for certain what they would be similar to) to other music publishers, and appeared to encourage other MP3 player manufacturers to do the same.

"I'm hopeful that technology companies and creative companies will understand how each other's futures are intertwined," Stephenson is quoted as saying.

Meanwhile, UMG and others are compelled to seek similar royalty arrangements with manufacturers such as Apple – which no longer lose money on products that are already well-entrenched in the market. If Apple and others were to make similar deals with the music industry, or to succumb to pressure and accede to such deals, the result could be higher production costs, which could lead to retail price hikes for MP3 players down the road.

However, judging from comments made in the past from CEO Steve Jobs, it would likely fight against such deals first, especially if publishers seek retroactive royalties from devices already sold.

Reuters appears to cite a UMG spokesperson this morning as saying that manufacturers of small, music-playing devices such as cell phones going forward could subsidize the entire sale of MP3 player devices, though it’s clear from the context of the citation that the reporter was completely lost with regard to what the spokesperson was trying to communicate.

If the citation is accurate, it suggests that music publishers are working to establish a system where MP3 player manufacturers are prepared to break even, if not lose money at first, off the sale of their devices, and that the revenue would come through subscriptions whose fee structures would be calculated more like cell phone service rather than per-song downloads.

Based on what we do know about Microsoft’s Zune plans, that company is already well prepared to lose a little up front, and may be more willing to do so if its competitors become pressured to lose even more. In an environment such as the one suggested here, the manufacturers with the most to burn up front could stand to reap the most down the road.