Microsoft and Universal Music have announced a new deal with one another that allows Microsoft to begin offering selections from Universal Music’s vast musical library for download on its Urge digital music download service.
According to the terms of the deal, Universal Music is set to garner a much larger share of the profits from the partnership than it does from the one it currently has is in effect with Apple’s iTunes. Unlike its deal with Apple, Universal will also receive a royalty on each mobile media device, the Zune, that Microsoft sells. This is in addition to a percentage of the digital music download revenue.
The deal is most likely a hardline attempt by Universal to increase the amount of money it makes on digital music downloads after being met with such a firm stand by Steve Jobs earlier this year to maintain the status quo.
Despite the best efforts of music companies to raise the price of iTunes downloads above 99 cents(USD), Steve Jobs stood resolute and successfully rebuffed their attempts. He 
rightfully argued that doing so simply pushes people back into the illegal P2P and file-sharing conundrum from which many of them came. They service must be cheap and easy to use if it is to be successful.
Unfortunately for Microsoft it had very shaky footing upon which to lobby Universal for the use of its music. Universal knew that in order for the Zune player and its Urge digital music download service to be successful, Microsoft had to have decent selection of music fro users to choose from. Universal leveraged this fact into getting a cut of Microsoft’s Zune player, which is not the case with Apple’s iPod and may possibly spell trouble for its financial future later on down the road.
If all things are considered equal, the royalty payment on Zune sales could potentially inhibit Microsoft’s ability to compete on a level playing field. Luckily for Microsoft Apple’s contract with Universal expires next year and could allow for a more competitive atmosphere between the two.
With recent reports that a mere 5-10% of the music stored on iPods was purchased legally, music companies have been trying to figure out a way to recoup their losses.
David Geffen, former head of Geffen records notes:
It’s a major change for the industry. Each of these devices is used to store unpaid-for material. This way, on top of the material people do pay for, the record companies are getting paid on the devices storing the copied music. It certainly changes the paradigm.
Universal Music’s chairman, Doug Morris furthers:
I’m hopeful that technology companies and creative companies will understand how each other’s futures are intertwined,” Mr. Morris said last night. “It can only work if one doesn’t try and take advantage of the other, and so far we’ve come out on the short end.
With current federal legislation covering only outdated audio devices like digital-audio tape machines and not the new digital music players, the royalties that music companies receive on music recording and playback devices has decreased significantly. Taking this along with the continual decline in CD sales, music companies have been scrambling to secure new revenue streams to make a profit, if not to simply contain the hemmoraging.
In any event Microsoft had to approve the deal or otherwise risk the success of it so-called “iPod killer.” With Universal Music accounting for a third of all all new album sales in the U.S. it was left with little choice.
I think what it will mean for all of us in the end though is higher prices on digital music players and downloads. Costs, as they always are, will be passed onto the consumer and either push many back into the world of file-sharing and P2P networks or simply discourage many from purchasing as much as they might normally be inclined.
After seeing the billions that Steve Jobs made for Apple, everybody now wants a slice of the iPod Apple pie.
SOULXTC: “walkin’ the streets of P2P”
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