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A Universally Bad Idea

Sunday, December 10th, 2006

So Microsoft is paying the record label Universal a dollar for each Zune sold. (See the story here.) Doug Morris, the CEO of the Universal Music Group, justified it quite succinctly: “These devices are just repositories for stolen music, and they all know it,” he said. “So it’s time to get paid for it.”

The labels have been arguing for quite a while that they should be “paid for it”–specifically, trying to get Apple to pay them royalties on every iPod as reparations for all that stolen music that would be played on the devices. Even Sony’s Howard Stringer had argued for this. In September 2005, he said to me, “a hardware device is not worth anything without content, and. . . iPod has yet to demonstrate that it’s valuable to the content company. The terms of [the iTunes Music Store] deal make very little money for the content companies.” I thought it unusual for Sony, an electronics company that itself makes digital music players, to be making that argument. (Will Sony retroactively pay record labels a portion of all the profits from the Walkman?)

In any case, although Microsoft’s top Zune executive Robbie Bach, described the fee to me as a forward-thinking move in rethinking the issue of royalties, it’s hard to see the fee as anything but a short-sighted strategem that really makes no sense at all. (Unless you see it as establishing precedent that would to cause trouble for Apple, which has resisted the idea of those payments–a charge that Bach specifically denies.)

Let’s look at the bottom line. Microsoft pays Universal a dollar for each Zune sold. That’s chicken feed. Even if Apple had paid Universal a dollar for each iPod sold, that would only be $80 million. Which is less what Universal is making from royalties on iTunes songs. (Do the math: Apple has sold maybe 1.5 billion songs. Universal has a quarter of the market–that’s 375 million songs, with about 70 cents royalties on each–$262 million and rising fast.) Also, though the labels may argue that iPods are encouraging piracy, certainly there are millions of iPod users whose interest in music has increased dramatically because of the device, and are actually buying CDs to rip into their collection. Wouldn’t it make more sense to put energy into selling even more songs online–by making the experience better and more affordable?

Of course, Universal isn’t the only music label, and if MP3 makers pay all the labels–and what about the indies?– the devices will cost more. And consumers might well think, “Hey, if I’m paying a fee to the music labels on the assumption that I’m stealing music, doesn’t that make me entitled to steal music?” Actually, I doubt that this would really change behavior. But it would certainly erode the alleged high moral ground that labels claim when they argue that the “right thing to do” is not steal music. If those customers know that part of the money they spent to buy an iPod has already lined the pockets of the music labels, why shouldn’t they feel that they’re entitled to grab music wherever they find it?

What I find really amazing is the mindset of Morris when he describes iPods and other MP3 players as “repositories for stolen music.” I hope the quote is taken out of context–maybe he was saying that among other things, iPods often hold stolen music. Otherwise, it would seem that he is despises the medium that is, literally, the future of his industry. I’m sure that Doug Morris is aware that within a few years–whether it’s five or ten is of little import–virtually all music will be delivered digitally, and CDs will be as dead as cassette tapes. Though piracy is a huge challenge, there are also tremendous opportunities for revenue that will come from this change. Those opportunities deal with making direct connections to customers, tapping into communities centered on musical genres and fans, making live concerts and rarities available and other things that please customers. Not taxing MP3 players on the assumption that the buyers are thieves.

8 Comments

  • The music labels are very content suckling at the teat of innovate companies and other industries. There is a long history of capitulation to the cries of piracy from music labels. The labels get a cut for every blank cassette tape, DAT tape, and recordable CD manufactured. The labels claim that no one would buy a blank CDR except for stealing music. I’m sure the film studios get a cut on blank DVD’s as well. I mean there is no other use for a blank DVD than to steal a movie, right?

    I can’t believe that Microsoft voluntarily gave Universal $1 for each Zune. It is not in their corporate culture to voluntarily give away money; much less actually pay for what they want to steal.

    My speculation on why the labels are not doing as well as they once were is that everyone has finished converting their record collection over to CD’s. In the days of vinyl you might buy the same album several times. You’d scratch or break your favorite album and have to replace it. Mass produced tapes would also require replacement as they degraded or broke. The CD, with its longevity, allowed everyone to purchase an album for the last time.

    I suspect that the “boomers” and people over 35 are the last generation that actually had music collections. These collections actually mattered to the collectors. The music spoke to them. They wanted to preserve their collection and, as the labels published their libraries to CD, they were bought up en masse. This is the rise of profits the labels had in the late-80′s through the mid-90′s.

    The ability to download music came about at the same time that most people had finished converting their collections to CD. The two were unrelated but the labels decided to blame their losses on piracy instead.

    It’s in their genes to say that any playback device or medium that they did not invent is doing them harm. The tactic has worked so well in the past.

    The problem with the labels not liking download services is that they only one to make them money is iTunes. All of the other services amount to true chump change. iTunes has generated over ONE BILLION dollars of PURE PROFIT for the labels. If you lump all of the other download services together do they even come close — NO!.

    The labels are kicking themselves because they could not come up with a way to sell music online on their own. They resent that some other company gets a slice of the profits. This is inverse to the normal relationship that the labels have with other industries. The labels are used to free money — kickbacks — from computer media sales. The labels are envious that Apple has reversed the flow of money — even the small amount that Apple takes.

    The music labels are historically predators. They prey on artists, they prey on the computer industry, they prey on their customers (RIAA lawsuits anyone?). The labels now want to prey on every digital music player made. Should we be surprised?

  • Personally, this is the strongest reason that I cannot support the Zune.

    Could you imagine if video game manufacturers had to pay game publishers because games could be pirated? Hard drive manufacturers paying movie/record industry because people could be downloading pirated media, gun makers responsible for deaths, man it’s unbelievable.

    These industries have got look at legitimate ways to respond to the disruptions to their industry. Blackmail isn’t the answer.

  • I think we should all pay a dollar to them for each computer we own then
    And each tape deck we have or VCR or DVD recorder for TV or TiVO oh come on guys it’s just a dollar where the heck does it stop..
    This next bit is a generalisation and my own opinion only.
    Record companies are corrupt and always have been.. they take 70cents of itunes while us poor muso’s get abou 4 to 5 cents. They have always bribed people as in payolla so there stuff gets played. Lets face it they have no morals..

    There you go I said it and we all know it is mostly true though I am sure somewhere there is some honest record labels ..

  • Universal got the idea from Canada, where we have to pay a royalty tax on all recordable media — CDs, cassette tapes, etc. Charitable organizations, such as churches, can get exemptions.

    Last year, the courts struck down the royalty tax on devices, such as iPods, saying that they could be used for more than just storing music. The tax on MP3 players was in the order of $20.

    You have the right message in this blog, one that needs to be repeated over and over: if we pay a royalty tax to cover “stolen” music, then we gain the right to “steal” music — after all, the musician has received his royalty.

    There is a similar royalty tax on libraries. The Canadian government collects $$$ from libraries to compensate authors, who are not receiving income each time their books are read.

    The problem is, where does Canada’s royalty tax go? I wonder how much is kept by the recording companies and government buerocrats, and how much actually passes through to Canadian musicians — a topic the Canadian media has never examined. I’m a Canadian author, and I’ve ever received any cash from the tax on libraries.

  • I’ve argued that Microsoft agreeing to pay Universal $1 a device is a strategic move that may effect Apple much more than it hurts Microsoft. See my post on the subject: http://www.mathoda.com/archives/86

  • Bach is lying. MSFT knows that the Zune is a complete joke. The company will attack Apple’s model to force it to abandon its sensible and market-cultivating ’99 cents for everything model’ – and at some point MSFT will attack its intellectual property. MSFT has no interest in actually developing a compelling consumer experience. The company never has. The market will be manipulated through the hardware and service providers, the consumers will be told what to do and MSFT will prevail. That’s the general MSFT interpretation of how to run the universe. In the popular music context that will play out with MSFT making throat-cutting deals with the labels, breaking Apple’s model and then trying to screw the labels once Apple is vanquished.

    MSFT has one big problem. They don’t control the content the way they control the OS. Most all of the labels treat MSFT, appropriately, like a herd of mendacious reptiles. In fact, the labels recognize MSFT as a kindred, malevolent spirit. Yes, MSFT actually is in the novel situation of being forced to negotiate with a much nastier bunch of reptiles than themselves. (Imagine the spanish conquistadors getting off the boat and being met by Indians with helicopters and naplalm.) MSFT was successful in the technology sector because it was not a technology company – it was a ruthless law firm that got its hands on an operating system and knew how to exploit the moment it saw unfolding before it – the proliferation of general purposes computers. Engineering-driven companies like DEC would have – and did – adapt to the moment in very different ways. .

    MSFT as skanky, opportunistic law firm is an old interpretive model for the company but it is relevant again as MSFT finds itself negotiating with the most litigious industry ever, an unimaginably whiny, hairtrigger mob of megalomaniacs that would make MSFT look like a Junior Achievement agricultural co-op. If MSFT, in typical skankatiousness, tries to screw over the labels, or pull a PlaysNoMore on them somehow, they will mightily regret it.

    Couldn’t have happened to nicer guys.

  • What all of you seem to ignore – or be ignorant of – is that not all songwriters are also performers. In fact, most of them still are not. You just don’t hear of them unless they are also performers. Songwriters are dependent on royalties for their incomes. A few pennies a song may not seem like much to you, but it adds up, and thousands of downloads which don’t pay royalties can seriously affect the income songwriters or their heirs receive. Wake up!

  • This is exactly what I expected to find out after reading the title A Universally Bad Idea. Thanks for informative article

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