A Universally Bad Idea
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.