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Microsoft Universal deal sure to be challenged

Anti-trust ahoy

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We suppose we have to record the big news story of the week, covered by everyone from the New York Times down, that Microsoft is letting Universal Music Group get some revenue every time it sells a Zune player.

The record labels have made it very clear that they resent Apple's success with its iPods, which they see as being sold on the back of iTunes, and their content.

The only problem with going forward with Universal is that all of the labels will have "most favored nation" terms in their contracts and so will also want the same terms, while Microsoft cannot have such wording in its favour.

Universal will get less than one per cent and insiders said they expect around $1 for each $250 device. If every major record label took the same amount it could be getting on for two per cent to three per cent of the value of the device, and as much as six per cent of the amount that Microsoft gets paid by a retailer. It makes turning a profit on the Zune far harder than on the iPod.

Microsoft confirmed it would now offer similar royalty deals to the rest of the industry.

But that cannot be the end of the story. Has Microsoft got better terms for the sale of each piece of music. In other words, will it reasonably recoup its lost dollar in music sales as they rise? Regardless, the Zune is scheduled to be launched next week.

Another reason given for the reverse royalty is that this will compensate artists for loss of revenue through piracy. It is well known that iPods tend to carry copies of unprotected CDs and some pirated works, but this is just being used as an excuse by Universal. Why should its artists get recompense, and not those of the 2,500 or so independent labels, or the other major labels.

That's what equipment levies are for, so Microsoft sells a Zune outside the US, in a country like Germany, which has storage high levies, and those levies are being paid twice over.

It looks to us like this payment might be construed as an abuse of dominant position, and might get challenged, certainly in countries in Europe. You cannot be in a dominant position and ask for money for something that doesn't involve the sale of your product. If Universal tries this with Apple, Steve Jobs would, we are sure, have no qualms in cutting it out of a huge amount of existing music revenue.

Copyright © 2006, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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