Business Model Judo: Microsoft’s Zune, Universal, and Apple’s iPod
November 10th, 2006A number of news and blog sites (NYTimes, Reuters, Engadget, Tai-Pan Way) have noted that Microsoft has agreed to pay a record company, Universal, a certain undisclosed amount ($1.50?) for each Zune device Microsoft sells. They note that this is a major concession by Microsoft, since Apple only pays record companies for each song sold, not for each sale of an iPod device.
The record companies are upset by the deal they originally struck with Apple, since Apple has a tremendously large business with rich profit margins based on iPod device sales, but each iPod has on average only 20 or so songs sold on iTunes. That’s alot of music on iPods that was either legally ripped from CDs, or illegally traded.
Many parties seem to think Universal has done a number on Microsoft by convincing Microsoft to make a payment for each Zune sold. However, to my mind this isn’t so bad for Microsoft either. The true loser in this deal is … Apple.
Microsoft’s Zune has just been introduced, so it doesn’t cost much to Microsoft to make a payment on each hardware device sold to Universal today, and it will take awhile for its sales to ramp up to a point that such payments cost Microsoft much. Microsoft also hasn’t historically put the same emphasis that Apple has on trying to make money from the hardware (PCs, Xboxs, cell phones); Microsoft is content to make money from its software (Windows, Office, Xbox games, Windows mobile).
Apple already has a huge number of iPods it sells every month. And Apple’s contracts with the record companies are going to expire in a year. If Universal insists on the same deal from Apple that they got from Microsoft, in both dollar amounts and in business model structure this is going to cost Apple alot more than it costs Microsoft.
Microsoft is therefore using Apple’s strength (the massive lead in devices sold) against Apple, a neat act of business model judo. …and since record company contracts often contain a provision that states if you give another record company a better deal you will give me the same deal as well, it’s not just Universal that will get this payment from Microsoft, or demand this type of payment from Apple… all of the record companies will.
Of course for Microsoft to truly succeed, and for the record companies to obtain some real type of leverage against Apple, the Zune and its successors must still be great products. The early reviews indicate the Zune is a promising device… but time will tell.
November 11th, 2006 at 1:58 am
Really interesting read… Microsoft has so little to lose by shaking things up in the portable music world. I wonder what Microsoft is really trying to achieve with Zune anyway. The whole thing seems un-Microsoft (and not in a good way). Sometimes it looks like their whole strategy is to monkey Apple’s innovations and use their leverage of marketshare to make profit.
By the way I’ve never been to your site before today!
November 11th, 2006 at 5:40 am
This is a silly argument.
1. Are you claiming that Microsoft is counting on always having low numbers of device sales? (It only hurts Apple more because they sell more.) Is that their strategy.
2. You claim it’s okay for Microsoft to lose money on the hardware because they’ll make it up on the software. How? It’s a free application and no other store besides the iTunes Store, eMusic, and allofmp3 make money. Where does Microsoft make up the loss?
Apple doesn’t need Universal. (As many like to point out, only 20 or so tracks on each iPod are bought from the store.) Universal needs Apple. Every Microsoft fanboy or Apple-hater claimed the labels would get higher and variable prices from Apple last round of negotiations. They didn’t. Apple played hard ball. Now they have even more leverage and even more music from other sources. Just consider: Apple separately negotiates with UMG by region/country. UMG could pull a third of Apple’s tracks from the iTS in the U.S., and they’d still have a catalog of 2.25 million plus (which is equal to what most stores have) and they’d still have fresh UMG deals around the world. (A deal was just completed in Japan for example.)
Microsoft only set a precedent for themselves. They should be worried about the Xbox and Media Centers and many other products which fall under this precedent.
November 14th, 2006 at 3:26 am
I’m not arguing that Microsoft loves paying a fee for each hardware unit it sells to Universal. I’m arguing that such a fee impacts Apple far more, if universally (excuse the pun) applied, and it is very likely it will be universally applied, so for Microsoft to agree to it is a judo like business move. Microsoft has to recognize the effect such a fee would have on Apple if the record companies get used to it, and right now they have nothing to lose on paying such a fee. As for where Microsoft will make its money, if you control an entire content hardware/software ecosystem (Zune devices won’t be limited to music) there are lots of places to make money even with a hardware device fee. Content sales (music, movie, etc), advertising, market data, and targeted content sales for parts of an interface (such as ringtones on cell phones) are all possibilities. If you love the Zune brand because of how it lets you share with your friends, why wouldn’t you love a Zune phone? If Microsoft or Apple can sufficiently fragment the content market, they won’t be hostage to such fees in the future, but for the time being I think such fees are much better for Microsoft’s Zune than Apple’s iPod.
November 14th, 2006 at 4:58 pm
The whole ‘record companies get paid for each player sold’ thing is just so fundamentally wrong. Why should Universal (or any other record company, for that matter) get money from me, when there are no Universal-signed artists on my player? Why should I have to pay them twice for each track I legally purchased from them? And how does this all work for the smaller/independent labels? We release all our music through our own label. Is Microsoft going to pay us $0.0001 for every Zune sold to compensate us for copies of our music on Zunes? I wish… and it that case, I do hope they sell by the millions!
(Btw. our music can be freely downloaded from our website - by all means load it up to your Zune, iPod, whatever :P)
November 14th, 2006 at 5:41 pm
“and it is very likely it will be universally applied”
No, it’s not. Because you WANT it to be does NOT make it so. UMG certainly asked for the same thing last year from Apple and got laughed at.
“Microsoft to agree to it is a judo like business move.”
You can keep saying “judo” over and over again, but the facts are pretty clear: Microsoft was only going to finalize a deal a WEEK before their store was released with the largest distributor of music. They couldn’t get the deal done and got bent over the barrel.
“and right now they have nothing to lose on paying such a fee.”
Come on, I’ve seen links to this silly little blog post on every story covering this, I know you know how people are responding. Each of those stories is full of people saying: that’s it, I’m done with Zune and UMG. They have a lot to lose and are losing it: it’s called goodwill, perception, a willingess to use the product. They singlehandedly lost at least 10% of their potential business by agreeing to a pointless fee.
“if you control an entire content hardware/software ecosystem (Zune devices won’t be limited to music) there are lots of places to make money even with a hardware device fee”
That’s quite a big “IF.” Customers aren’t going to consider them a legitimate contender if they can’t expand out of the US in a year, if they can’t release another member of the line in a quarter or two. But you have them controlling a whole, successful family of consumer products extending beyond music? Get a grip on reality.
“If you love the Zune brand because of how it lets you share with your friends, why wouldn’t you love a Zune phone?”
Yeah, read that first clause again. Another big “IF.” And how does saying: well, this costs them but they sell me and other fanboys other stuff so it doesn’t matter? Aren’t they also going to pay UMG for your “stolen” content on the phone?
Your fanboyism is a “judo chop” to your own argument.
“If Microsoft or Apple can sufficiently fragment the content market, they won’t be hostage to such fees in the future, but for the time being I think such fees are much better for Microsoft’s Zune than Apple’s iPod.”
And the absurdity continues. Apple HAS ALREADY fragmented the market (they were partially responsible for taking Tower out of the market and will represent the 3rd largest US retailer of any form of music, they represent 80% of online music, they actually have more negotiating power than the studios, other stores (mortar or digital), and have all the cache you could imagine.
So let’s see: Microsoft pays money they shouldn’t have to and receives a lot fo bad press. Apple doesn’t pay fees and gets a bump in perception because they will fight this. This helps Microsoft more than Apple.
Stop sucking on the teet, it’s making you drool.
November 15th, 2006 at 12:50 am
Dear TF,
Apple is still on contract. When that contract expires, UMG can decide what to do. When there is no alternative to the iPod, UMG looks backwards if it doesn’t license its music to Apple. If there are alternatives, its competitive strength to require such a fee from Apple increases.
I used the term judo because it is the martial art that teaches using an opponents strength against them. Microsoft setting an industry precedent that record companies get paid per device sold potentially has a worse impact on Apple then Microsoft. I’m not saying it’s certain to; but the better the Zune sells, the more the record companies are no longer beholden to Apple, and can demand such a fee from both industry players. Unless and until the Zune sells better than Apple, it doesn’t cost Microsoft much.
If Apple doesn’t get bent over the same barrel, you’re right, this just hurts Microsoft. But if Apple does get bent over the barrel, because all of the record companies clamor for similar rewards from Apple that UMG got from Microsoft, then it will have been exactly what I said. We can argue about the probabilities of Apple being forced to pay a per device fee, but it is certainly more probable after a competitor has agreed than it was before a competitor agreed.
I’m not sure the dislike of a few people over this type of fee being paid for Microsoft either (a) has much of an impact on the market or (b) has many people thinking negatively of Microsoft which after all is paying the fee. It may have people thinking negatively of UMG, but that’s mostly in the know people, and frankly, most people don’t follow such an issue closely enough to have much impact on music sales of UMG.
If Microsoft never becomes a legitimate contender, then paying a per device fee isn’t going to impact them much, is it? It’s only an issue for Microsoft if they succeed in the marketplace, and if they do such a fee is likely to be aimed at Apple as well, your protests not withstanding.
I think certain kinds of content are easier to copy than others. And subscription services may actually succeed when broadband wireless happens.
With respect to fragmentation, you misunderstand the fragmentation I’m talking about. I’m talking about fragmentation of the music studios. There is some possibility that the value add of studios diminishes in a world of easy social webs. Or at least the ability to create competitive studios with not too much capital increases, once distribution is in the hands of a Google/YouTube, Microsoft and Apple, rather than in the hands of cable channels and record companies.
I don’t think people blame Microsoft at all. Only a small subset of people are aware of or care about this copyright issue, and the majority of such people blame UMG, not Microsoft.
November 18th, 2006 at 11:11 am
Business Model Judo…
Does Microsoft lose money on its Xbox 360 and Zune hardware?……
November 21st, 2006 at 2:52 am
Microsoft loses money on the Xbox 360 hardware sales, losing more money early in the product’s lifecycle, and less as their efficiency in producing them improves, making a profit on each videogame sold on the system. Microsoft is believed to make a profit on each Zune sold.