Microsoft, Universal May Be Playing Into Steve Jobs' Hands

So Universal finally has the deal it wants in exchange for digital distribution rights. Microsoft has agreed to a deal that will give them a piece of the action on every Zune portable music device it sells. And Microsoft is, according to the New York Times, ready to extend that offer to the other major record labels. Universal has been tough on the DRM issue. As Jeff Leeds points out in his article, "The move also reflects Universal’s recognition that, for all the runaway success of gadgets like the iPod, consumers are still not buying enough digital music to make up for declining sales of music on compact disk. Universal said it was only fair to receive payment on devices that may be repositories for stolen music". The labels make a good point when they point out the flaws in Apple's iPod/iTunes system where a study shows Apple sells only about 20 songs per iPod. Maybe Universal's way -- becoming partners with the hardware supplier -- can generate the revenue they have been longing for.

But, let's not get too far ahead on this one. It was Steve Jobs who pulled a fast one on the record labels when he brought his iPod/iTunes idea to them originally. They didn't see it as much of a threat then and were willing to accept pennies on the dollar in return for help in solving one of their other problems -- music piracy. We all know what happened next and whether they meant to or not the labels helped create the monster -- so to speak that they can't control -- Steve Jobs, record executive.

So, now along comes Microsoft with its second bite of the Apple in an attempt to claim the digital music device market Apple stole away. You see, the deal Microsoft made with Universal -- the one the labels hope will change the terms of digital music licensing in the future -- is for the Zune. The Zune! Microsoft's entry into the iPod market. My experience with the next generation at least on the college level is that these happy iPod owners and users will need a lot of convincing to switch. They are initially underwhelmed from early buzz. The Zune doesn't do enough things to be better than an iPod and worth the cost and inconvenience of switching. The Zune could lay an egg. That would be unfortunate for Microsoft but even more unfortunate for their hungry partners -- the record labels.

That means Universal got the deal it and the other labels wished they made with Apple in the first place, but the Zune is not the iPod and the Zune could be a flop or at best, an also-ran. If it gave iPod a run for its money it would be not only the device of the year but of the decade. Holding your breath is a death wish on this one.

In the end, it may have been the right deal for the labels, but with the wrong company, at the wrong time. Somehow I don't think Steve Jobs is worried. Unlike Microsoft, he knows the youth market for portable players, owns the market and possession is still nine-tenths of the law. In fact, as Jobs no doubt knows, if one more competitor has a failure, Apple won't even see another attempt to beat them for a long time to come. I'm betting the sly-fox, baby boomer from Cupertino knows the next generation better than Microsoft. Microsoft's move plays right into Jobs' hands if it eventually fails because it allows Jobs to tighten the noose on fixed pricing -- and he continues to fix the pricing. The fixed rate -- 99 cent model that labels don't like and can't do anything about. The labels will then lose the sweet deal with Microsoft along with all those CDs it's not selling. Inevitably, it will be time to substantively re-invent the record industry unless it's already too late.

Revenge can be sweet, but it can also backfire.