how does Apple get away without paying royalties to the record companies?

how does Apple get away without paying royalties to the record companies?
Dr.Eric Flescher

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http://money.cnn.com/2006/11/09/technology/microsoft/index.htm
Zune: Music industry's new BFF
Company breaks from Apple with promise to pay music producers a royalty for each music player sold.
By Grace Wong, CNNMoney.com staff writer
November 9 2006: 12:51 PM EST


NEW YORK (CNNMoney.com) -- Microsoft is opening up its arms to the music industry as it launches its new portable music player against rival Apple's iPod.
Microsoft (Charts) has agreed to pay Universal Music Group a cut from the sales of its new Zune portable music player, a Universal spokesman confirmed Thursday.

Microsoft will pay Universal Music a royalty on each Zune device it sells.

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Under the terms of the deal, first reported by The New York Times, Microsoft will pay Universal a flat fee for each $250 Zune it sells.
Universal, a unit of Vivendi (Charts), wouldn't disclose the amount it will receive, but the Times reported it's likely to be more than a $1 per device.
Microsoft also will pay royalties on songs bought through Zune Marketplace, its new music download service.
Microsoft's concession could give song producers more leverage as they continue to negotiate music licensing deals with digital music services.
Apple (Charts), in particular, could encounter more resistance: CEO Steve Jobs has so far refused to share revenue from iPod sales with record companies. And Apple's licensing deal with the music industry is up for renewal soon.
"It shows that part of the Zune strategy isn't only to win the hearts and minds of consumers but the hearts and minds of record companies as well," said Michael Gartenberg, research director at Jupiter Research.
Until now, music companies have received royalties only on songs sold on music services like iTunes and not on the actual devices themselves.
Zune vs. iPod, round 1: Holiday shoppers
But digital music sales haven't been growing fast enough to offset the declines in CD sales, according to Michael Goodman, senior analyst at The Yankee Group.
The revenue shortfall has made music executives anxious to find new ways to increase their slice of the digital music pie.
Microsoft too is eyeing the market with the launch of Zune and its online music service Zune Marketplace. Although this isn't Microsoft's first foray into digital song downloads, this is the first time that it's rolled out an MP3 player meant to compete directly with the iPod.
But Microsoft faces a tough battle. Apple has a lock on 75 percent of the market for portable music players, according to market research firm NPD Group.
"Zune has to differentiate itself from the iPod and one of the ways they're trying to do this is create a groundswell of support from industry and artists," Goodman said.
Universal promised to share its Zune royalties with its own artists, which include Black Eyed Peas and U2.
If other music labels like Sony BMG and Warner Music (Charts) follow suit, then other music player makers like Apple could find themselves in a tough position, industry experts said.
Just how much leverage, if any, the record labels will gain from Microsoft's move won't be known for awhile, these experts added.
"This is a way for Microsoft to drive a wedge between labels and Apple, but it doesn't give music companies leverage against Apple until Zune gets market share," Gartenberg said.


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http://money.cnn.com/2006/11/07/technology/zune/index.htm
Zune vs. iPod, round 1: Holiday shoppers
Microsoft is getting ready to tackle the digital music market, but analysts aren't expecting Zune to be a holiday sensation.
By Grace Wong, CNNMoney.com staff writer
November 8 2006: 1:21 PM EST


NEW YORK (CNNMoney.com) -- The big splash Microsoft is determined to make in the digital music player market this holiday may end up being a flop.
Five years after Apple (Charts) launched its first iPod, Microsoft (Charts) is taking aim at the digital music market with its Zune player, which goes on sale Tuesday.

Microsoft's Zune goes on sale Nov. 14.

ZUNE SPECS
Capacity
30 GB - Up to 7,500 songs, 25,000 pictures or 100 hours of video.
Colors
Available in black, white or brown.
Features
Ability to send songs and pictures to other Zune users. FM transmitter lets users tune in to local radio stations.
Price and Availability
$249.99. In stores Nov. 14.




Industry experts, however, aren't convinced the company will be able to take a bite out of Apple, which has a 70 percent share of the market for portable music players.
"I'm very skeptical about its ability to take hold in a market that already has a dominant player. It doesn't feel disruptive enough to gain a foothold," said Ted Schadler, an analyst at Forrester Research.
Microsoft has played up features that differentiate Zune from just being another "me-too" product, including the ability for users to wirelessly send songs and pictures to each other - a capability the iPod doesn't have.
But many analysts aren't buying into the idea of "community" that Zune is built around.
The idea of connected communities has caught on like wildfire - just consider the viral growth of video sites like Google's (Charts) YouTube and News Corp.'s (Charts) MySpace.
Music for the MySpace generation
But communities don't just spring up - there has to be something immediately valuable to users in order for them to take hold, Schadler said.
One of the reasons why YouTube is so popular is because anyone can post a video and share it with everyone immediately. In contrast, before a Zune user can share music, they have to find a friend who also owns a Zune player.
"That's going to be a slow transition," said Shawny Chen, a research analyst for Current Analysis.
She expects Zune to win over some consumers but doesn't expect it to attract a huge following this season, partly because of the sharing feature, but also because Microsoft is targeting a narrower audience.
Whereas Apple offers a range of music players - from its $79 shuffle to its higher-end video iPod - there's only one Zune option, and it's aimed mainly at college-aged buyers, she said.
To be sure, the iPod isn't flawless. Some consumers have been frustrated by its battery life while others have complained that some screens scratch too easily.
And while Apple dominates the market for portable music players, a survey conducted by technology firm ABI Research early this month suggests iPod users could be won over by rival products.
Fifty-eight percent of iPod users planning to purchase a MP3 player said they would consider buying Zune, according to the survey of 1,725 respondents.
"Our conclusion is that iPod users don't display the same passionate loyalty to iPods that Macintosh users have historically shown for their Apple products," ABI research analyst Steve Wilson said in a statement accompanying the survey.
Drawing up long term battle plans
As the battle plays out, one thing's for sure: Microsoft is in the digital music business for the long haul.
Robbie Bach, president of Microsoft's entertainment and devices division, said at the company's analyst meeting earlier this year that Microsoft plans to invest "hundreds of millions" in Zune over the next few years.
That's part of the company's big push to build its overall entertainment division. Microsoft recently announced a plan that would allow Xbox 360 owners to buy or rent movies and TV shows through its online Xbox Live Marketplace.
"Video, games and music are becoming a larger part of the PC experience. The ability to provide the right software and framework is important for Microsoft's overall strategy," said D.A. Davidson analyst Alan Davis.



Rent or buy movies through your Xbox

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http://money.cnn.com/2006/11/09/technology/pluggedin_lewis_zune.fortune/index.htm
Microsoft takes on iPod
The new Zune lets music lovers swap songs. Too bad Microsoft does better with the hardware than the software, says Fortune's Peter Lewis.
By Peter Lewis, Fortune senior editor
November 9 2006: 1:44 PM EST


NEW YORK (Fortune) -- Microsoft has finally presented a challenger to Apple's ubiquitous iPod digital music players. It's bigger and heavier and more difficult to use.
But the 30-gigabyte, one-size-fits-all Zune, which is due to hit stores this month priced at about $250, was actually invented in Redmond, Wash., and for that reason Apple (Charts) should be quaking in its designed-in-California boots, even though it owns the digital music business.