Monday, November 13, 2006

Universal Music and Microsoft throw stones in the levy pond

I was reading an article in DRM Watch by Bill Rosenblatt over the weekend. The article dealt with the introduction of the Zune player of Microsoft and the agreement of Universal Music with Microsoft, that there will be a levy on every Zune sold. It looks like a new business model.

Microsoft is busy with the launch of Zune digital music player, a competitor of the iPod of Apple. The Zune will be more than the iPod. It has a wifi connection to share music and has a built-in FM radio. And of course, it will cost less than an iPod, unless all the music companies are going to follow the Universal Music example. Universal Music Group will collect US $1 in royalties for every $250 Zune device sold, in addition to per-track royalties for music sold through the Zune service. The other major record companies are expected to be cutting similar deals.

This business deal will have a lot of consequences. Normally governments cash levies on equipment like copying machines, tapes and CD-ROM. But now it is a private company putting a levy on a piece of equipment. So the first conflict can be expected with governments as some governments have are considering to put levies on iPod like machines. But the new business model might also backlash on the music industry: if they are going to put a levy on the machines, they should not use DRM on songs.

In many European countries there are already levies in place. And people are getting fed up with levied being put on levies. There are levies on copying machines, which are shared by publishers, but businesses have to pay extra levies for copying business literature, again to be shared by publishers. In the US this is different as only digital tape recorders and blank media have a levy put on them. It is clear that in Europe there will be a problem for the music companies to get to a settlement.

But there will also be consequences for the music companies. Such a levy will mean extra revenues for the music company and as this is related to equipment, it is most likely that it will stay with the music company and will not be shared with the artists. The companies will refer the artists to the per-track royalties which are shared between the companies and the artists. And 1 US dollar per player means 1 million US dollars when 1 million music players have been sold. But the music companies will also have to think through the consequences. When a blank levy is put on a player, it means that this is a blank levy for copying. So the music companies should abandon digital rights management on downloading such as encryption-based content protection technologies.

It will be interesting to see how this levy will go down with the equipment companies other than Microsoft, the music companies other than Universal Music and with the user. Universal Music will now attempt to get an agreement with Apple, I guess, while other music companies will have to knock on the same doors of equipment manufacturers. But what happens if Apple refuses to pay the levy. And the careful built up ethics of payment per track royalty will be lost again, unless encryption is being replaced with a combination of acoustic fingerprinting and forensic watermarking in order to track illegal copies.

It will be interesting to see how this Microsoft-Universal Media levy will be implemented and accepted in the market. But Zune will have to be launched first and become a fearsome competitor.

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Blog Posting Number: 568

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