November 9, 2006: The New York Times reports that Microsoft has entered into a first-of-its-kind agreement by promising $1 of every Zune Music Player sale to Universal Music. Absent from the agreement: A promise to pre-load content or provide free music downloads to those who purchase Microsoft's digital audio/video device.

In fact, Universal promised a licensing deal -- and absolutely nothing else:

Universal Music, a unit of Vivendi, will receive a royalty on the Zune player in exchange for licensing its recordings for Microsoft's new digital music service, the companies said. Source.

Speculation regarding the politics of the agreement began to appear almost immediately. The biggest question seemed to center around whether it was Microsoft or Universal sitting in the driver's seat during negotiations: Did Microsoft craft the deal as a shot across Apple's bow or did Universal pressure the Redmond Giant into a crappy deal -- simply because they could?

Newsviner Carl Howe (via his Blackfriars' Marketing blog) casts his lot with the former scenario when he wrote about the agreement last week:

While this sounds like a simple "we wanted to get a major music label on board deal", it's really an attempt to poison next year's licensing contract renewal between Universal and Apple. After all, Microsoft is unlikely to sell more than two million Zunes in the next six months to a year, so this costs them little. Source.

Over at Daring Fireball, John Gruber disagreed with Howe (and others) and seems to believe that Universal took advantage of Microsoft's late entry and (relatively) weak position in the market by squeezing them for a small portion of each Zune sale:

What we've got here is a nice, warm, shit sandwich from Universal Music, and Microsoft concluded that they had no choice but to eat it. Source.

The truth may lie somewhere in the middle, even if there is every reason to believe that Universal had the bargaining "high-ground" in negotiations: If Universal is the "rock" and Apple is the "hard place" -- the Zune certainly finds itself wedged between the two positions. Microsoft may have choked-down the shit sandwich with the thought that Apple would eventually have to order from the same limited menu.

Oh, what a difference a dollar makes!

Reality may manifest in unexpected forms when it comes time for Apple to re-negotiate its licensing deals with the major studios: Whereas Microsoft's role was little more than a guest at the dinner-table -- Apple's market-leading position means Steve Jobs may get to play the role of host.

The difference is obvious: 0% of the market (Microsoft) vs. most of the market (Apple).

While Microsoft isn't likely to sell an astounding number of devices (at least initially) Apple sold over 20 million iPods in 2005 alone. Without Universal's catalogue, Microsoft's music store would have been doomed to failure. With that in mind, Microsoft didn't buy hope at the price of one dollar per Zune -- Universal held hope hostage and demanded a ransom of one dollar for every Zune sold.

The question then becomes: What can Apple buy for one dollar?

Universal won't have the convenience of leverage when they square off against Apple. The likely strategy will involve a bluff prior to the start of formal negotiations by threatening to remove their catalogue from the iTunes Store, but Steve Jobs knows that Apple is carrying the nuts in this particular high-stakes game of poker. (Jobs has also been in this position before and it's clear that if the studios were serious about pulling their catalogues, they would have done so during the "variable pricing" battle. He forced their hand once and shouldn't have to do so again.)

Using the 2005 numbers, one dollar of every iPod sold would "earn" Universal around twenty five million dollars. If Apple were to deal with the four major studios, they'd be shelling out $100,000,000.

That's a lot of money and the figure represents a lot of negotiating power. Obviously, there's no incentive for Apple to give away that much money when they're already making the studios richer via the iTunes store and digital downloads. As has already been demonstrated, they don't have to "give" anything away when they could invest that money instead.

At this point, Apple is in a position to negotiate better terms with the studios and a better experience for iPod/iTunes users. The possibilities are endless, but the following seems reasonable:

Apple needs to strike back at the "social" features touted by Microsoft -- at the same time, they need to capitalize on the limitations imposed upon wireless sharing via the Zune. (Sharing music on a Zune appears to be a bit like going to a kegger with mom and dad in tow.)

One possibility:

• Allow iTunes users to set up "music groups" on the iTunes Store.
• A group owner would be able to post a playlist to his or her group, limited to twenty songs.
• Allow playlists to be replaced once per week.
• Up to ten individuals (at a time) could be invited to join the group.
• Those ten members could then stream the playlist any number of times from within the iTunes Store.
• While listening, a hot-key could flag any given song into a wish-list for later purchase.
• Free downloads, etc. would be earned by the group owner based on purchases of flagged music.
• Users could join up to five groups at a time.

In essence, an idea like this would add a bit of "flickr-esque" functionality to iTunes and could go a long way towards building a social-network for Apple's iTunes software. (There are certainly any number of creative ways to bargain when you're holding $100,000,000 -- Apple just needs to bring a few ideas to the table.)

Every concession to quality, accessibility and ease-of-use ensures that Apple will maintain its current dominance in the industry and if the following quote from Doug Morris is any indication, it's pretty obvious that Universal has little to no interest in the "customer-satisfaction" aspect of selling music:

"These devices are just repositories for stolen music, and they all know it," UMG chairman/CEO Doug Morris says. "So it's time to get paid for it." Source.

This sentiment is common (if less blunt) throughout the industry and consumers are forced to play a frustrating game of wait and see. Even assuming that Morris is correct in saying that every single digital audio player in existence is home to (at least) a few stolen songs -- it's never a good idea to wage war against the inevitable: Retail outlets budget a certain amount of money towards stolen goods and most of these companies are smart enough to avoid implicating their paying customers in those thefts. (The accusatory tone of the Morris quote simply illustrates the strangle-hold the Music Industry has on its customers: He's willing to say it because he thinks no one can do anything about it.)

A war on piracy (at the consumer level) is a bit like being angry at ice-cream for melting: There's just not all that much you can do about it -- better to focus on aspects which can be controlled.

The first company to tilt towards the customer is going to start a revolution and Apple is in a better position than most to bargain for a slice of that pie.

In the long run -- pie tastes a lot better than shit sandwiches.

Note:

The premise of giving away one dollar for every device sold is problematic based on the number of studios that will eventually wish to participate.

A more realistic situation involving hypothetical figures:

• 100 million dollars = (x)percent of 2005 iPod profits.
• 20% = Percentage of total iTunes sales attributed to Universal in 2005

Apple would then offer Universal 20 million dollars -- subject to stipulations. (All labels would receive the same offer based on their percentage of total iTunes music sales for any given year.)