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Zune and the new paradigm

Zune Microsoft's Zune, which goes on sale next week, might not fare any better than the Toshiba Gigabeat upon which it is based. Given Apple's head start and superior design, the Zune has little chance of making a serious dent in the iPod's market share. But Microsoft may already have made life more difficult for Apple by cutting a boundary-pushing deal with Universal Music Group to license UMG's catalog for the Zune Marketplace service. As first reported by the New York Times, the most controversial element is the fee that MSFT will pay UMG for every Zune sold -- upwards of $1 a unit. It's probably safe to assume that MSFT will pay the same to the other three major record companies, given how similar their licensing deals tend to be.
Bob Lefsetz burst a blood vessel over this, but it struck me as a sign of things to come in the portable-music world. The fact that devices like iPods aren't covered by the Audio Home Recording Act (which requires device-makers to pay royalties to the music industry) seems like a historical accident now; I mean, what's the rationale for treating MP3 players differently from digital audio tape recorders? And one of the nice things about the royalties provision of the AHRA is that the money is split between copyright holders (e.g., the labels and music publishers) and artists, songwriters and back-up performers. The AHRA also strikes a reasonable balance of interests, forcing device manufacturers to disable second-generation copying (in other words, no copies of copies) in exchange for protection against copyright-infringement lawsuits). More important, the royalties (although small) give the music industry a stake in the success of the device.
The record companies will certainly try to command royalties from other manufacturers not covered by the AHRA, but they have leverage only over the ones who, like Microsoft, are tied to an on-demand music service. That probably doesn't include SanDisk or Creative, but would include Samsung (which wants to launch its own music service) and Apple. Don't expect Apple to be as compliant as Microsoft, however; given the dominance of the iTunes Store, the labels need Apple as much as or more than Steve Jobs needs them.
The Wall Street Journal's Walt Mossberg and the New York Times' David Pogue had the first Zune reviews on Thursday. Both said the Zune wasn't as good as a video iPod. But neither gave enough attention to what makes the Zune different -- the combination of a subscription service and WiFi. For instance, both complained that if you beamed a song from your Zune to a pal's Zune, your friend could play it only 3 times before the DRM locked it down. But what if both you and your friend subscribed to Zune's unlimited music plan -- would the DRM still kick in? The answer is yes, at least in the initial Zune version, but you wouldn't know that from their reviews. What if the song started as an MP3, not a track downloaded from the Zune Marketplace? Would that come under the 3-plays-only DRM? Only Pogue addressed this issue and said the answer is yes. He also railed (rightly) against the DRM being excessively strict. That's something Microsoft can and should tweak, because it seems ridiculous that recommendations can't be passed from friend to friend to friend.
Whether Zune succeeds in the marketplace, IMHO, will depend on its ability to hook music omnivores -- the folks who see value in subscription services -- by offering best-in-class synchronization along with superior abilities to discover music and share it with friends. It's not going to win over customers who view the market through Mossberg's anti-subscription-music prism (and today, that means most people) or who, like both reviewers, obsess over how its features stack up to the iPod. The iPod doesn't support subscription services (yet), and it has no wireless functions (yet). It's practically in a different category.
Robert Scoble offered a non-hands-on review that answers more of the really interesting Zune questions than either the Journal or the Times. Read it here. While he pointed to a strength that Apple can't match, Scoble found some troubling shortcomings. Based on what he and Pogue said, I'm thinking that Microsoft missed the mark with Zune 1.0. I'm still waiting for a player that provides wireless access to a well-stocked online jukebox, then lets me share playlists and podcasts with pals. Maybe a later version of the Zune will do that, but the first one certainly doesn't.

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Times editorial writer Jon Healey pens opinion pieces about a variety of business issues, and blogs about technologies that are changing the entertainment industry's business model.

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