MTV Gets Real, Microsoft Gets Punk'd

Yesterday's MTV- RealNetworks alignment is a cautionary tale about how Microsoft botched a lucrative music partnership. It's a classic example of Microsoft changing strategy midstream because of a real or perceived competitor, when the company should have kept the priority on its partners.

MTV: A Powerful Partner
Some background: In late 2005, Microsoft and MTV announced URGE, a new music store that would be integrated into Windows Media Player 11.

The MTV partnership made sense for loads of reasons:

• MTV already was a showcase customer for Windows Media technologies and close partner because of MTV Overdrive. The broadband music channel widely used Windows Media technologies, including DRM (digital rights management), and appeared in Windows Media Center's Online Spotlight section.
• MTV has a strong and recognizable brand that is synonymous with music and youth. MTV brand association is what Microsoft needed to gain traction against iTunes and the iPod and the proliferation of Apple's Fairplay-DRM format.
• MTV is a programming powerhouse while MSN Music was a lame duck from its launch. There was no feel of a program director in charge, the way there was at iTunes Music Store. MTV knows how to program content—and not just music. Microsoft badly needed this kind of content focus integrated into the Windows experience.
• MTV could have given Microsoft access to loads of content—everything from Comedy Central to Nickelodeon to VH1. With MTV, Microsoft could have established an online video presence long before Apple added movies to the iTunes Music Store; the content would have been better aligned with younger consumers buying music and devices.
• Microsoft could have cut online advertising deals across MTV properties . An MTV/Viacom partner could have been a showcase customer for MSN adCenter.

I contend that the Microsoft-MTV partnership was rife with possibilities and could have put some drag on the iPod's and iTunes' momentum. People seem to forget that the iPod wasn't an instant hit and that the iTunes Store came several years after the device. I see two fundamental reasons for the iPod's success:

• Apple got the user interface/synchronization mechanism right with version one.
• Potential customers already owned plenty of content they could use on an iPod. Rip, synch and roll, baby.

Content remains king (or queen, if you like), and MTV has a whole lot more programmable content, programming experience and established record label relationships than Apple. Microsoft could have inherited those from its music partner and made all that content available in Windows Media Audio format.

URGE is Purged
But Microsoft derailed the MTV partnership even before URGE launched. In July 2006, following months of rumors, Microsoft revealed that it would launch Zune music player and its own music store—the Zune Marketplace. Windows Media Player 11 officially launched months later, in October, with the wonderfully integrated URGE music store. URGE delivered an outstanding user experience—and with the subscription service—one equal to and in some ways superior to the iTunes Music Store. A few weeks after WMP 11 was released, Microsoft launched its new music player and Zune Marketplace, which bore strong resemblance to URGE but without nearly as good playlists or programming.

In last November's post, "Microsoft's Music Madness," I questioned the sanity of abandoning partners rather than working with them to fix the Windows Media music problem.

Fast forward to yesterday. RealNetworks and MTV have formed the new company Rhapsody America. Verizon and Vodafone are partners, too, creating a surprisingly strong axis reaching the mobile, Web and desktop markets. Nearly all those benefits listed above for Microsoft now go to Real. The major exception is the advertising portion, in the sense that Real isn't in the business of ad serving and keyword search, as are Google and Microsoft.

Not only did Microsoft lose an important partner in MTV, a former rival is now emboldened. Before the iPod and iTunes tore up the music market, Microsoft worried more about RealNetworks, the star of which dimmed somewhat because of Apple. But Real's relationship with SanDisk helped keep the star in the sky. Now that star is brightly shining, and its shadow may even fall on Apple.

The Universal Tax
What six months ago looked like a music showdown between Microsoft and Apple is now looking more like MTV/Real will be the more formidable opponent, with Zune and the Zune Marketplace headed to the sidelines.

Microsoft bet wrong on a solo, integrated music strategy that is inconsistent with its partner roots and that alienated hundreds of partners, MTV being only one. Worse, DRM-free music from EMI and Universal Music Group make uncertain the long-term Apple and Microsoft proprietary, rights-protected formats.

For now, Apple and Microsoft both stand on the sidelines as Universal pushes out huge catalogs of DRM-free music to many different online retailers. As I said before, content is king.

There's an irony and perhaps an answer in Universal's moves. The irony is that Microsoft agreed to a Universal tax of a buck for each Zune sold, yet the software giant isn't yet reaping the DRM-free sales benefits. The answer may be why Universal refused to renew its long-term contract with Apple. Universal understands the value of content. By locking out Apple, Universal can generate more competition and that would be good for its business.

But that's the easy answer. I believe there is another: Apple doesn't want to pay a similar Universal tax on the iPod. Universal's DRM-free distribution plan puts lots of pressure on Apple to make concessions to the music label. I suspect that one of those is giving a cut of iPod sales to Universal.

As for Microsoft, there is a second irony. The company's PlaysForSure marketing was all about choice. Zune took away choice from partners and many customers. Now, DRM-free music is helping to create more choice, as did Microsoft's decision to go solo. If not for Zune, Microsoft and MTV could have made sweet music. Instead, there is Rhapsody, and more alternatives to the iPod and iTunes.

Related Posts:

• On the Road With Microsoft, Microsoft Watch, August 13, 2007
• Is That 1 Million Zunes Shipped or Sold?, Microsoft Watch, May 29, 2007
• What Apple DRM-Free Means to Microsoft, Microsoft Watch, April 2, 2007
• Whoa, Zune Is Social, Microsoft Watch, January 2, 2007
• Welcome to My Social, Microsoft Watch, December 25, 2007
• Zune Goes to War, Microsoft Watch, November 14, 2006